Private equity’s $2 trillion pile of cash is set to fuel M&A opportunities in 2025.

Private equity firms are sitting on an unprecedented war chest: roughly $2 trillion in uncalled capital. Often referred to as “dry powder,” this cash pile has been accumulating since the last big global mergers-and-acquisitions blowout, in 2021, when volume reached a whopping $5.9 trillion, according to Dealogic. The following year, activity plummeted 38.8%, and it’s been relatively quiet ever since.

“We had a general slowdown in private equity exits in 2023 and 2024,” says Alain Dermarkar, US co-head of Private Equity at global law firm A&O Shearman. High interest rates were an issue; steep borrowing costs and lower returns created valuation mismatches, ultimately reducing the size, scope, and appeal of private equity deals.

“The leverage was quite challenging,” Dermarkar notes.

According to an Ernst & Young report, private equity activity had somewhat of a comeback in 2024, spiking 36% in value compared to 2023. Valuation gaps narrowed and more deals were completed, but it wasn’t a full rebound to pre-slowdown levels.

In 2025, it’s a different scenario. Many funds are starting to feel less cautious, and a chunk of that uncommitted capital is expected to get deployed.

“I think there’s a pent-up demand that’s now being released,” Dermarkar says, citing lower interest rates and the expectation that President-elect Donald Trump’s administration will be friendlier toward consolidation. “That combination is what’s prompting a lot of folks to think 2025 will be a robust year for M&A activity—particularly for private equity.”

Not everyone is convinced. Coller Capital released its private capital barometer survey in December, and let’s just say private equity investors could not have been happy. Nearly 80% of limited partners—those once-loyal backers that private equity funds depend on—declined reinvestment opportunities with at least one of their current managers over the past 12 months, the report showed.

Blame it on persistent liquidity constraints.

“LPs are getting frustrated because more money has been invested in PE than has been pulled out in the last five years,” says Jeffrey Kadlic, founding partner at Evolution Capital Partners. “If they’re not deploying that money, they’re not generating that return.”

For perspective: Private-equity dry powder peaked at $2.6 trillion in December 2023, per S&P Global. By July, it had grown by almost $50 billion.

“That uncalled capital is just waiting for a home,” Kadlic observes.

How Long a Wait?

The real action will come after the dust settles in the first quarter of 2025. “Private equity takes advantage of opportunities when presented,” Kadlic says. But the first three months will be crucial. “We got to get through Q1.”

The regulatory landscape, as well as the potential for tax cuts, will likely impact how private equity firms deploy capital and whether they choose to buy or sell, he argues. It all depends on what bills are in the queue and what will get past.

At the end of last year, the corporate tax rate in the U.S. was a flat 21%, the level established by the previous Trump administration’s 2017 Tax Cuts and Jobs Act (TCJA), which reduced it from the previous 35%. This time, Trump is proposing to extend the TCJA and lower the corporate tax rate to 15% for domestic production.

That could incentivize businesses to pursue exits, and private equity firms will be ready to step in, taking advantage of favorable conditions to acquire undervalued companies, sell them at the highest price possible, or take them public. What that timetable will look like is anyone’s guess, but the hope is that liquidity goes back to private equity investors “sooner, rather than later,” says Kirk Konert, managing partner at AE Industrial Partners.

“There’s a backlog of deals that need to either go public or be sold,” he says. “I think people are optimistic that 2025 is the year when you start to see some of those trades happen.”

Where The Action Is

Once private equity money is put to work, observers expect certain sectors to see higher levels of deal activity than others. For AE Industrial, whose bread and butter is aerospace and defense, the modus operandi thus far is taking them to the moon: literally.

It was in 2022 that the Boca Raton, Florida-based firm acquired a majority stake in Firefly Aerospace. In January, Firefly plans on becoming the first private company to land a spacecraft on the moon, beating Elon Musk’s SpaceX to the punch.

“That’s an exciting event for us and our investment,” says Konert. “Defense-oriented businesses are trading up.”

Private equity managers are also increasingly interested in artificial intelligence. Last year, deploying AI quickly became a leading focus, per a survey by FTI Consulting in which roughly 83% of respondents said it will prove to be either very or somewhat important to their sell-side endeavors while 59% predicted AI will transform value creation within portfolio companies.

Additionally, many private equity firms are eager to integrate AI into their operations, with a majority already running pilot projects and looking to scale these initiatives across the wealth management and financial services sectors.

“Father time is catching up,” says Myles J. McHale, Jr., senior vice president of Cannon Financial Institute. Smaller firms are struggling to compete with the larger players that can better absorb regulatory compliance costs and invest in new technology, he notes.

McHale expects the trend to continue into 2025, citing four key factors: regulatory changes, technological advancements, scale, and the aging workforce of financial advisors. Private equity firms are at the forefront of this reshaping of the industry, he adds, pouring capital into consolidation and technological innovation.

“Larger firms can offer more competitive pricing and a wider range of services due to their scale and geographic locations,” McHale argues.

The need for advanced technology, too, is driving consolidation as clients demand digital solutions and more sophisticated platforms. Smaller firms that cannot invest in these technologies are being forced to merge or seek an acquirer. Those firms that invest in digital transformation will have a competitive edge in the market, positioning themselves for continued success as the industry evolves, McHale predicts.

As for manufacturing, tariffs on certain goods or services will also affect private equity. Depending on the geopolitical climate, the added layer of complexity created by higher duties will compel private equity firms to stay nimble, adjusting their strategies to keep up with the ever-evolving landscape of international trade and regulatory shifts.

“It depends on what ultimately [unfolds],” A&O Shearman’s Dermarkar says. “If you reshore, you can benefit from a lower tax rate. So it’s just going to have to be up to the company to decide what path is best for them.”

While tariffs and international trade policies will create some headwinds, the abundance of cash on the sidelines and the growing need for scale and technological sophistication are likely to drive private equity deals in the coming year. If not, firms run the risk of frustrating their limited partners, who will then continue to pay management fees just to have all that dry powder sit there. If it stays idle too long, fund managers could miss out on big returns, though they will still get their cut.

That means 2025 will be a year of transition, with private equity firms poised to navigate the uncertainties of a new administration while capitalizing on the opportunities that arise. For those able to stay ahead of the curve, the potential for growth and strategic acquisition could be substantial.

“Now there’s pressure to put money to work,” Kadlic says.