For the past decade, private equity has been fueled by a simple formula: low interest rates and readily available leverage. But as we navigate 2025, it’s clear that the landscape has fundamentally changed. The era of cheap money is over, and with it, the days of relying on financial engineering to drive returns. This shift is a direct response to the sustained higher interest rate environment.
So, what’s next for private equity? The answer lies in a return to the basics: operational value creation. In this new environment, the most successful firms will be those that can roll up their sleeves and work directly with their portfolio companies to improve performance, drive growth, and create lasting value.
The New Normal: A Shift from Leverage to Operations
With interest rates at their highest levels in over a decade, the cost of borrowing has skyrocketed. This has made it more difficult and expensive for private equity firms to use leverage to finance their acquisitions. As a result, the focus has shifted from financial engineering to operational improvements.
This means that instead of simply relying on debt to juice returns, firms are now looking for ways to improve the underlying performance of the companies they own. This can include anything from streamlining operations and cutting costs to investing in new technologies and expanding into new markets.
This back-to-basics approach is not only a response to the current interest rate environment, but also a reflection of a broader trend in the industry. As the private equity market has become more competitive, it’s no longer enough to simply buy a company and hope for the best. The most successful firms are those that can bring true operational expertise to the table. Bain & Company highlights this focus on operational improvements as a key driver of returns.
The Unstoppable Rise of Private Credit
Another key trend shaping the private equity landscape in 2025 is the continued growth of private credit. As traditional lenders have pulled back, private credit funds have stepped in to fill the void, providing much-needed capital to small and medium-sized businesses.
This has created a massive opportunity for investors. Private credit funds offer the potential for attractive, risk-adjusted returns, with less correlation to the public markets. And with the private credit market now valued at over $1.5 trillion, it’s an asset class that can no longer be ignored. Moody's reports continued growth in this sector.
For more on this, check out our in-depth look at the rise of private credit funds.
What This Means for Investors
So, what does this all mean for investors? In this new era of private equity, it’s more important than ever to partner with firms that have a proven track record of operational value creation. Look for managers who have deep industry expertise and a hands-on approach to working with their portfolio companies. For more insights, read our full article on Beyond the Rate Hikes.
It’s also important to consider an allocation to private credit. This can provide a valuable source of diversification and income in a well-rounded portfolio. As always, be sure to do your own due diligence and consult with a financial advisor to determine if private equity and private credit are right for you.
The Road Ahead
The private equity landscape is constantly evolving. But one thing is clear: the firms that will succeed in the years to come are those that can adapt to the new environment and create real, lasting value. By focusing on operational improvements and embracing the growth of private credit, private equity can continue to be a powerful engine for economic growth and a rewarding asset class for investors.