Achieving private equity exits in today’s market

December 2025  |  SPECIAL REPORT: PRIVATE EQUITY

Financier Worldwide Magazine

December 2025 Issue

Private equity (PE) exits in today’s market demand more flexibility, more creativity and more discipline than at any point since the Great Recession. Despite momentum as deal activity has seen an uptick, the question remains as to whether exit activity will follow suit.

That question continues to be front of mind for the industry as liquidity pressure from limited partners (LPs) increases. Three consecutive years of low distributions to paid-in capital are increasingly impacting fundraising efforts. Portfolios are full of ageing vintages, with many assets on firms’ books for longer than six years. At 2024’s exit pace, the industry would take more than nine years to fully clear the backlog.

Recent years have seen sponsors turn to alternative liquidity strategies, including secondaries, continuation vehicles and dividend recaps. These solutions have their place. With the right asset, more time under PE stewardship can lead to the home run returns investors seek. However, LPs generally favour a conventional sale that delivers immediate and transparent liquidity – even at a discount to internal valuations – over alternative liquidity solutions that extend holding periods or constrain liquidity under limited market validation.

Despite the slower fundraising market, there remains plenty of dry powder waiting to be deployed. For firms looking to sell, setting an asset up for a successful exit requires a pragmatic playbook. Sellers should focus on exit preparedness to support a disciplined process, valuation gaps and tools to address them, and maintaining a flexible mindset, particularly when it comes to navigating larger exits.

Exit preparedness

Focus on what you can control. As with anything, the key to a successful exit process is preparation. With the political and macroeconomic uncertainty that has dominated 2025, it is more important than ever for sellers to tune out the noise and focus on what they can control. Readiness to exit, a high-quality management team and an understanding of the market conditions, including financing needs and conditions, can lead to a smooth sale process which bolsters buyer confidence. Buyers will pay for certainty and underwrite momentum, rewarding sellers who present a well-prepared equity story paired with an efficient sale process, which in turn will provide sellers with a robust and competitive process.

Start with leadership. A strong management team not only bolsters fundamentals but can unlock additional value by effectively helping to drive the sale process. Proven exit experience, particularly in the finance function, can help showcase assets in their best light. High-quality financials backed by robust data and key performance indicators contribute to bidder confidence in historical figures and projections. An emphasis on understanding governance, legal and regulatory risks can protect against diligence issues that may surface mid-process, which could dampen deal certainty and result in re-trades. This preparation also pays off when it comes to papering the deal with more efficient drafting and less back and forth between the parties.

Understand changing market conditions. It is equally necessary to be prepared for the market conditions at the time the process kicks off and at the time parties are seeking to transact. Recent headline deals indicate that there is currently significant capacity in the debt markets, as highlighted by the $20bn of debt behind the proposed acquisition of Electronic Arts as announced in late September and the high leverage ratio in Sycamore’s take private of Walgreens. The current competitive tension between traditional bank lenders and private credit offerings is creating a favourable environment and optionality for acquisition financing, with loan margins near historic lows. Any further reduction in interest rates, as many are anticipating for Q4, would add fuel to the buyout market and help support exit momentum. However, we have also seen some setbacks that dampen this optimism and attracted scrutiny, such as the recent high-profile bankruptcy of First Brands.

Keep a tight grip on the process. Preparation also pays off once the auction process gets formally underway. As the market has tilted toward buyers, many sellers find that auction processes have softened. Buyers are more hesitant and selective, and auctions lack the depth needed to produce competitive tension. Soft processes with shorter buyer lists, flexible timetables and more bilateral engagement can erode value if not designed deliberately. To avoid common pitfalls, sellers should consider pre-emptively answering diligence questions, provide credible underwriting support and create a sense that value is fair even if not maximised by competition. If proceeding to exclusivity, or engaging in bilateral negotiations, it favours sellers to manage exclusivity tightly, tie extensions to objective milestones and preserve alternatives through parallel conversations as long as feasible.

Be ready for the possibly bumpy ride. Sellers need to understand and prepare for the possibility that it may not be a straight path to get to the exit. Many general partners have needed to withdraw or postpone the timeline for transactions in the pipeline. Political instability and unexpected policy changes can impact deal certainty and draw out timelines for regulatory approvals in a way that many deal documents may not contemplate if not carefully drafted.

Valuation gaps

Manage expectations on multiples. Starting three years ago, the median earnings before interest, taxes, depreciation and amortisation (EBITDA) multiple for exits fell below the average for assets held on firms’ books, with this gap growing to over 1x according to data from MSCI. This came after more than a decade where a favourable macroeconomic environment, driven by inexpensive debt, made buyout firm wins straightforward. Assets acquired during the historic 2021 buyout frenzy were acquired at record high multiples. Those assets are now approaching the end of their hold period, while interest rates remain elevated compared to pre-pandemic norms. As a result, sellers may need to accept that the pandemic era multiples may not be there on an exit. Fortunately, sellers can turn to several tools when confronted with a gap in their internal marks and prospective buyers’ valuation.

Earnouts. Earnouts are the principle instrument for reconciling different views of future performance. Operating as a risk-shifting mechanism, earnouts allow buyers to agree to higher seller valuations contingent on the asset performing in line with the supporting seller projections. Careful attention should be paid to the negotiation and drafting of earnouts. Definitional precision and clear operational covenants can create alignment between parties, but earnouts remain fertile ground for future disputes. Key points of focus between parties are revenue or EBITDA metrics, accounting policies, extraordinary items and dispute resolution mechanics. Memorialising details of the earnout in the letter of intent or during earlier stages of a sale process can help reduce friction in getting to the finish line.

Minority stakes and rollovers. Minority sell-downs and seller rollovers are also available as options to align incentives on value. Sellers can crystallise partial liquidity at a valuation commercially acceptable to the buyer, while retaining exposure to future upside which contributed to the seller’s higher marks. Naturally, any arrangements where the seller maintains a stake add complexity to the negotiation of the sale process. Additional transaction documents setting forth the post-transaction relationship are necessary, including agreements on veto, information and exit rights. By their nature, these provisions are typically heavily negotiated and vary depending on the size of the retained equity stake.

Deferred consideration. Vendor financing or deferred (but not contingent) consideration is another path to closing residual valuation gaps, particularly where buyer equity is tight. Buyers can use future cash flows from the acquired target to fund the deferred consideration, discounted at the time of purchase, while sellers can retain a large headline sale figure.

Structuring creativity

Consider allowing multiple bidders to team up on large assets. Consortium bids can present the path to exiting large assets, when large enterprise values shrink the pool of potential buyers. Consortiums allow bidders to pool capital and underwrite larger equity cheques. The arrangement does not have to be as simple as co-investment in the same asset. The market is seeing an uptick in creative deal structures, including multiple parties bidding jointly to carve up the business between them in a way that sellers do not anticipate or factor into their go to market strategy. It is important when considering multiparty transactions to account for the additional risks of any such structuring: reduced competition due to bidder coordination, delayed execution because of coordination time and intra-club negotiations, and increased regulatory risks as additional parties can trigger enhanced regulatory scrutiny and a broader scope of relevant jurisdictions. But flexible dealmaking, when steered by the right advisers, can lead to a successful exit that might otherwise have posed too large a challenge.

Consider dual-track processes. Sponsors should also avoid getting stuck on a single track to an auction process and note that the initial public offering (IPO) market is heating back up. In addition, de-special purpose acquisition company transactions are also seeing a resurgence, albeit not near the historic levels of 2021. For now, the increase in IPOs has not been PE-backed, but if trends continue, the public equities market could be a favourable outlet for the right asset. While IPOs require specific preparation separate from a sale process, if initial preparation considers both tracks, and management has or brings on the relevant experience, sellers can run a dual track process to keep options open and achieve the best result.

Conclusion

With dealmaking momentum growing in spite of headwinds, sellers looking at their portfolio and contemplating how to best offload lagging assets and meet investor demands can have confidence that there is a path to follow. The key is pragmatism. A playbook that focuses on a strong management team leading a deliberate sale process, understanding the broader dealmaking environment and buyer sentiments to solve the bid-ask spread, and remaining agile to deal structures beyond conventional approaches can lead sponsors to clean exits and successful distributions (and carry).

 

Alain Dermarkar and Romain Dambre are partners at A&O Shearman. Mr Dermarkar can be contacted on +1 (214) 271 5658 or by email: alain.dermarkar@aoshearman.com. Mr Dambre can be contacted on +1 (212) 610 6308 or by email: romain.dambre@aoshearman.com.

© Financier Worldwide

BY

Alain Dermarkar and Romain Dambre

A&O Shearman

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