📝 usncan Note: Investors Need To Look Beyond Current PE Returns To Find Future Alpha
Disclaimer: This content has been prepared based on currently trending topics to increase your awareness.
By Roberta F. Brzezinski and Martin Tornberg
After several slow years, the private equity exit market is showing signs of life. This is welcome news for a system plagued by various exogenous shocks — including COVID and related frothy valuations, high interest rates and the 2022 market correction, the US electoral cycle, and tariff uncertainty — that have resulted in wide bid-ask spreads repressing deal activity. In the current environment, market participants need to look beyond recent depressed returns and focus on the qualitative factors that give insight into future performance.
Some LPs are starting to reassess their manager rosters, tuning out the noise to identify key qualitative factors that could lead to outperformance in the next economic cycle.
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Deal activity on the rise by dollar volume
Private Equity International notes that private equity exit volumes reached $308 billion in the first half of 2025, the highest H1 total since 2022. The uptick, albeit on the high end of deal size, shows that some GPs have been heeding their LPs’ call for liquidity and resolving to sell at today’s still-muted multiples.
We predicted last October that deal activity was bound to make a strong comeback in 2025 and our team at Control Risks is now seeing this trend in our own pipeline. Over the past three months, demand from our Americas clients for transaction diligence and deal advisory has more than doubled.
Our current engagements mostly focus on the effects of global uncertainty and rapidly-changing regulatory and operational environments, highlighting the importance to investors of incorporating a broad range of qualitative factors—both macro and micro—when making investment and exit decisions.
The twist for GPs: A change in buyer
As fund managers have been forced to capitulate to low valuations in order to return capital to their investors, they are selling more to strategics. EY reports that strategic sales accounted for 26% of H1 transactions, with the value of those deals doubling in comparison to the same period last year. With cash-strapped GPs largely sitting on the sidelines, operating companies are stepping forward to take advantage of the lower deal metrics, a contrast from an earlier era of GPs outbidding operating companies. This follows strategies by international acquirers to diversify manufacturing and sourcing locations, as the trend towards more regionalized trade continues.
To optimize for this strategic interest, some GPs are getting out in front of potential roadblocks to exit, proactively reviewing and addressing qualitative portfolio-company issues such as shifting management team dynamics, regulatory impacts, and potential effects of tariffs.
The long view for LPs: Picking GP winners when returns are low
In a low-valuation environment, investing in the next generation of private-markets managers requires looking beyond current returns. As a result, some LPs are starting to reassess their manager rosters, tuning out the noise to identify key qualitative factors that could lead to outperformance in the next economic cycle.
To prepare for the road ahead, some LPs are engaging in “Portfolio SWOT” analyses, assessing a GP’s team culture, sector depth, thought leadership, and process rigor. By analyzing data from surveys, public records, social media, and human-source intelligence, LPs can draw conclusions both on a standalone basis and relative to other GPs in their portfolios.
Key qualitative factors to consider
Whether fund managers or fund investors, all participants in the private-markets ecosystem should carefully assess issues such as:
- Culture pluses: Is the company or fund manager well-networked with industry and research leaders in their chosen verticals? Do they demonstrate awareness of investable adjacent fields? Do they encourage intellectual curiosity across their teams, and do their junior team members demonstrate engagement?
- Culture minuses: Are there deficiencies in a company or fund management team such as high attrition, lack of a credible succession plan, and/or unreported workplace issues?
- Reputational and legal risks: Are there new or emerging red flags related to integrity and ethics, litigation, or political exposure in the current polarized environment?
- Geopolitical awareness: How is the company or fund manager assessing and planning around trade wars and tariffs to protect or reconstitute critical supply chains and markets and potentially develop strategic advantages?
- Regulatory exposure: Is the company or fund manager aware of unfolding changes to regulatory and legal frameworks, both domestically and in foreign jurisdictions housing their supply chains, customers, and/or investors?
- Digital security: Is the company or fund manager hardening its defenses against cyber attacks or data integrity issues that have the potential for operational disruption, reputational damage, or legal risks?
The task ahead: Future-proofing PE
In the current challenging environment, while GPs are selling assets cheaply or not at all, most LPs are focused on buying and selling baskets of secondaries. Both approaches, while key for asset-allocation housekeeping, are inevitably focused on the short term.
A Portfolio SWOT exercise can help these LPs look past today’s clouded DPI to improve their alpha, maximizing allocation decisions for the long term.
Meanwhile, the GPs who stand to win are those who can demonstrate qualitative readiness as they prepare for the next cycle.
Roberta Brzezinski is a Partner and head of the Business Intelligence practice in the Americas and Martin Tornberg is a Principal and Private Markets lead for EMEA at Control Risks, the strategic intelligence and security firm.
