Southern USA the Next Hotspot for Private Equity

In the US, private equity firms are emerging from a challenging period. High interest rates tied up investment until 2024, but now a brighter outlook is in the cards. As M&A activity begins to ramp up, I think there’s a solid chance that firms will turn to the Southern US and investment will pour into the region.

Given that the Fed slashed interest rates multiple times in the latter half of 2024 equalling a total of 100bps, and considering many firms are sitting on a massive amount of dry powder amassed in 2020 and 2021, it’s not surprising that many expect US dealmaking activity to rise this year; the question is, where will investors concentrate their efforts?

At least for me, Southern states hold vast potential, and because our sector has historically neglected the area, the opportunities are even greater.

There’s been a lot of buzz around Southern states becoming business hubs for the last few years, with the likes of Virginia, North Carolina, and Texas taking the top spots on CNBC’s 2024 Top States for Business league table. But, while many have acknowledged the area’s business prowess, it appears private equity firms are late to the party.

As of 2023, the private equity penetration rate was, perhaps unsurprisingly, highest in California and Massachusetts. While Texas boasted over 4,500 private equity-backed companies, its PE penetration rate sat at just 3.3% compared to the 6% awarded to the top states.

Whether firms have held off on investing in the South as a result of the economic conditions the sector has been up against, or because the vast majority of the industry is still drawn to the likes of Chicago and New York, it’s clear that, at least so far, firms haven’t made the most of the South’s business boom.

What this means, though, is that companies in the South have fantastic ROI potential; PE penetration isn’t quite as high, so there is a real opportunity for firms to capitalize on the private equity vacuum and drive strong commercial results, pushing up their returns. In fact, I think that over the next year, Southern states could deliver some of the highest PE returns seen anywhere in the US.

And I think the number of investment-worthy companies will only grow as more and more seek the business-friendly policies and regulations that Southern states offer. Considering that North Carolina levies the lowest flat corporate tax rate in the country and that many other Southern states aren’t far behind, it’s unsurprising that the rapid pace of corporate migration continues to hold firm.

With retail giants like Footlocker soon moving to Florida, EV leader Tesla turning to Texas, and tech titan Oracle moving to Tennessee, there’s no denying that some of the US’ biggest business names are leading the procession to the South.

It’s the region’s economic growth that keeps businesses and individuals moving into the area. Southern states are contributing more and more to national GDP , and while its large population is undoubtedly contributing to these strong results, it’s looking unlikely the South’s dominant performance will abate any time soon, with even more Americans steadily moving into the area.

Between 2023 and 2024, the South gained more people than all other regions combined; in fact, the region’s population grew by nearly 1.8 million . But, while its population continues to build, the area’s unemployment rate remains lower than in any other US region at 3.8%– this, too, will undoubtedly push GDP higher over the coming years and keep business and private equity activity bubbling away.

For firms that take a hands-on, operationally-focussed approach to their portfolio companies, finding the right talent is fundamental to ensuring healthy returns. There is plenty of talent in the South already; it has two of the top six business schools in the US, including my alma mater The University of Texas at Austin. Now, corporate migration is bringing yet more experienced businesspeople into the area and, crucially, is allowing talent from the South’s top universities to find rewarding jobs and stay in the region. The South’s talent pool is only getting larger and larger.

Of course, this continual population growth will also keep the Southern industry booming and build the business hustle and bustle that PE firms are looking for. All in all, it’s likely the South’s business scene will become increasingly lively, and I expect that, before long, we'll see private equity firms build up their portfolios in the area.

Realistically, the Chicago’s and New York’s of the US will continue to receive much of the sector’s attention, but I think the big winners of the incoming dealmaking increase will be the likes of Austin, Miami, and Charlotte, which will only continue to strengthen over the coming year.

It’s important to acknowledge here that I’m not necessarily talking about high-stakes, unicorn-level investments. While I’m sure the South will secure its fair share of these deals throughout 2025, the real shift will be the jump in transaction volume; Southern states are on course to become dealmaking hubs.

As for the sectors that will see the biggest investment influx? It would be easy to assume that firms would gravitate toward the trendy, big-ticket sectors – AI, fintech, or the broader tech space. But, while many tech powerhouses are making their way into the region, that’s not what Southern economies are built on.

It’s the likes of real estate, oil and gas, and the sticks and bricks service companies that run the towns, cities, and neighbourhoods across the South – and let me tell you, they’re primed for growth.

But that’s not all. Given all the factors I mentioned, particularly population growth and the GDP boom, there’s room for Southern firms to grow and expand organically. If investors enhance these firms with strong processes and bolster them with tech and data solutions, Southern portfolio companies will drive value in and of themselves without investors having to rely solely on other acquisitions.

All things considered, I wouldn’t be surprised to see Southern states delivering some of the strongest returns over the next year. With M&A activity set to increase, a low PE penetration rate opening up opportunities in the area, and businesses and talent flocking to the region, we could see these states become deal hubs – and so much so that they could rival even the most traditional private equity hotspots across the country.

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Kade Thomas is Founder and CEO of Emory Oak Partners

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The views expressed in this article are those of the author and do not necessarily reflect the views of AlphaWeek or its publisher, The Sortino Group