Private Equity Q1 Insights: Adapting to Economic Shifts and Deal Market Trends

[00:00:00] Sean Mooney: Welcome to the Karma School of Business, a podcast about the private equity industry, business best practices, and real-time trends. I'm Sean Mooney, the founder and CEO. In this episode, we have a special conversation where we're gonna give you an advanced preview into our Q1 2025 private Equity insights report.

[00:00:30] Needless to say, there's a lot going on in this one. Enjoy.

[00:00:40] During this special episode, we are going to talk about what the best business builders in the world of private equity were up to during the first quarter of 2025. And the unexpected dose of uncertainty that, uh, came with us right after first quarter 2025. But let's jump into it.

[00:00:59] During the fourth quarter of 2024, I shared how the PE and the broader business builder world felt like winter was turning into spring. Things were kind of feeling good and our data and intuition led us to predict that the economy would stay robust and the PE deal market would reawaken.

[00:01:19] Sure enough, early signs of warmth and recovery during Q1 2025 became apparent. The proverbial convertible tops were coming down and we were ready to kind of hit the road and pick up speed. We were seeing a resilient economy declining inflation, a strong job market expanding PMI indexes.

[00:01:40] In real, tangible traction in deal flow, which all confirmed that better weather was indeed on the way. But just so as often happens in the northeast where I spent most of my adult professional life, early spring can be fickle seemingly overnight. The sky's darkened in a cold blast from a new tariff policy.

[00:02:03] Reminded everyone that seasons don't change without a few surprises in between. As Mike Tyson famously once said, everyone has a plan until they get punched in the mouth. And on April 2nd, the business builder world got hit by a storm of policy fueled uncertainty.

[00:02:19] Our early read from BluWave's, thousands of proprietary projects, and. With these business builders is that PE in response got quiet for a little bit, but then quickly took action and started shaking it off. Leading PE firms were rapidly reorienting the way they looked at the world.

[00:02:40] And then we saw projects come right back in shortly after our Q1 data was locked. And so we saw them reacting swiftly, staying agile. Keeping one eye for sure on the horizon and the other one under proverbial weather apps. While the spring storm caught many of us off guard, we're seeing indeed that the best business builders in the world are treating as a call to action and opportunity and not for retreat.

[00:03:07] As experience often teaches us, in times like this, what we wanna do and what the private equity industry does. It is act like a buffalo. When the storm comes in, you run towards it and you run through it. Knowing that that's the fastest way through, we hope that, some of the insights that we share here and in our insights report, we'll give you some data to help navigate this weather system that's coming through so that we can get to the sunnier days ahead.

[00:03:29] So let's talk about specifically what we saw in Q1, 2025, knowing that there's an asterisk on it and the world changed. Literally two days after the quarter closed. But from what we were seeing in the first quarter, the market and the economy were showing signs of really nice health, and the leading indicators were showing that the deal market was markedly strengthening and the economy was kind of strong enough for what you need for the rest to kind of take shape and the flywheel to start spinning.

[00:04:03] Then what we really are all trying to figure out right now is the tariff plan has been introduced and that's caused volatility and uncertainty that people are managing through. First, let's address the, just announced Q1 GDP numbers of negative 0.3% at face value. That's quite concerning, but let's look at it with the tariffs in mind. We'll talk more about this later through our conversation. But in Q1, imports into the United States surged to 41% as corporations, really intelligently, took strong action to get their product into the United States ahead of the tariff announcements so that they wouldn't have to pay tariffs on those products.

[00:04:43] Well, as you look at how they calculate GDP, that caused a negative 5% adjustment to the GDP calculation rate. Normalized for this really kind of extraordinary importation action to get ahead of these policies, GDP would've been moderately positive. One economist we follow put normalized GDP at 2.3% when you adjust for this kind of extraordinary importation action.

[00:05:05] So you know, solidly decent, not great, but a decent GDP number. Then what we saw was the services and manufacturing PMI both came in above 50%, which signals expansion. and The other thing that we saw was in the job market, which was pretty strong in the low four percents again.

[00:05:23] We also observed inflation continue to go downwards. Went as low as 2.4% in March, getting closer to the federal reserve's, 2% target and well below 8.2% that we saw in September of 2022. And so absent the shock and awe from the tariff program, the economy was getting closer and closer to where the Fed would say, Hey, things are pretty good. The preconditions were there for a pretty good year at current course and direction. Then what we did was kind of interesting. We looked at our deal data index. So we looked at our activity indexes where we measure due diligence as a percentage of overall activity within private equity.

[00:06:03] 2023 saw a pretty steep decline in due diligence, which is a great correlate to deal activity. So it went down 21% year over year in 23 during the first quarter, and in 24 we saw it go up 4%. For the first quarter over the 23 quarter 25, we saw it up 15%. So the deal market was tangibly growing. And what that means is the PE firms were calling us for kind of the big ticket items where they were spending real money to enable acquisitions. The next thing we saw, some of our friends in private equity published their deal flow. So Hidden Harbor was showing much stronger deal flow than the year prior. We were seeing good signals from them. So the deal market, as we talked about, was coming back. The economic signals were good. As of March 31st, I think everyone was feeling pretty good. Then April 2nd happened. And what happened there? The stock markets kind of plummeted and they've been up and down and up and down. The VIX has been all over the place.

[00:06:59] We've seen the private equity industry really during that first week of April, as they so often have done in prior extremely volatile periods is they got quiet. They went quiet for this time, about a week, maybe a week and a half. As I look through other periods, COVID, they went quiet for a month.

[00:07:17] If we think about what was the more approximate kind of disruption? It was the, I call it a walk on the banks associated with the failure of Silicon Valley Bank.

[00:07:25] It got quiet for about two weeks that time. And so this time what was really interesting is we saw the market kind of pause for about a week. And now we're seeing volumes and activity come right back at it. And where are we seeing 'em take action? They're taking action where you'd expect on tariffs, on growth, on pricing, on procurement, around transportation, logistics.

[00:07:46] So there's a lot of activity going on right now, but the real interesting thing is we're still seeing lots of activity around commercial diligence. So I think for the 80% of the private equity industry, roughly, that isn't associated with an industrial end markets, they're still humming along. Good news is we're seeing PE quickly recalibrate, take action, where they have industrial, they're playing to win the rest of the industry.

[00:08:08] They realize their job is to make investments exit investments and manage through choppy waters as they've persisted really every year since 2020. And let's be honest, most years in between, there's always something going on. So that's the lay of the land from a very high point right now in the world.

[00:08:26] A lot of cards are gonna be dealt in the days, months, weeks ahead. The good news that we're seeing is the resiliency, the tenacity, the grid of the private equity industry is once again showing its true form. And the P firms are kind of like running straight through this and running towards opportunity and reframing that risk into something that enables them to not only survive, but also thrive.

[00:08:47] With that preamble in place, let's talk a little bit about what actually happened so as we look at our data, once again, there was tons of activity in the first quarter of 2025 around value creation. So 75% of all the activity, all the projects that came in were how do we make our companies better, safer, stronger?

[00:09:06] And so that's a really good thing, and it's something that I think we are really encouraged by. Now the flip side is we still saw a pretty big increase from last year in diligence. As usual, what we saw a lot of activity as, as we see every single quarter, was a ton of activity on strategy. They wanna know about the health and market, the size of the market, how it's growing.

[00:09:26] are the companies that they're investing in the right to win? What are their trajectories? What are the unique growth strategies that will fuel future value creation plans? Hi, Karma School of Business listeners, Sean here. Wanted to shine another spotlight on one of the most important ways PE firms assess opportunities. They are the most active users of a product called Commercial Due Diligence, also known as Market Studies.

[00:09:50] Why? Because they know the market always wins. And if you're confident that you have a good market, a solid strategy, combined with a good team that can execute, The odds of success go way up. They also understand that specialized insights from focused providers are critical because beta and average insights aren't good enough anymore.

[00:10:12] As a result, top P firms call us pretty much every single day to get connected with the best of the best, right fit providers in the world. This product is not just for those who do M& A, one source of alpha and edge is to do a commercial due diligence, including a growth strategy assessment on your own company.

[00:10:31] And you'll be amazed how much your insights and go to market plan will improve. Give us a call or visit our website at BluWave. net and we can give you excellence and alpha with ease. Back to the show. The next thing that we saw a ton of activity on was this whole concept of bringing in experts around senior advisors.

[00:10:50] They wanted, people had seen these cycles before who could be adjuncts to the deal teams, and then next, as you can understand, we saw a lot of activity around operations. So private equity firms, they look into the future, they could see to a certain degree that these tariffs were coming and they were gonna be prepared.

[00:11:05] So spending a lot of time under understanding the procurement postures of their companies, the operational resiliency, the way to enable capacity. So there's a lot of focus going on, like, okay, we're still gonna invest, but how do we play to win when these tariffs results may do come.

[00:11:21] And then we also continue to see areas look like as we always do focusing on technology. These tech stacks are always improving and enhancing, and there's this little thing called AI going on. So within the land of private equity, a lot of what we typically see, but there was just more of it, which was really exciting.

[00:11:38] Now let's talk about value creation. This is where you see some also really interesting things in the first quarter of 2025. One thing that was really interesting was we saw a pretty steep decrease in human capital activity from Q1, 2025 versus Q1, 2024. And just as a quick aside, we always look at year over year versus sequential quarters because so much of what happens in private equity in the business building world is seasonal.

[00:12:07] You do things differently in the first quarter and the second quarter, the third quarter and the fourth quarter based upon deal seasons, but also operational cadences that relatively repeated themselves year over year. So the best comparison is actually year over year, not quarter over quarter. And so with that in mind, we saw the year over year comparisons of human capital.

[00:12:25] Still by far more than two to one, the biggest area of private equity spends time on is hiring talent and upgrading talent and bringing in new skills. And so it's still a two to one margin over what other people are focusing on. But it pretty meaningfully declined year over year versus the first quarter of last year.

[00:12:42] And why is that? The best thing that we can really think about here is, it's related to the extending hold on private equity portfolio companies. And while the deal markets have picked up. Those ones haven't closed yet. And so if we had more deals closing in the first quarter this year, we would expect human capital to increase next quarter.

[00:13:00] We'll see. But in the first quarter of 2025, it relatively declined year over year, and we think that's because overall, the deals that were closing last year, there was just not as much rebound you would expect. And so what happens is private equity firms really make the big changes, the top grading, the additions, the upgrading in year one of a new hold.

[00:13:23] And so you need new deals to really push human capital to occur. And if that's kind of like a mediocre amount of volume, you're not gonna see a ton of activity. And we saw a lot of activity from prior periods because if a private equity firm is gonna hold a company. Past a five year hold, usually around three or four years, they're saying, okay, we're gonna bring in people now for the next growth phase because we're gonna own this thing for 6, 7, 8 years.

[00:13:46] And you need different people for different times. And so I think what we've seen here on the decline is not that it's a, they're hiring less, fundamentally, it's just they need the deal engine to restart again for them to bring in the huge waves of people that they're accustomed to doing.

[00:14:01] The next big area where we saw a big, big uptick was technology. And we've been talking about this, the private equity industry, they're fast followers and so they weren't the first ones to bring in neural networks. Where we've seen them spend a lot of activity right now is getting their data right, getting it organized, getting it structured, getting it clean, getting it put into places where they can visualize it and analyze it to help them inform their decisions.

[00:14:26] We've seen over the last two years, wave after wave after wave of P firms saying help us get our data clean, organized, analyzed, and these will be foundations to do the really cool stuff. Now, what we're actually seeing in addition to that is the leading P firms have been doing that ahead of others are now putting in the really cool AI stuff that enables efficiency, effectiveness, quicker synthesis of information. And so we're seeing the enablements actually occur now within the P world, and that's super, super exciting. The other area that we've seen a lot that you expect, just like in due diligence phase, we're seeing a ton of activity and operations.

[00:15:01] In the first quarter, we had people saying, Hey, we need procurement groups transportation logistic groups to realign our footprint of suppliers. We need pricing strategy to deal with the inflation that's going on. So that whole toolbox, they've been going on this, really earlier than it really came through. I don't think people expected the magnitude of the tariff policy that came through. But they knew something was coming, and so we saw a lot of activity that was going there.

[00:15:25] Hi, this is Sean. Wanted to take a quick moment to tell you a little bit why BluWave exists. It's based on this whole notion that assessing opportunities and building business is really hard. We all know third party expert service providers can dramatically help. But at the same time, it's hard to know who's good.

[00:15:46] Usually leaving you like I would do and call friends and ask, Do you know someone who does this? Or just go the square peg round hole route. So, after nearly 20 years in PE, I decided to solve my own problem and created BluWave. Today, many hundreds of PE firms, thousands of portcos, leading public companies, private companies all call BluWave to instantly get connected with the exact third party service provider they want that's pre credentialed by BluWave and perfectly calibrated for their need and really good.

[00:16:17] You too can give us a call or visit our website at BluWave. net. We're free to use and you can benefit the same way other top PE firms do. The last big thematic area that we've seen a lot of push on, just like in prior periods is more and more focus year over year on growth.

[00:16:34] And so the private equity firms are investing in growth in their portfolio companies. One, I think most importantly because they view it's a correlate to overall exit value. The more you grow, the faster you grow. The higher the multiple, the more the company's worth When you sell the business after it's been transformed.

[00:16:49] The other thing if we're candid is there's a whole crop of businesses that were bought in. 2021 and 2022 at the peak of the last cycle. And for private equity firms to make the return that they wanna make, very justifiably on these investments, they realize in order to overcome kind of peak valuations, they gotta grow more.

[00:17:09] And so the private equity firms are very heavily focused on how do we accelerate growth within these businesses. So that we can make a fair and attractive risk adjusted return on prior investments, and then ultimately return that capital to the LPs. And the LPs are certainly saying we wanna see more of that, sooner from the PE industry.

[00:17:28] So there's a little bit of a pressure point there that I think all of PE and the LP worlds are working through right now. but certainly the incentives are aligned. the higher risk adjusted return that you can bring back to investors. The better right now though, I think the industry is battling an issue associated with liquidity.

[00:17:44] I think everyone wants to have their cake and eat it too. We want the higher multiple, but we want cash now. It's hard to reconcile that. I think the industry is working through it. So those are some of the big trends. I think we had all systems go as of the first quarter. We've had certainly a dose of uncertainty that has entered the industry.

[00:18:00] Right now, the private equity industry is taking action. Net net, I think we will work through this, but I need to see more cards, as does everyone else. In the meantime, there's tons of opportunities that are presenting for those who have the audacity to take action, run towards the storm, see the opportunity so that when we get through this, we're already through the other side and others are just kind of like loading up their wagons again and starting to, head towards opportunity.

[00:18:27] it is a time that was very exciting in the first quarter. I think we hit a blip to be sure I think by what we're seeing in the data right now. I'm optimistic that the rest of this year still has a lot of opportunity to be had. but I'll speak for all business builders.

[00:18:41] We would certainly love to have a little bit more certainty from our leaders in Washington DC to help us make decisions.

[00:18:49] That's all we have for today. We hope some of this information gives you insight and Alpha into how to play the game of business better in the days ahead. Please continue to look for the Karma School of Business Podcast anywhere you find your favorite podcast. We truly appreciate your support. If you like what you hear, please follow five star rate, review and share.

[00:19:10] This is a free way to support the show and it really helps us when you do this. So thank you in advance. I. In the meantime, if you want to be connected with the world's best in class private equity grade professional service providers, independent consultants, interim executives that are deployed and trusted by the best business builders in the world, including many hundreds of top private equity firms and thousands of portfolio companies, and you can do the same whether or not you're in the P world, please give us a call or visit our website@BluWave.net.

[00:19:37] That's B-L-U-W-A-V-E. And we'll support your success onward. The views and opinions expressed in this program are those of the individuals presenting and do not necessarily reflect the views or positions of any other persons or entities, including those referenced herein.

[00:20:01] No representations, warranties, financial, legal, tax, or other advice made herein. Consult your advisors regarding any topics discussed during this episode.

Private equity insights for and with top business builders, including investors, operators, executives and industry thought leaders. The Karma School of Business Podcast goes behind the scenes of PE, talking about business best practices and real-time industry trends. You'll learn from leading professionals and visionary business executives who will help you take action and enhance your life, whether you’re at a PE firm, a portco or a private or public company.

BluWave Founder & CEO Sean Mooney hosts the Private Equity Karma School of Business Podcast. BluWave is the business builders’ network for private equity grade due diligence and value creation needs.