Perspectives

To bridge these gaps, we compare private market indices to corresponding public market proxies within relevant asset classes. This comparison is standardized by rescaling the corresponding public and private   indices to a common value at the dates of their pre-Global Financial Crisis (“GFC”) peaks. A narrow gap suggests public and private valuations are in sync; a wider one hints at over- or undervaluation in either space, thereby setting the stage for shifts in M&A activity.

To illustrate this concept, consider the U.S. Buyout asset class. The chart below tracks the gap between the Burgiss-MSCI U.S. Buyout Index¹ and the U.S. Buyout Public Proxy² , starting from their pre-GFC peaks when they are assumed to be trading at or near parity. The indices move in sync until the COVID-19 pandemic in 2020, during which public markets reacted sharply to economic conditions with significant declines, while private markets showed more moderate, delayed responses. From 2021 onwards, the Burgiss-MSCI U.S. Buyout Index maintains relatively consistent valuations compared to the U.S. Buyout Public Proxy, which experiences more pronounced fluctuations.

Beyond serving as a comparative metric, the public-private valuation gap also functions as a predictor of private company M&A transaction volume. When the gap narrows and valuations align, M&A transaction volumes typically increase. This correlation stems from the convergence of public and private market valuations, creating an environment where buyers and sellers more easily agree on pricing and complete transactions. Conversely, when the gap widens, private company M&A transaction volumes tend to decline due to greater valuation disagreement. Interestingly, this relationship persists across a number of asset classes, including Buyout, Real Estate, Energy, Infrastructure and Venture.

Mind the Gap

We observe a consistent negative correlation between the public-private valuation gap and announced M&A transaction volumes³ of private target or private acquirer firms – with variations in timing and magnitude – across all examined asset classes. When the public-private valuation gap is low, private company M&A volumes tend to be high, and vice versa. While our analysis generally spans Q3 2007 to Q3  2024 for most asset classes, the Venture assessment starts from Q3 2018 due to limited Venture M&A transaction volume before 2018.

Additionally, while the public-private valuation gap has historically been wide, it has begun to narrow in recent quarters. For example, the public-private valuation gap for buyout peaked at 30% in Q2 2023 and has since declined to 14% as of Q3 2024. This narrowing gap has already influenced buyout market activity, with the four-quarter moving average of announced private company M&A volumes growing from $39 billion in Q2 2023 to $60 billion as of Q3 2024. Should this convergence in valuations continue, we expect private company M&A volumes to further increase in the coming year.

As this valuation trend fuels a thriving M&A market, investors can expect accelerated deal flow, shorter holding periods and potentially higher returns as portfolio companies take advantage of favorable market conditions. This environment also enhances exit opportunities and liquidity, whether through sales to strategic buyers or other PE firms, positioning private capital as an attractive investment in the coming years.

Don’t Forget Credit

While our focus for this research is on the equity markets, Ares typically views these trends from a Credit lens. The Ares Global Credit Monitor – Fourth Quarter 2024 offers further insights into the current M&A environment and how today’s trend compares to historical patterns. It discusses the recent increase in M&A activity, supported by leading indicators such as increased Non-Disclosure Agreements (NDAs) volumes and rising CEO confidence. The report also provides broader context around interest rates, credit availability and political movements that influence market dynamics beyond valuation considerations.