After a challenging 2023, PE rebounded notably in 2024. By Q3’24, deal value rose 36%, while deal volume increased 18% year-on-year¹. US fundraising at par with 2023 levels, with US$236 billion raised by Q3² , while European funds brought in EURO110 billion (US$1115.64billion) during the same period, nearing the EURO122 billion (US$128.27billion) raised in 2023.³

As the year advanced, limited partners (LPs) adopted a cautiously optimistic outlook. According to the SSC Intralinks 2024 LP Survey, 62% of LPs plan to increase PE allocations next year⁴. This optimism reflects expectations of better returns driven by lower interest rates, alongside rising interest in sector-specific funds and co-investment opportunities. LPs are increasingly targeting high-growth sectors, reinforcing PE's critical role in institutional investment strategies.

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The Expanding Role of ESG

ESG principles have become central to PE in 2024, with ESG funds accounted for 20% of private capital raised⁵, signifying their growing importance in PE strategies. This reflects a growing emphasis on aligning investment strategies with societal and environmental goals. PE firms are increasingly adopting ESG practices, working with portfolio companies to enhance sustainability, governance, and social responsibility while creating long-term value.

For Islamic finance, this alignment with Shariah guidelines presents significant opportunities. As PE managers embrace ESG frameworks, discussions on Shariah-compliant investments are simplified, fostering collaboration in ethical and responsible investing.

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Liquidity and Secondary Markets

Shorter holding periods for portfolio companies emerged as a notable trend in 2024. The median holding period dropped to 5.6 years after reaching 5.8 years in 2023⁶, driven by favorable exit conditions. Secondary markets expanded significantly, with transaction volumes soaring to US$72 billion in H1 2024 compared to US$42 billion in the same period of 2023⁷. This growth provides an effective tool for liquidity management, enabling GPs and LPs to balance portfolios and unlock capital. For Shariah-compliant investors, specific secondary strategies requiring lower leverage to finance investments is proving to be a viable way to access buyout opportunities while adhering to Islamic finance guidelines.

Preview of 2025

Monetary Policy and Market Momentum

Aggressive rate cuts by central banks in 2024 have set the stage for increased PE activity in 2025. Improved financial conditions are expected to stimulate IPO activity, particularly in Europe, where fintech firms are gearing up for public listings, and in the US, where resurgence in tech IPOs is anticipated in the coming year. A KPMG survey revealed that 84% of PE professionals expect 2025 to surpass 2024⁸ inactivity levels, buoyed by easing valuation concerns and declining interest rates.

AI’s Next Phase and Emerging Technologies

The AI sector is poised for significant growth, with greater focus on applied AI in areas like enterprise software and drug discovery. Investors remain highly interested in AI technologies, as Preqin’s latest report shows PE tech buyout volumes have nearly doubled over the past decade. The software sub-sector — including SaaS, machine learning, and AI — has led this expansion, accounting for 70% of deal volume and 66% of deal value in tech buyouts over the last five years⁹. Within Islamic Finance, AI offers a unique opportunity for PE growth. By investing in software companies offering transformative technologies, Shariah-compliant institutions could harness the higher PE returns in pure equity investments and without the need for restricted financing structures.

Expanding Co-Investments and Secondary Markets

The secondary market will remain vital in 2025, providing liquidity solutions for LPs and GPs, underscoring secondaries’ role as a key portfolio management tool. Co-investments are also growing in popularity, enabling GPs to partner with LPs on larger deals. Such structures offer unique opportunities to access premium assets while adhering to Shariah principles.

Key Insights and Opportunities for Islamic Finance in 2025

While 2025 brings challenges including geopolitical and fiscal policy shifts, PE investors are well-positioned to capitalize on opportunities in AI, ESG-focused investments, and secondary markets. These areas offer ethical and impactful prospects closely aligned with Islamic finance principles. By prioritizing innovation and leveraging the long-term nature of PE, the industry can deliver resilience and consistent returns, even amidst the uncertainties that lie ahead.

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Author

Saad Adada, CFA

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As published in Islamic Finance News December 2024

_Sources: ^‍

^{1-https://pitchbook.com/news/reports/q3-2024-global-pe-first-look}

^{2-https://iles.pitchbook.com/website/files/pdf/Q3_2024_US_PE_Breakdown.pdf}

^{3-https://files.pitchbook.com/website/files/pdf/Q3_2024_European_PE_Breakdown.pdf}

^{4- https://www.intralinks.com/resources/publications/ssc-intralinks-2024-lp-survey?utm_source=pei&utm_medium=partner-referrals&utm_content=newsletter&utm_campaign=7015d000002hJIa}

^{5-https://www.preqin.com/about/press-release/esg-funds-take-over-one-fifth-of-all-private-capital-fundraising-in-2024-by-April-preqin-reports}

^{6-https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/rate-check-aging-portfolios-weigh-on-private-equity-managers-81958924}

^{7- https://www.moonfare.com/blog/mid-year-review-private-equity-2024}

^{8-https://kpmg.com/us/en/media/news/kpmg-ma-deal-market-study-july-2024.html}

^{9- https://www.preqin.com/insights/research/sector-in-focus/strategy-in-focus-tech}