By David M. DiPietro

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Weaker growth and lower rates set to open up private markets

Shifting conditions should create new opportunities in private credit and private equity.

November 2024, On the Horizon -

We anticipate two developments that should open up private markets for investors in 2025. First, a challenging economic environment will likely fuel demand among borrowers for more complex, bespoke credit solutions; and second, the Fed’s rate‑cutting cycle could deliver conditions conducive to more firms going public and increased mergers and acquisitions (M&A).

Increasing customization to drive the private credit outlook¹

Capital deployment in private credit rebounded strongly in 2024 as M&A activity increased, driven by a benign macroeconomic environment and pent‑up demand. We expect this to continue in 2025, expanding the role of private credit as the financing source for situations requiring flexibility unavailable in the broadly syndicated loan market.

“For borrowers, private credit offers benefits particularly useful for M&A activity....”

For borrowers, private credit offers benefits particularly useful for M&A activity, such as speed and certainty of execution, confidentiality, customization, and partnership with fewer lenders. For investors, private credit may provide a spread premium over traditional fixed income, which comes in largely two forms: an illiquidity premium, which should compensate investors for locking up their capital for extended periods of time; and a complexity premium for delivering the benefits to borrowers mentioned above.

We believe the opportunity to capture alpha through complexity could increase if the U.S. economy slows meaningfully in 2025. Private credit is well positioned to deliver bespoke solutions, including liquidity financings and capital structure restructurings, to companies with more challenged debt service requirements. If the broader economy continues to rally, these situational opportunities may be more limited and more conventionally performing private credit will take precedence.

Private equity investors eye end to the IPO drought

The long period of low interest rates following the GFC led to many companies remaining private for longer, even when they became very large. We believe one of the biggest areas of opportunity in private equity is in large private companies, ideally at attractive valuations, before they go public.

However, the three‑year‑long drought in initial public offerings (IPOs) has dampened the opportunity set. This fall in IPOs has been more of a supply problem than a demand problem: Private companies do not want to subject themselves to the price volatility of publicly traded shares, and many firms seek to avoid the heavier quarter‑to‑quarter financial scrutiny that being public involves.

Another key reason has been the challenge of forecasting revenues and earnings given the widely disparate views of the state of the economy. As the economic outlook becomes clearer and companies are more confident with their projections, private companies should be more comfortable with the decision to go public. Also, with more certainty about the Federal Reserve’s rate‑cutting cycle, equity market volatility could ease in 2025, clearing the way for more IPOs.

Investors can also usually access liquidity from their private investments via M&A activity. Lower interest rates will help loosen up the M&A market by lowering the cost of capital for acquirers. If both IPOs and M&A activity pick up, existing investors in private companies would have two avenues to redeem their cash, potentially at better valuations.

Key takeaway
A more challenging economic environment and the Fed’s rate‑cutting cycle should open up opportunities for private market investors in 2025.

David M. DiPietro Head of Private Equity, T. Rowe Price

David DiPietro is the head of the Centralized Private Equity team (CPET). CPET serves as a single point of accountability and coordination of all private-equity investments. David is a vice president of T. Rowe Price Group, Inc.

Nov 2024 • On the Horizon

Rate cuts provide opportunities for U.S. small-caps and financials

By Stephon Jackson

Nov 2024 • On the Horizon

Value and small-caps could power international equities

By Justin Thomson

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¹This article is also co-authored by Alan Schrager, Portfolio Manager and Senior Partner, Oak Hill Advisors (OHA). OHA is a T. Rowe Price Company.

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