What's Happening?
European private equity funds have outperformed their US counterparts for the first time in over a year, driven by cheaper borrowing costs and increased deal and exit activity. According to PitchBook's
Global Fund Performance Report, European funds recorded a rolling one-year internal rate of return (IRR) of 9.1% in the first quarter of 2025, surpassing the 7.7% IRR of US funds. This shift marks a reversal from the previous five quarters where US funds led. The European Central Bank's eight interest rate cuts since January 2024 have contributed to this trend, compared to five by the US Federal Reserve. Mid-sized funds, raising between $250 million and $500 million, achieved the best results with a 9.7% IRR, attributed to their agility in capital deployment and reduced reliance on leverage.
Why It's Important?
The outperformance of European private equity funds highlights the impact of monetary policy on investment returns. Cheaper borrowing costs in Europe have spurred deal-making and exit activity, attracting international investors seeking better entry multiples than in North America. This trend could influence global investment strategies, as investors may shift focus to European markets for higher returns. The performance of mid-sized funds suggests a potential shift in investment preferences towards more agile and less leveraged funds. The ongoing macroeconomic uncertainty and potential short-term negative returns in Q2 underscore the volatility in the private equity landscape.
What's Next?
Analysts anticipate a recovery in private equity returns later in the year, driven by stronger deal flow in Q3 and further expected rate cuts from the Federal Reserve. Investors and fund managers will likely monitor monetary policy changes closely, as these could significantly impact future returns. The performance of European funds may prompt US funds to reassess their strategies, potentially leading to increased competition and innovation in the private equity sector.
