Rational Expectations in Private Equity: A 2025 Outlook

Today, those expectations are more fragmented and consequential than ever. As macroeconomic conditions tighten and policy signals fluctuate, understanding what PE professionals expect—and how those expectations shape investment behavior—is a strategic imperative.

Through three proprietary micro surveys conducted by PE150, we assessed expectations around three major forces reshaping the investment landscape: interest rates, the likelihood of a soft landing, and tariff policy. Each topic cuts to the heart of capital deployment, value creation, and deal timing. Our audience—comprising GPs, corporate development leaders, and M&A bankers—offered not only predictive insights, but strategic postures.

This report synthesizes those findings with external context and data from public sources including the Federal Reserve, IMF, JP Morgan, McKinsey, EY and others. 

Our goal: to map how rational expectations are driving real decisions in private equity today, across risk pricing, sourcing strategy, exit timing, and sector rotations.

The following pages explore these expectations in depth, structured across the three themes. Each section includes interpretation, implications, and placeholders for key charts to be inserted. We conclude with a strategic synthesis: what these expectations tell us about the trajectory of PE over the next 12–18 months.

Interest Rates & Private Equity’s Repricing Moment

The Federal Reserve's rate path remains the single most important macro variable for private equity. Our micro survey shows a near-even split among private equity sponsors: 50% expect rates to stay flat, while 35% of consultants and 32% of corporate development executives expect them to rise.

That divergence is critical. PE sponsors—deeply reliant on leverage—have the most to gain from stable or falling rates. Their expectations suggest hope for refinancing opportunities and margin improvements via multiple expansion. Consultants and Corp Dev professionals, perhaps less anchored to portfolio leverage, appear more focused on inflation persistence.

2023's high-rate environment depressed deal value by 60%, creating a cautious environment where only cash-rich buyers could compete. Sponsors are now recalibrating: embracing operational value creation and shifting toward deals that don’t require aggressive leverage.

Implications:

• If the Fed cuts rates, expect a short-term deal surge and valuation expansion

• Flat rates maintain the status quo: slow volume, heightened due diligence, and repricing across secondaries

• Rising rates? Expect a shift toward minority deals, structured equity, and continuation vehicles

Strategic Takeaway: Sponsors are preparing for all scenarios, but rooting for one: rate stability with a dovish lean.

Soft Landing or False Hope? The Recession Expectations Divide

When asked whether the U.S. economy was headed for a soft landing, a mild recession, or an ongoing contraction, private equity sponsors were the most bearish: 45.5% believe a recession is already underway. That stands in contrast to Investment Bankers (43.2%) expecting a mild recession and Corporate Development (38.1%) still betting on a soft landing.

This sentiment divide is more than psychology—it reflects deal pipeline reality. PE sponsors, embedded in portfolio company operations, are seeing softening margins, cautious lenders, and extended sale processes. Bankers, whose fees depend on forward momentum, are betting on resilience. Corporate Dev, with longer time horizons, appears willing to play through short-term volatility.

The macro data remains ambiguous: inflation is moderating, but growth is slowing. Labor markets have softened but not collapsed. In this in-between zone, expectations shape strategy.

The  soft landing narrative remains intact, but increasingly fragile. The U.S. economy has shown resilience: inflation has moderated, consumer spending is stable, and labor markets have cooled without collapsing. The Federal Reserve has paused further rate hikes, aiming to give the lagging effects of previous tightening time to work through the system.

But beneath the surface, cracks are forming.

• The IMF has downgraded global growth projections, citing persistent geopolitical tensions and sluggish manufacturing demand.
  

• Consumer confidence has wobbled, pressured by sticky prices in services and recent trade tensions flaring back up.
  

Leading indicators like freight volumes, new housing permits, and small business hiring are flashing yellow. 

Monthly inflation surged through 2021 and peaked in mid-2022, with multiple prints above 1.0%, before moderating throughout 2023. The disinflation trend held for much of 2024, though early 2025 brought renewed volatility—culminating in a slight negative CPI reading in February. This uneven path underscores the Fed’s challenge: inflation is cooling, but not consistently. For private equity, the persistence of price noise complicates rate expectations, prolongs valuation uncertainty, and forces a more scenario-driven approach to capital deployment.

Strategic Takeaway: The soft landing is priced in—but contingency planning for contraction is dominating strategic discussions.

Tariff Tensions and the M&A Supply Chain Chessboard

Nearly 47% of respondents in our micro survey significant supply chain disruption if a new wave of tariffs is enacted in 2025. Meanwhile, 32% expect an acceleration in domestic sourcing. That leaves just 21% in the "no major impact" camp—suggesting that trade policy is no longer noise in M&A modeling.

Trump's proposed tariff policy—a blanket levy on nations taxing U.S. exports—is forcing dealmakers to reprice supply chain exposure. For PE firms, this means higher diligence costs and more strategic value creation plans. Expect reshoring, bolt-ons, and operational integration to take center stage.

Some see opportunity: tariffs could make U.S. industrials and domestic manufacturing platforms more valuable. Expect roll-ups in aerospace, components, and even industrial insurance to reaccelerate.

A recent EY survey reinforces this sector-specific lens. Respondents expect rising trade tensions to moderately or significantly harm non-U.S. manufacturing (70%), consumer goods (73%), and healthcare (27%), while projecting a positive impact on U.S.-based manufacturing (47%) and aerospace and defense (50%). Technology, despite exposure to global supply chains, was seen as relatively balanced, with 43% seeing no impact and 50% expecting a moderately positive effect. These views underscore how tariffs are actively reshaping sector-level playbooks and sharpening the strategic focus of dealmakers.

Implications:

• Tariff risk is becoming a core underwriting filter

• Expect a premium on vertical integration and proximity to end markets

• Sponsor-backed manufacturers with diversified or domestic supply chains could command higher exit multiples

Strategic Takeaway: Tariffs are no longer an edge case. For many dealmakers, they’re now a base-case modeling scenario.

Deal Activity Rebounds, but With a Different Center of Gravity

Private equity dealmaking appears to be rebounding—but not symmetrically. After hitting a cycle low of $61B in 4Q23, U.S. PE deal value has recovered to $93B in 1Q25, with volume holding near recent averages at 49 deals. Sponsors are pursuing fewer but larger, more deliberate transactions. This signals a risk-aware environment where capital deployment is focused on thematic clarity and sector resilience.

Sector rotation also tells the story. Technology remains dominant at 31% of deal volume, even after a slight pullback from 34% in 4Q24, supported by expectations for U.S. tech spending to hit $3T in 2025. Meanwhile, Healthcare and Utilities gained momentum, rising 6–14pp as investors pivot toward defensiveness and essential services. Real estate posted a modest uptick, while consumer and “Other” sectors saw relative declines.

Implications:

• PE firms are favoring sectors with pricing power, margin stability, and long-term tailwinds

• Tech continues to attract attention but is being filtered for durability and cash flow

• Expect continued selectivity: sponsors are underwriting for stability, not just growth

Strategic Takeaway: The recovery in deal value is real, but the market is bifurcated. High conviction themes are getting capital. Everything else is on hold.

Exit value rose in 1Q25, with further growth anticipated as dry powder remains abundant and a backlog of unsold assets begins to clear.

Private equity exit activity regained momentum in 1Q25, with values climbing to $89B, the highest since mid-2022. Exit count also edged up, suggesting improving buyer appetite and thawing market conditions. GPs are capitalizing on stronger pricing, supported by ample dry powder and a buildup of mature assets. With IPOs still limited, sponsor-to-sponsor deals and secondary transactions continue to dominate exit strategies in a cautious but active market.

Conclusion: Mapping Rational Expectations to Strategic Readiness

If the PE world is driven by rational expectations, then 2025 is shaping up as a year of probabilistic strategy. Firms are not betting on a single macro path—they’re constructing optionality. From interest rate hedges to tariff clauses in SPAs, sponsors are building playbooks for multiple futures.

The dominant theme across all three micro surveys is fragmentation. PE no longer operates on a shared macro consensus. Consultants, bankers, and sponsors see different data, value different signals, and position accordingly. That divergence is both a challenge and an advantage—creating mispricing and strategic whitespace.

For GPs, this means:

• Stress-testing models across rate and inflation scenarios

• Building resilient capital structures

• Prioritizing sectors with pricing power and supply chain control

• Expanding toolkit usage (NAV-based financing, continuation funds, minority stakes)

In short, rational expectations today demand rational optionality. For firms that can adapt, 2025 won’t just be a repricing moment. It could be a reset for smarter, more resilient private equity.

Sources & References

EN. (2025). IMF downgrades global growth forecast to 2.8 pct in 2025 amid increased tariffs. https://english.news.cn/20250423/f720f77b848d4e6d8fe79ee4f63e5a73/c.html#:~:text=Noting%20that%20the%20tariffs%20alone,economic%20activity%20and%20the%20outlook. 

EY. (2025). Private Equity Pulse: key takeaways from Q1 2025. https://www.ey.com/en_us/insights/private-equity/pulse#:~:text=Summary,equity%20landscape%20amid%20ongoing%20uncertainty.&text=Building%20the%20cash%20discipline%20and,Find%20out%20more.&text=Discover%20the%20five%20key%20drivers,value%20creation%20in%20uncertain%20markets.&text=As%20deal%20flow%20starts%20to,value%2C%20but%20action%20is%20needed

EY. (2025). Private equity US market insights and trends. https://www.ey.com/en_us/private-equity/us-private-equity-industry-insights 

PE150. (2025). Private Equity Eyes Fed’s 2025 Rate Path: What It Means for Private Markets. https://www.pe150.com/p/private-equity-eyes-fed-s-2025-rate-path-what-it-means-for-private-markets 

PE150. (2025). Tariffs Reloaded: Trump’s Trade Gambit and the M&A Domino Effect. https://www.pe150.com/p/tariffs-reloaded-trump-s-trade-gambit-and-the-m-a-domino-effect 

PE150. (2025). What Our Survey Reveals About the Soft-Landing Narrative, and What It Means Going Forward. https://www.pe150.com/p/what-our-survey-reveals-about-the-soft-landing-narrative-and-what-it-means-going-forward 

Western Asset. (2025). CPI Inflation Moderates, but With a Hint of Tariff Effects. https://www.westernasset.com/us/en/research/blog/cpi-inflation-moderates-2025-03-12.cfm