Industry Trends
Global private markets outlook 2025
In 2024, private market stakeholders demonstrated resilience in the face of higher interest rates, geopolitical instability, and evolving trade policies. Capital deployment increased across asset classes, with private equity showing notable recovery after two challenging years. The sector experienced a rebound in dealmaking, particularly in considerable private equity (PE) deals, and an uptick in distributions. Improved financing conditions led to higher entry multiples, allowing sponsors to sell companies at better prices. Despite persistent inflation and geopolitical uncertainty, private equity emerged stronger, continuing to outperform the S&P 500.
Global PE assets under management (AUM) declined slightly by 1.4 per cent, prompting GPs to innovate with new fund structures to meet liquidity demands. Larger GPs leveraged their scale for a competitive advantage, although smaller mid-market funds were easier to raise. Refinancing portfolio companies remains challenging in the current higher-rate environment.
Real estate experienced an uneven recovery, with global deal value rising 11 per cent to $707 billion. Rate cuts and reduced supply in sectors like multifamily and industrial contributed to this Growth. Opportunistic fundraising declined, but property-level returns improved, driven by appreciation and more substantial income returns. Alternative sectors, such as manufactured housing, senior housing, and data centres, posted robust returns. GPs with operational expertise gained market share, while capital allocators harnessed analytics to enhance service delivery.
Private debt evolved, with banks and syndicated lenders increasing their share of financing. Direct lending spreads compressed, reflecting banks' increased risk appetite. Infrastructure saw accelerated capital deployment, with robust deal activity and a decrease in dry powder. Investors showed strong interest in increasing allocations to infrastructure, driven by global trade growth, energy transition investments, demographic shifts, and rising power demand. Infrastructure managers adapted their investment strategies to capitalize on these opportunities, particularly at the intersection of energy and digital themes.
Source: McKinsey
Quarter Review
Private markets outlook: Q2 2025
The current market outlook highlights several key investment opportunities and strategies amid ongoing economic uncertainties. Investors are advised to be discerning and diversify across strategies to mitigate risks. Attractive allocation options include investments with balanced capital supply and demand dynamics, domestic assets insulated from geopolitical risks, and opportunities for additional risk premiums from complexity and innovation.
Infrastructure equity, particularly in European and Asian renewables, is seen as promising due to strong governmental support for decarbonization. Complementary opportunities exist in hydrogen, heat pumps, batteries, and electric vehicle charging. In the US, renewable energy growth may slow due to political and economic challenges, but geographical diversification remains beneficial.
Real estate equity is showing signs of recovery after a significant correction, with positive trends in deal volumes and transaction pricing. Selectivity is crucial, especially in regions and property types with varying fundamentals. The market for continuation funds in private equity is growing, providing liquidity options and the potential for significant transaction value increases.
Insurance-linked securities offer diversification benefits, particularly in the face of consistent catastrophe losses. Corporate balance sheets are robust, providing opportunities for well-collateralized debt. Renewable energy continues to benefit from decarbonization and energy security concerns, with Europe and Asia presenting attractive investment opportunities.
Overall, the market environment favours strategies that leverage strong asset performance and active management to enhance cash generation. Investors should focus on sectors with favourable structural trends and operational performance less sensitive to economic fluctuations, such as modern, sustainability-certified real estate assets.
Source: Schroders Capital
Private equity pulse: Q1 2025
In Q1'25, global private equity investment totalled $444.9 billion, a slight decline from $463.8 billion in Q4'24, with deal volume dropping from 4,958 to 3,762 deals. The US led with $234 billion in investments, over half the global total. The Americas attracted $287.1 billion across 1,868 deals, while the EMA region saw a decline to $109.1 billion across 1,555 deals due to economic challenges and elections. Japan's PE activity surged to $20.2 billion, nearly matching its 2024 total, while China's PE investment was slow at $4 billion across 36 deals. Infrastructure, including energy and IT, remained a key focus for PE investors due to its stable cash flows and growing demand for AI processing capacity.
The number of PE funds is shrinking, with capital consolidating among established firms and high-performing niche funds. Q1'25 saw 19 new funds in the $500 million to $1 billion range, reflecting this trend. Corporate restructuring and carve-outs provided acquisition opportunities, particularly in Japan and India, where majority investments are becoming more common.
Looking ahead to Q2'25, geopolitical tensions, tariff uncertainties, and market volatility are expected to impact deal activity, with resilient sectors like business services, infrastructure, and healthcare likely to see more focus. Investor confidence may rebound with clearer government policies, potentially boosting dealmaking in the latter half of 2025. The exit market remains critical, with market turbulence affecting IPOs and potentially leading to forced exits at lower valuations. Despite challenges, the global PE industry continues to grow, with increasing assets under management and a cautious yet flexible investment approach.
Source: KPMG
Private credit insights: Q1 2025
Investor optimism at the start of 2025 has shifted to caution due to trade policy tensions and macroeconomic uncertainty, leading to market volatility. Concerns over tariff policy are affecting market activity, with inflation and economic Growth implications weighing on sentiment. While tariffs' immediate impacts are swift, their broader effects on consumer spending, inflation, and business planning will take time to unfold. Private credit, known for its defensive characteristics, has historically performed well during volatile periods.
Market expectations suggest US base rates will remain elevated at 3.5% over the next three years, benefiting private credit as a floating rate asset class. Early 2025 saw a brief rebound in M&A activity, but this has since slowed due to market volatility. Private credit spreads stabilized in Q1-25 but are expected to adjust higher in the short term, reflecting elevated risk.
Mid-market private credit borrowers, typically in defensive industries with stable cash flows, are well insulated from direct tariff impacts. Despite a strong start to the year for new issue activity, investor sentiment has shifted to a "wait-and-see" approach due to tariff uncertainties. This environment creates opportunities for private credit lenders to gain market share, offering loans at attractive levels with strong collateral protections.
Private credit continues to be a preferred financing source, with yields remaining attractive due to upward pressure on spreads and elevated base rates. Mid-market borrowers, with limited exposure to cross-border trade and heavily impacted sectors, are expected to remain resilient. Default rates are below historical averages, and private credit has provided investors with attractive risk-adjusted returns and lower loss rates compared to leveraged loans and high-yield debt.
Source: Northleaf Capital
Market Sentiments
Private credit: changing the credit landscape
The private credit ecosystem is fundamentally realigning the debt value chain in capital markets, driven by the limitations on banks' lending due to regulations. Private credit offers tailored solutions for debt capital allocation, impacting deal origination, underwriting, structuring, placement, and distribution. Its influence is growing rapidly, especially amid global trade uncertainty and market volatility, positioning it as a resilient source of debt capital during economic downturns. The industry is attracting attention from regulators, investors, and companies, with private credit lenders aiming for a larger share of the credit market.
Private credit provides a streamlined routing of capital from investors to borrowers, offering customized financing solutions and tax strategies to enhance returns and financial planning. The sector has seen significant Growth, with combined private debt unrealized value and dry powder reaching $1.05 trillion in September 2024. The number of large debt deals has also surged, indicating a shift from traditional lending channels.
The ecosystem around private credit is integrating with traditional workflows, leveraging existing systems and relationships to expand. During economic troubles, private credit can maintain capital flow due to its long-term investor commitments. This stability is attractive to investors like pension funds, which need predictable returns over long periods.
Private credit's Growth is driven by the creation of portfolios with below-investment-grade credit risk, leading to the formation of large credit funds. The industry aims to finance various sectors, with a total addressable market estimated at $31 trillion. Despite potential risks, the private credit market is actively working to mitigate them, ensuring stability and innovation in the financial landscape.
Source: PWC
Market Opportunity/challenges
Investing in middle-market infrastructure opportunities
The infrastructure asset class, traditionally dominated by large, established general partners (GPs), is evolving with a growing middle-market segment. This segment, driven by new and emerging managers, now accounts for nearly 95% of infrastructure transaction volume and over 90% of active GPs. The middle market offers significant opportunities due to its fragmented nature and the broadening definition of infrastructure, which now includes sectors like digital infrastructure, renewables, and energy transition. Emerging managers, often on their first or second fund, and sector specialists dominate this space, providing innovative approaches and value-creation strategies.
Middle-market infrastructure investments have shown superior return potential compared to large-cap investments, driven by better entry valuations and more abundant value-creation opportunities. These investments also offer a differentiated liquidity profile, with middle-market funds distributing more to investors at similar stages of maturity compared to larger funds. Secondary investments are highlighted as an effective way to target the middle market, offering diversification and access to high-quality assets at attractive valuations. Sector specialization within the middle market allows GPs to drive value creation akin to larger platforms while targeting specific, opportunity-rich segments. The performance and liquidity potential of middle-market infrastructure investments make them a compelling addition to an infrastructure portfolio. However, these investments come with risks, including commodity price fluctuations, environmental claims, and regulatory changes. Overall, the middle market provides access to parts of the infrastructure market that larger GPs may find challenging to penetrate, leveraging industry-specific expertise and established sourcing networks.
Source: HarbourVest
Private Credit: Insulated but not immune to tariff threats
S&P Global Ratings anticipates that the immediate impact of the Trump administration's tariff policy on direct lending portfolios will be contained due to their domestic focus and emphasis on services. However, second-order effects such as sustained inflation weakened consumer spending, reduced corporate investment, and recessionary pressures could have significant consequences. The tariffs, including a 10% universal baseline import tariff and an additional 145% levy on many Chinese goods, have heightened market volatility. While the direct impact on middle-market collateralized loan obligations (CLOs) is limited, ripple effects could challenge sectors like construction, engineering, and healthcare equipment.
The credit estimate (CE) portfolio is concentrated on software, healthcare services, and business/professional services, which are less reliant on cross-border shipments. However, a slowdown in consumer spending and corporate expenditure could still affect these sectors. Smaller or medium enterprises in the CE portfolio may struggle with negotiating power and cost pass-through ability, especially in low-margin and competitive markets.
Tariff-driven inflation could lead to higher interest rates, exacerbating difficulties for borrowers with strained cash flows, particularly those in the ‘ccc’ score category. The CE downgrade to upgrade ratio was just above one to one in early 2025, but downgrades are expected to rise. Selective defaults may increase as troubled borrowers seek debt relief.
At least 10% of the CE portfolio may be vulnerable to tariffs, with 335 companies identified as having significant cross-border sales or international supply chain dependencies. Federal cost-cutting is expected to have minimal impact on middle-market firms. Stress tests suggest that 14% of 'b-' scored entities could face downgrades in a moderate stress scenario, potentially raising the 'ccc' category distribution. Conditions for private credit can change, and S&P Global Ratings will continue to assess credit risk at the borrower level.
Source: S&P Global
Trade war & middle market private equity
Despite narratives suggesting a collapse in private market activity since 2021, the middle market has shown remarkable resilience, particularly during the pandemic. Middle-market private corporations have historically outperformed larger companies in terms of revenue and EBITDA growth, driven by secular growth trends like data centres, near-shoring manufacturing, and healthcare services.
The middle market PE companies have lower balance sheet leverage, with close to 40% less debt compared to larger firms, and potentially lower loss rates, suggesting stronger alpha propositions. The investment thesis of Growth at a Reasonable Price (GARP) remains compelling for middle-market PE, with recent revenue growth rates surpassing pre-pandemic levels due to above-trend nominal GDP growth.
Large and mega-cap PE valuations are higher due to more capital inflows, but middle-market PE offers attractive multiples on deals between $500 million and $1 billion. The context emphasizes the importance of focusing on revenue growth targets to achieve long-term return goals and cautions against relying on brand awareness or inflated IRRs. Overall, the middle market PE sector provides a robust investment opportunity with significant growth potential and resilience against economic stressors, making it a valuable consideration for investors seeking deep alpha propositions.
Source: FS Investments
Private credit’s mass appeal, new risks
Private credit enjoys an advantage over banks: locked-up money, which prevents panic-induced runs like the one Silicon Valley Bank experienced in 2023. Private credit backers commit money for years, making cascading runs impossible. However, the fast-growing $2.2 trillion private credit universe, particularly evergreen vehicles, introduces new risks. Leading firms like Blackstone and Apollo Global Management have raised nearly $300 billion from private individuals thanks to evergreen vehicles that allow investors to redeem some cash. These vehicles differ from classic private credit in three ways: they are perpetual, allowing managers to reinvest proceeds; investors can pull cash at will, though redemptions are limited to 5% of net asset value per quarter; and they have mass appeal, attracting retail investors.
Evergreens have downsides, such as managers losing control over investment timing and potential ripple effects during a crisis. Redemptions could force funds to sell hard-to-trade assets quickly, causing loan prices to fall. Despite these risks, industry advocates argue that capped redemptions and the turnover of investments provide a buffer. The sector has delivered positive returns every year since 2010, with a 9.4% annual average. Evergreen vehicles coped well during the 2020 pandemic and 2022 rate hikes, with top funds seeing redemptions peak at less than 3% of equity capital in early 2023.
The rapid Growth of the industry risks attracting flightier investors and leading to riskier lending practices. Persistently large redemption requests could hinder new loans, denting returns and causing a slow-motion decline. Firms may struggle to deploy raised funds, potentially leading to unexpected losses and difficulty in honouring redemptions. Evergreen’s popularity may result in less sophisticated investors and riskier practices, requiring managers to stay disciplined to avoid negative outcomes.
Source: Reuters
ESG Trends
The evolving role of ESG in private capital
The integration of Environmental, Social, and Governance (ESG) factors is reshaping private equity (PE) and private debt investments, influencing deal sourcing, due diligence, and value creation. Industry leaders are balancing ESG considerations with high returns, revealing opportunities and tensions. A roundtable in London discussed these issues, highlighting regional variations in ESG priorities, with North America focusing on social factors and Europe on environmental issues. Measuring ESG quantitatively remains challenging, with startups emerging to address this. The European Union’s double materiality approach has created confusion, but funds like TPG’s Rise are successfully integrating societal impact metrics. The private equity and private debt sectors are positioned to lead this transformation, aligning with societal goals while creating resilient businesses.
Challenges in the cross-border distribution of Alternative Investment Funds (AIFs) within the EU were also discussed. The European Commission is seeking to streamline fund distribution, but global capital flows present challenges. Brexit has added friction, but establishing a European presence is ultimately straightforward. Semi-liquid structures catering to professional and institutional investors show potential. Tailoring strategies to specific jurisdictions is crucial due to regulatory variability. Large pools of capital outside Europe offer fewer barriers.
The trend towards realization is expanding access to private markets for non-institutional investors, though investor education remains a challenge. Semi-liquid funds are growing, but navigating complex regulations is necessary. Regulatory frameworks and investor protection need re-evaluation. Permanent capital structures are gaining traction, providing stability. The influx of retail investors forces managers to rethink allocation strategies. Success in this transformative era hinges on education, transparency, and innovation. The democratization of private markets offers broader participation and economic Growth.
Source: Funds Europe
