The Calculated Gamble of Going-Private Deals in a Volatile Economy

The U.S. economy in Q2 2025 is navigating a precarious balance between fragile growth and rising risks. With GDP contracting in the first quarter (-0.3%) and inflation stubbornly elevated (CPI at 3.1%), the Federal Reserve has kept rates at 4.5% to combat price pressures. Against this backdrop, private equity (PE) firms are increasingly turning to going-private transactions as a strategy to avoid market volatility and seize undervalued assets. But what are the strategic advantages—and the pitfalls—of this approach?

Strategic Advantages: Stability and Flexibility

Going-private transactions offer PE firms three key benefits in today's environment:

1. Avoiding Public Market Whiplash
   Public equities have been volatile, with the S&P 500 trading at a forward P/E of 22.87—far above non-U.S. peers—while sectors like tech face regulatory scrutiny. . Taking companies private shields them from this instability, allowing firms to focus on long-term value creation. For instance, 3G Capital's $9 billion acquisition of Skechers in Q2 2025 capitalized on the stock's 20% decline amid trade tensions.

1. Operational Agility
   Private companies can pivot faster to address challenges like supply chain disruptions or inflation. PE-backed firms can reinvest profits without quarterly earnings pressure, a critical edge in sectors like AI infrastructure. Blackstone's $16 billion acquisition of data center operator AirTrunk in late 2024 exemplifies this: the deal positioned it to capitalize on the $2 trillion AI infrastructure “super cycle” over the next five years.

2. Access to Cheap Debt
   Despite high rates, the private credit market—now managing $1.9 trillion—has kept financing affordable. Leveraged loan yields have fallen to 4.5% due to competition between banks and private lenders. This liquidity allows PE firms to pursue large deals, such as Brookfield's $1.5 billion investment in Castlelake in 2024, which expanded its capacity to fund acquisitions.

Risks: Leverage, Liquidity, and Geopolitics

The same factors that empower going-private strategies also introduce significant risks:

1. Interest Rate Exposure
   The Fed's stance—rates to remain near 4.5% through 2025—means refinancing debt will grow costlier. Companies with high leverage (e.g., those with debt-to-EBITDA ratios above 6x) face steep challenges if economic growth stalls.

2. Liquidity Traps
   Exit pressures are mounting: nearly half of PE portfolios were acquired before 2020, yet IPO markets have frozen. Klarna's Q2 IPO cancellation underscores the difficulty of realizing gains. This forces firms to rely on continuation funds or secondary sales, which may underprice assets.

3. Geopolitical Headwinds
   Tariffs and trade wars continue to disrupt supply chains. Companies in industries like manufacturing or consumer goods face margin pressures, while tech firms confront data localization laws. PE-backed firms in these sectors must build geopolitical resilience into their valuations.

Sector-Specific Outlook

The calculus of risk vs. reward varies by sector:

• Winners: Sectors tied to secular trends—AI infrastructure, clean energy, and healthcare—are prime targets. Microsoft's revival of the Three Mile Island nuclear plant (a $2 billion deal in 2024) highlights how PE can fund critical infrastructure.
• Losers: Consumer discretionary and retail face headwinds from inflation and weak wage growth.

Investment Advice: Proceed with Precision

Investors in going-private deals should prioritize:
1. Firms with Strong EBITDA Growth: Focus on targets in AI, energy, or healthcare with clear paths to profit expansion.
2. Debt Profiles: Avoid deals reliant on optimistic refinancing assumptions; favor those with covenant-lite loans or equity kicker structures.
3. Geopolitical Buffers: Prefer companies with diversified supply chains or exposure to politically stable regions.

The current climate rewards patience. While Q2 saw a 24% drop in deal value compared to Q1, selective opportunities remain. As one PwC analyst noted, “The M&A recovery is overdue, but it will succeed only for those with deep sector expertise.”

In short, going-private transactions are a viable strategy—if backed by rigorous due diligence and an eye toward the Fed's tightening cycle. The balance between risk and reward hinges on where you place your bets.