RiskMap 2025 for private market investors

RiskMap 2025 | Roberta Brzezinski | Martin Tornberg

Our Top Risks for 2025 can help investment teams prepare for a range of challenges that will demand scrutiny and adaptability.

Investors should prepare themselves for a strong return to deal activity in 2025. As of Q3 2024, green shoots had already begun to appear, and the US Federal Reserve’s 50 bps rate cut is expected to unleash more activity. However, with increased activity comes increased risk, and investors will do well to review several areas to make sure an appropriate risk management focus is still in place:

2022’s spike in inflation in Q1, the ensuing sharp rise in interest rates, and significant equity-market correction cast a shadow over equity valuations and lured investors to consider resurgent fixed-income instruments. As a result, many private markets investors and corporate buyers – the drivers of global M&A – have spent the past two years sitting on the sidelines instead of transacting.

We can roughly compare the drop in M&A activity from H1 2022 to H1 2024 to the aftermath of the 2008 global financial crisis (GFC). The graph below of global financial services M&A activity shows a 60% drop in M&A by value over two years during the GFC, while the current period has seen a drop of 57%.

As a result of the reduced M&A activity, private markets managers have been unable to return expected capital to their investors and as a result were able to raise significantly less capital over the period. And since some investors who still hold “dry powder” have been shying away from concluding transactions due to a persistent gap in valuation expectations between sellers and buyers, they now face growing pressure to transact, with investment deadlines looming.

For every action, there is a reaction – and the pent-up demand in the private equity industry to sell portfolio companies, return capital to investors and raise new funds is likely to spur a strong reaction in 2025. M&A green shoots versus the first three quarters of 2023 are already clear, with a 27.6% increase in deal value and a 13.3% increase in deal count globally.

New winners and losers will emerge during the coming deal renaissance which, if the GFC is any indication, will be marked by highly profitable transactions side-by-side with forced exits from the industry.

Fund managers and institutional investors alike should scrutinize their current portfolios to determine their allocation decisions, considering how future investee performance or sale valuations may have been affected by reputational, cultural, regulatory, and sectoral changes over the past several years.

And after reviewing the micro circumstances, investors should consider the key macro geopolitical factors that Control Risks predicts are likely to affect global business in 2025. Two risks in particular could have significant impacts on investors:

A multifaceted global trade war between China, US and the EU could negatively affect portfolio returns in several ways. Governments in 2025 will scale up industrial policies to compete with geopolitical rivals, secure strategic supply chains, and cultivate critical sectors, as part of a more general move towards state intervention in the economy. Reviewing technology choices will need to be done through a geopolitical lens and could, together with tariffs, raise costs and time required to achieve economies of scale across multiple jurisdictions, fundamentally altering market and investment attractiveness on a number of parameters.
Digital concentration risk can lead to catastrophic system failures. Growing concentration among critical hardware and software players could painfully disrupt global communications. Three main drivers are exacerbating this risk:

Emboldened nation-state threat actors are foregoing previous norms of behaviour in the digital space, continuing to deploy systemically disruptive cyber operations against critical infrastructure and centralised technology providers.

Vulnerable critical targets such as concentrated cloud services and widely adopted software services, and the continued adoption of emerging technologies including AI and industrial robotics, will exacerbate concentration risks in 2025.

Government responses may be ineffective, or overshoot. The EU, US and China have all recently rolled out regulations, the effect of which remains uncertain, making effective risk mitigation and compliance a complex - and costly - area in the near future.