Industry Trends
Emerging trends in private equity co-investment
Over the past decade, co-investment demand has surged as institutional LPs have increasingly funneled capital into private markets to reduce costs and drive higher risk-adjusted returns. LPs now reserve 15-30% of their private investment allocation for co-investments. GPs also benefit by leveraging co-investment capital to pursue high-potential deals without exceeding portfolio limits. However, co-investment activity is influenced by broader market dynamics, including a challenging fundraising environment and higher capital costs. Global buyout funds raised 23% less capital last year, and venture capital fundraising has deteriorated further. Co-invest capital has become a strategic tool for GPs to incentivize new commitments and extend fund deployment. Elevated capital costs have led GPs to contribute more enormous equity stakes, increasing interest in co-investment capital. Despite these supply-side factors, broader dealmaking challenges, such as wide bid-ask spreads and macroeconomic headwinds, continue to weigh on the market. Illiquidity has been a significant barrier to broader LP participation in co-investments. LPs with dedicated co-investment teams have been best positioned to capitalize on market opportunities. 2024, global capital raised through co-investments hit a record $33.2 billion, but the deal count was the lowest since 2013. A wave of pent-up transaction activity is expected to boost co-investment participation. Pre-signing and co-underwriting deals have become more prevalent, offering LPs less competitive access to coveted deal flow and better performance. LPs must adopt robust processes and technology infrastructure to support co-investment programs effectively.
Source: Chronograph
Quarter Review
Private equity pulse: Key takeaways from Q1 2025
In Q1 2025, private equity firms experienced a 45% increase in deal volume compared to the previous year, driven by large deals like Sycamore Partner's acquisition of Walgreens. Despite this growth, rising trade tensions and uncertainty are causing investors to be cautious, with nearly three-fourths of general partners expecting tariffs to negatively impact deployment activity in the next 3-6 months. However, increased market volatility leads firms to adopt higher risk tolerances and become more opportunistic. Sectors such as Aerospace and Defence, domestic middle markets, distressed deals, and private credit are expected to benefit from global realignments and market dislocation.
Firms focus on operational improvements within their portfolios, with 87% working on supply chain impacts and a majority assessing manufacturing footprints. Liquidity and working capital are significant concerns as firms aim to increase resilience and capitalize on opportunities. The return of corporate acquirers has boosted exit activity, with trade sales accounting for 82% of deal value in Q1, up from 59% the previous year. This shift reflects a dynamic change in the private equity landscape amid ongoing uncertainty.
Private equity firms are well-positioned to navigate these challenges, with over US$1.6 trillion in dry powder available for opportunistic investments. The industry has grown significantly over the past two decades, managing more than five times the capital it did in 2005. It has learned the value of decisive action during periods of macro dislocation.
Source: EY
AI mega deal boosts VC results in Q1 2025
In Q1 2025, VC investment experienced its strongest quarter since Q1 2022, primarily driven by a record $40 billion AI deal announced on March 31. This deal significantly boosted the total VC investment to $80.1 billion, a 28% increase from the previous quarter. Without this deal, investment would have fallen by 36%. Despite the rise in investment, deal volumes declined, indicating investor reluctance to finance follow-on rounds without clear liquidity paths, especially for companies that haven't raised funds since 2021. Mega-round financing decreased, with 79 transactions over $100 million, down from 90 in Q4 2024. AI deals continued to bolster VC investment, though fewer megadeals were noted compared to the previous quarter. Excluding the $40 billion transaction, five AI deals raised $8.6 billion among the top 10 deals. The information technology sector dominated, representing 74% of investments and accounting for seven of the top 10 deals. Healthcare and industrial goods and materials sectors also showed growth, while business and financial services weakened. Regionally, the Bay Area led with nearly 70% of all VC investment, followed by New York and Austin. The overall outlook for 2025 is positive, though the significant $40 billion deal's impact won't be repeated. AI investment remains strong, but market volatility and liquidity challenges may affect future investments. Founders are advised to focus on realistic valuations and sound business practices. Despite uncertainties, the current environment is favorable for starting new companies, with excellent access to talent and technology.
Source: EY
Market Sentiments
Private credit secondary sales on the rise amid market uncertainty
Investors are increasingly looking to sell their private credit holdings due to market volatility caused by US President Donald Trump's trade wars. Private credit, a $1.5 trillion industry involving specialized lenders like Apollo Global Management, Ares Management, and KKR, has seen limited secondary market activity. However, the recent market downturn may change this trend as investors seek liquidity and reduce exposure to private assets. Greg Ciesielski of HarbourVest notes a growing interest in selling private equity and credit exposure, marking a potential inflection point for private credit secondary activity. Pantheon recently raised $5.2 billion for a fund buying private credit stakes, and Coller Capital acquired a $1.6 billion senior direct lending portfolio from American National.
Negotiating secondary market sales typically takes weeks, but the rapid market selloffs have forced some hedge funds to offload private debt positions quickly. Symon Drake-Brockman of Pemberton mentions that current market conditions offer opportunities to buy quality credit at a discount. Last year, secondary market deal volumes reached a record $160 billion, driven by asset sales from leveraged buyout funds and investors needing cash. Private equity transactions dominate the secondary market, with only 2-3% of private equity assets traded compared to less than 1% in private credit.
The "denominator effect" is a significant driver for selling, as it leaves investors overly exposed to private markets when public markets decline. Despite the volatility, there has been little distressed selling, with discounts around 5-10% below par. Analysts predict more challenging times, increasing interest in secondary market sales.
Source: Reuters
Private credit 2025: An insight into yield, risk, and absolute value
Private credit performed well in 2023, providing strong floating rate yields and a buffer against market volatility. Direct Lending and Asset-Based Finance (ABF) offer consistent, contractual income. With $2.2 trillion in private credit AUM accumulated over five years, the market is crowded, raising questions about relative value and risk evolution. Dan Pietrzak, Global Head of Private Credit at KKR, notes heightened sensitivity around geopolitical tensions and US policy uncertainty but remains optimistic about the global investment environment. Private credit remains a core portfolio component, offering strong cash yields and returns without compromising credit quality. KKR focuses on upper middle-market companies with $50-$150 million EBITDA, which have more resilience during tough times. ABF provides complementary exposure with hard collateral and different economic drivers, offering secured risk backed by tangible assets. Despite lower interest rates, direct lending spreads have tightened, but investors can still achieve attractive returns. Credit asset selection is crucial in managing downside scenarios like inflation and rate reversals.
The ABF market, projected to exceed $9 trillion, offers significant opportunities as banks reevaluate balance sheets and corporates shift to asset-light models. M&A activity is gradually picking up, though not as quickly as expected. Transparency in private credit valuations is maintained through independent, third-party providers, ensuring robust and well-governed processes.
Source: KKR
The rise of private debt: Navigating valuation challenges
In the wake of the 2008 financial crisis, private debt has become a significant asset class, appealing to investors seeking alternative financing. Regulatory changes post-crisis increased bank capital requirements, reducing funding for riskier borrowers and boosting private debt's popularity due to its flexibility and customized terms. Private debt fundraising surged from $116.1 billion in 2014 to $302.1 billion in 2021, with the market potentially reaching $3 trillion globally.
Interest rates and inflation significantly impact private debt valuation. Stable interest rates before 2022 allowed most financial assets to be measured at amortized cost under IFRS. However, rising inflation in 2022 increased interest rates, necessitating a shift to fair value assessments for private debt instruments to ensure accurate market reflection and investor confidence.
Transparency and valuation concerns persist in the private credit market. Unlike public markets, private credit valuations often lack transparency and rely on fund managers' discretion. The rise in "payment-in-kind" loans and valuation discrepancies among fund managers highlight the need for standardized valuation processes.
Regulatory bodies have intensified their focus on valuation practices to enhance transparency and mitigate systemic risks. Updated IPEV Guidelines, IOSCO reports, FCA reviews, and FSB recommendations emphasize robust governance and valuation practices. The BCBS and ESMA have also provided guidance to ensure accurate asset valuation.
Despite challenges, private credit managers anticipate growth in mature and emerging markets driven by bank pullbacks, borrower awareness, and regulatory clarity. The sector's ability to address valuation challenges and maintain investor confidence will shape its future, requiring collaboration among regulators, investors, and fund managers.
Source: EY
Market Opportunity/challenges
Unlocking opportunities: Increasing retail client exposure to private capital investing
Investment management firms in the US and Europe are exploring ways to increase retail investors' access to private market investments, which can offer portfolio diversification benefits. Retail investors' private capital holdings are under $1 trillion, less than 7% of the global $14.5 trillion in private capital AUM. However, trends suggest significant growth potential, with predictions that US retail investors' allocations could rise from $80 billion to $2.4 trillion by 2030 and EU allocations from €924 billion to €3.3 trillion.
Retail investors, defined as non-accredited individuals with net worth under $1 million or income under $200,000, represent a large, untapped market. Existing product structures like mutual funds, ETFs, and interval funds can facilitate their access to private markets. US regulations allow mutual funds and ETFs to invest up to 15% in illiquid securities, including private funds. Interval funds, not subject to this limit, have minimum investments ranging from $1,000 to $50,000.
Efforts to increase retail access include launching new product structures and expanding distribution partnerships. For example, Thrivent, BondBloxx, and Virtus have introduced mutual funds and ETFs with private equity and credit exposure. In the EU, regulatory changes ease access to Alternative Investment Funds (AIFs), potentially broadening the retail investor base.
Investment managers are encouraged to consider how to bring private assets to retail investors, as this market is poised for growth. By 2030, US retail investors are expected to significantly increase their private capital holdings, narrowing the gap with European counterparts.
Source: Deloitte
Q2 2025: Navigating uncertainty in private markets investments
Investment opportunities and strategies in the current market emphasize the importance of diversification and selectivity. Key focus areas include private debt and credit alternatives, infrastructure, real estate, and private equity.
Private debt offers promising opportunities in specialty finance, asset-based lending, and infrastructure debt, providing stable, high-income cashflows amid volatility and inflation concerns. Infrastructure equity is particularly attractive in European and Asian renewables investments, with complementary opportunities in hydrogen, heat pumps, batteries, and electric vehicle charging. Despite recent uncertainties, real estate equity is showing signs of recovery, with positive trends in deal volumes and transaction pricing.
Private equity, especially small and mid-sized buyouts, has demonstrated resilience during market disruptions, with continuation funds providing valuable liquidity options. The secondary market saw record transaction volumes in 2024, and continuation funds are expected to continue their strong growth trend.
Renewable energy investments benefit from decarbonization and energy security concerns, and there are attractive opportunities in Europe and Asia. The US market remains cautiously optimistic despite political challenges.
Overall, balanced capital supply and demand dynamics, domestic companies insulated from geopolitical risks, opportunities for additional risk premiums, and reduced correlation with listed markets are important. Investors are urged to be discerning in selecting strategies and investments, focusing on diversification across various private market classes.
Source: Schroders
Others
Private capital: The key to boosting European competitiveness
Europe, the world’s third-largest economy, faces a competitiveness crisis that has suppressed income growth. Mario Draghi’s European competitiveness agenda calls for €800 billion in annual investment until 2030, but public funding alone is insufficient. Private capital, operating at half the scale of the US, has a unique opportunity to bridge this gap. Key actions for private capital include investing in European priorities like energy, infrastructure, and defense, accelerating cross-EU consolidation, tapping new funding sources such as pension funds, and supporting productivity enhancements through workforce upskilling.
Europe's economic engine has sputtered due to lower investment in productivity-driving assets compared to the US. Despite similar investment levels as a percentage of GDP, the US invests more per capita in machinery, equipment, intellectual property, and intangibles. European public companies' return on invested capital (ROIC) is lower than their US counterparts. The Draghi report and the European Commission's Competitiveness Compass highlight the need for increased investment from private and public sources.
Europe's private equity and venture capital investors have about €1.5 trillion in assets under management, with annual equity investments averaging €130 billion. Opportunities for private capital include investing in energy transition, AI, digitalization, aerospace, and defense. Policy initiatives aim to accelerate innovation, support start-ups and scale-ups, and enhance the financial ecosystem. Private capital can drive complex mergers and integrations, raise specialized funds, and support productivity growth through tech-driven transformations. Aligning with the Competitiveness Compass, private capital can reshape Europe's global competitiveness, fostering growth, sustainability, and resilience.
Source: McKinsey
Leading through crisis: The role of private markets
With market volatility increasing, understanding the role of private markets in navigating crises is crucial. Private markets, including private equity, credit, infrastructure, and real estate, offer valuable diversification tools to help investors manage uncertainty. Unlike public markets, private investments provide insulation and control, protecting investors from the stock market's rapid fluctuations and allowing for more strategic adjustments during market turmoil.
Evidence suggests that private markets withstand crises and often perform better during such times. A report by Schroder Capital in October 2024 showed that private equity outperformed public markets by approximately 4% over 25 years, with an even higher outperformance during significant crises. During the Global Financial Crisis of 2007-2009, the US Buyout sector's asset value declined by 28%, compared to the S&P 500's 55% drop.
Due to their structure and pre-committed capital, private equity funds continue deploying capital during downturns, leading to stronger recoveries as they buy undervalued companies. Thanks to their long-term investment horizon, these funds are not forced to sell at low prices during market downturns.
While private markets offer significant advantages, they require proper judgment and experience, as not all private deals are equal. The success of private investments heavily depends on the lead investors and management teams involved. Despite the challenges, private markets present a compelling case for investors seeking higher returns and better risk management during volatile periods.
Source: Petiole
