The M&A Downturn of 2025: Strategic Shifts in Private Equity Liquidity and Regulatory Risk

The private equity landscape in 2025 is undergoing a seismic shift as firms grapple with a confluence of macroeconomic headwinds and regulatory turbulence. Traditional mergers and acquisitions (M&A) exits, once the cornerstone of portfolio monetization, have faltered amid geopolitical tensions, divergent monetary policies, and heightened antitrust scrutiny. According to a report by S&P Global, Q1 2025 marked the lowest level of private equity exits in two years, with trade wars and economic uncertainty stifling cross-border dealmaking [5]. This downturn has forced general partners (GPs) to recalibrate their strategies, prioritizing fund-level liquidity solutions over conventional exit pathways.

Macroeconomic Pressures and the Decline of M&A

The global macroeconomic environment has become a critical constraint for M&A activity. Subdued growth, inflationary pressures, and divergent central bank policies have eroded buyer confidence, particularly in sectors reliant on discretionary spending. A McKinsey analysis highlights that private equity capital is increasingly flowing into defensive sectors like professional services, defense, and education, where cash flows are stable but growth is limited [2]. Meanwhile, trade tensions—exemplified by U.S. tariffs on Chinese imports and retaliatory measures—have created a "shadow of uncertainty" over cross-border transactions, further dampening exit opportunities [5].

Compounding these challenges, the cost of capital has risen as investors demand higher returns to offset macroeconomic risks. This has led to extended holding periods for private equity assets, with firms delaying exits to meet internal rate of return (IRR) targets. However, prolonged ownership also increases regulatory exposure, particularly in sectors like technology and energy, where geopolitical risks and ESG mandates are intensifying [4].

Regulatory Turbulence and the Rise of Liquidity Alternatives

Regulatory changes in 2025 have further complicated the M&A landscape. The U.S. Securities and Exchange Commission (SEC) has imposed stricter disclosure requirements, including enhanced transparency around fees, performance metrics, and ESG claims [2]. These rules, while aimed at investor protection, have lengthened deal timelines and increased compliance costs. Simultaneously, antitrust enforcement has become more aggressive, with regulators scrutinizing transactions for labor market impacts and potential monopolistic tendencies. As noted in a Freshfields Bruckhaus Deringer analysis, the "Khan/Kanter precedent" has normalized the expectation of merger blockages, prompting dealmakers to incorporate complex risk-allocation clauses like "efforts covenants" and "outside dates" [4].

In response, private equity firms are pivoting to fund-level liquidity solutions. Continuation funds, which allow GPs to extend ownership of high-value assets, have emerged as a critical tool. For instance, New Mountain Capital closed a $3.1 billion continuation fund to retain its stake in Real Chemistry, a healthcare innovation company, after traditional exits like IPOs became unviable due to market volatility [5]. Similarly, Arcline Investment Management launched a multi-asset continuation vehicle to consolidate aerospace-related portfolio companies, preserving flexibility for future exits [1].

Sponsor-to-sponsor exits are also gaining traction, enabling GPs to transfer assets to peers without relying on public market buyers. These transactions, often facilitated by secondary markets, allow firms to return capital to limited partners (LPs) while retaining upside potential. A June 2025 report by Dakota highlights that such strategies are particularly appealing for long-held assets, with nearly 40% of firms willing to accept a 5%-10% discount on original underwriting to unlock liquidity [1].

The Emergence of Evergreen and Open-End Structures

To address LP demands for greater liquidity, private equity is experimenting with evergreen and open-end fund structures. Unlike traditional closed-end funds, evergreen vehicles allow investors to subscribe or redeem capital through defined windows, offering a balance between private equity returns and public market flexibility. A Natixis report underscores that these funds are particularly attractive to individual investors and retirement savings plans, which require more accessible capital structures [1]. For example, U.S. managers are leveraging 2020 Department of Labor guidance to integrate private equity into target-date funds, broadening their investor base [3].

However, evergreen funds face performance trade-offs. The need to maintain liquidity pockets can dilute returns compared to closed-end peers, and internal liquidity management requires sophisticated asset selection and risk controls. Despite these challenges, GPs view the shift as necessary to align with evolving investor expectations, particularly as high-net-worth individuals and institutional LPs prioritize cash flow over long-term illiquid commitments [1].

Strategic Sectors and Technological Adaptation

While the M&A downturn persists, private equity is finding opportunities in sectors resilient to macroeconomic shocks. Technology and energy remain focal points, driven by robust growth and ESG-driven capital flows. A Ropes & Gray analysis notes that firms are leveraging AI and predictive analytics to streamline due diligence, reduce errors, and forecast deal performance, enabling faster execution in a complex regulatory environment [5].

Meanwhile, ESG compliance has become a non-negotiable component of exit strategies. Regulatory frameworks now mandate rigorous ESG reporting, pushing GPs to integrate sustainability metrics into portfolio management. This shift is evident in sector-focused funds, which combine industry expertise with ESG-aligned value creation to navigate regulatory hurdles [5].

Conclusion

The M&A downturn of 2025 has accelerated a strategic reorientation in private equity, with liquidity innovation at its core. As regulatory and macroeconomic pressures persist, the sector’s ability to adapt—through continuation funds, evergreen structures, and technology-driven efficiencies—will determine its resilience. While challenges remain, the long-term appeal of private equity as a diversification tool and outperformer relative to public markets continues to attract capital, signaling a dynamic but uncertain path forward.

**Source:[1] Global Private Markets Report 2025, [https://www.mckinsey.com/industries/private-capital/our-insights/global-private-markets-report][2] The macroeconomic backdrop to the private capital market, [https://www.privatecapitalsolutions.com/insights/the-macroeconomic-backdrop-to-the-private-capital-market-june-2025][3] U.S. Private Equity Market Recap - June 2025 | Insights, [https://www.ropesgray.com/en/insights/alerts/2025/06/us-pe-market-recap][4] M&A Predictions and Guidance for 2025 - A Fresh Take, [https://blog.freshfields.us/post/102js93/ma-predictions-and-guidance-for-2025][5] Private equity exits fall to 2-year low in Q1 2025, [https://www.spglobal.com/market-intelligence/en/news-insights/articles/2025/4/private-equity-exits-fall-to-2year-low-in-q1-2025-88524467]