Private Equity Expansion in the Southern Regions of the United States Gaining Momentum
In the dynamic world of private equity (PE), southern states are making a significant mark, with their attractive economic landscape and untapped potential drawing increased interest from PE firms. Despite a generally cautious national PE market, several factors specific to the South are making it a desirable destination for investment.
## Lower Business and Labor Costs
The South's business-friendly regulatory environment and lower labor costs, particularly in comparison to the Northeast and West Coast, make it an appealing prospect for PE investment. Companies in sectors such as manufacturing, logistics, and services stand to benefit from the potential for margin expansion and operational optimization.
## Privatization and Outsourcing Trends
An ongoing trend in southern states is the privatization of public services and the outsourcing of core government functions to private entities. This environment creates new opportunities for PE investment in sectors like health care, infrastructure, and child care, as they become open to private market participation.
## Favorable Tax and Subsidy Policies
Southern lawmakers have implemented regressive tax systems and offered significant economic development subsidies to businesses. These tax incentives and subsidies help reduce upfront investment risks for PE firms, making Southern deals more attractive on a risk-adjusted basis.
## Targeting of Underserved Markets
Private equity firms are investing heavily in sectors like housing, health care, and transportation, areas where southern states have historically underinvested in public goods. These investments can yield high returns as they address unmet needs, with eight of the top ten metros with the largest number of private equity-owned units located in the South.
## Sector Growth
PE firms are seeking sectors with resilient cash flows and long-term growth potential. The South’s growing population, expanding infrastructure needs, and increasing demand for affordable housing and health care align well with current PE investment strategies.
## Caveats and Market Dynamics
While these factors make the South attractive to private equity, broader market conditions in 2025 are challenging. High interest rates and extended holding periods are making it harder for PE firms to achieve their target returns, and deal activity remains subdued compared to previous years. However, within this environment, the South stands out for its cost advantages, policy support, and untapped market potential.
In summary, southern states are emerging as potential PE hubs due to lower costs, policy support for private investment, and significant opportunities in underserved sectors—despite broader headwinds in the private equity market. Southern portfolio companies have the potential to drive value organically without relying solely on acquisitions, given the factors such as population growth and GDP boom.
As the South continues to grow and develop, it is poised to become a major player in the private equity sector, with corporate migration bringing more experienced businesspeople into the region and allowing talent from the South's top universities to find rewarding jobs and stay in the region. Southern states, such as Virginia, North Carolina, and Texas, are becoming business hubs and have been taking top spots on CNBC's Top States for Business league table.
Southern economies are not primarily built on trendy, big-ticket sectors like AI, fintech, or tech. Instead, they are grounded in more traditional industries, providing a stable base for PE investment. Southern firms have room to grow and expand organically, with the potential to deliver strong returns over the next year. The South even boasts two of the top six business schools in the US, including The University of Texas at Austin.
As we move towards 2025, the private equity landscape in the South is set to undergo a significant transformation, with the cities of Austin, Miami, and Charlotte expected to be the main beneficiaries of the increase in dealmaking activity. Southern states could potentially rival traditional private equity hotspots across the country in terms of dealmaking activity.
Investing in business sectors with resilient cash flows and long-term growth potential, such as housing, health care, and transportation, is increasingly attractive for private equity firms in the South due to its growing population, expanding infrastructure needs, and increasing demand for affordable options. Additionally, the South's business-friendly regulatory environment, lower labor costs, and favorable tax and subsidy policies make it an appealing destination for private equity investment, particularly in sectors like manufacturing, logistics, and services that can benefit from operational optimization.
