Industry Trends
The potential of private markets: A comprehensive study
The Private Markets Study 2025 reveals significant insights from 500 institutional investors managing $4.3 trillion in assets across Asia, Europe, and North America. The study highlights a strong belief among over 73% of institutional investors that private markets will outperform public markets over the next five years. Global private market allocations have grown to an average of 11% of portfolios, reflecting a shift in institutional allocations and a growing sophistication in investor motivations, such as unlocking the illiquidity premium.
Key findings indicate that 40% of North American investors find benchmarking performance a significant barrier to investing in private markets. Despite challenges like high transaction costs and asset valuations, investors are increasingly confident in the long-term outperformance of private markets. Equity-based assets, including private equity, real estate, and infrastructure, are expected to lead in risk-adjusted returns, with a strong interest in diversification.
Sustainability has become central to investment strategies, with 75% of investors considering it in their decision-making processes. There is a growing demand for net-zero infrastructure, renewable energy, and battery storage, underscoring the pivotal role of private markets in achieving global climate goals.
The study also identifies the illiquidity premium as a significant motivation for private market investments. However, investors must navigate high transaction costs, valuation concerns, and geopolitical risks. The study emphasizes the need for strategic navigation in this complex investment environment.
Source: Aviva Investors
A new phase for private markets
The 2025 private markets outlook anticipates a transformative period for private markets, emphasizing opportunities in less crowded areas. In 2024, trends such as a "flight to safety" towards more considerable funds and asset manager consolidation were observed. Wealth-targeted private market funds are expected to grow due to product innovation. The landscape is becoming bifurcated, with mega-sized deals facing intense competition, while less liquid areas offer better valuations and less competition.
Private equity showed signs of recovery in 2024, with deal activity potentially exceeding $850 billion and exit values normalizing. However, the total PE assets are higher than pre-2020 levels, indicating a need for accelerated exit activity. The focus is shifting from financial engineering to value creation through revenue and margin expansion.
Secondaries are gaining importance, with transaction volumes expected to surpass $140 billion in 2024. GP-led transactions, particularly single-asset continuation vehicles (SACVs), are growing rapidly despite limited dry powder. The SACV market is undercapitalized, with a significant supply-demand imbalance favoring buyers.
Private debt, though growing, remains a small portion of the fixed-income market. The asset class is expected to reach $2.3 trillion by 2028. However, increased competition in direct lending suggests exploring less crowded areas like core middle market space, CRE debt, and European private debt markets for better returns.
Commercial real estate (CRE) faced challenges due to high interest rates but remains fundamentally strong. Key themes such as self-storage, healthcare facilities, and specialized residential properties drive growth in alternative CRE sectors, representing over 30% of the investable US CRE universe.
Overall, the report suggests that investors should focus on value creation, diversification, and exploring less competitive areas to capitalize on emerging opportunities in private markets.
Source: Franklin Templeton
What's next for private capital?
Private capital, encompassing debt, equity, and tangible assets, has grown significantly over the past decade, entering 2025 with USD 2 trillion of dry powder. Investors face high central bank rates, trade tariffs, and a complex exit market. The high-rate regime has benefited private credit investors but also increased default risks. Exit opportunities remain limited, affecting distribution rates and asset allocations.
Key trends for 2025 include:
- Distributions Stuck in a Holding Pattern: Distributions from private capital funds have slowed significantly since 2021, especially for younger holdings. This trend is most noticeable in venture capital and least in private credit. Investors will continue to monitor distributions amid cyclical and structural headwinds.
- Shrinking Gap in Valuation Multiples: The rapid increase in interest rates has led to reassessments of asset valuations. The gap between exit and active investment multiples has narrowed, potentially supporting optimism for increased exit activity in 2025.
- Private Credit Tests Uncharted Waters: Private credit funds posted strong returns in 2024, but higher interest rates have created challenges. Mezzanine lenders have tightened underwriting to avoid defaults, and distress rates have converged with senior loans. The future path of interest rates will be crucial for private credit investors.
- Private Investments in Green Mobility: Private-capital funds increasingly invest in energy-transition opportunities, particularly in low-carbon automobiles. Despite strong cumulative returns since 2019, green mobility investments have faced challenges since 2021. The U.S., Canada, and the EU have increased tariffs on Chinese EV imports, impacting global EV manufacturing and investment flows.
Investors must navigate these trends and challenges to capitalize on opportunities in the evolving private capital landscape.
Source: MSCI
Private debt: Outlook
Private debt is poised for a strong year in 2025, driven by a rebound in M&A activity. Despite interest rate cuts squeezing returns slightly, the asset class will continue to offer compelling risk-adjusted investment opportunities. Private credit defaults are expected to rise but remain manageable for well-equipped managers. Competition for deals will intensify as broadly syndicated loan (BSL) markets rally, forcing debt funds to adapt pricing while sticking to core strengths.
The favorable dynamics of rising inflation and interest rates that benefited private debt have shifted, with central banks cutting rates and BSL markets bouncing back. In 2025, private debt managers will face increased competition from BSL markets, offering lower pricing to win back credits. Bank of America reported that at least $30 billion worth of private debt deals in the US were refinanced in the BSL market in 2024 at lower rates.
Despite increased competition, private debt managers are well-positioned for a strong year. They may need to reduce margins to stay competitive but can still deliver high single-digit returns. An anticipated uptick in M&A activity will drive demand for private debt financing. Private debt managers have proven their ability to finance extensive credits, and while BSL markets offer lower pricing, private debt provides flexibility and certainty of execution.
Portfolio management will be crucial as defaults are expected to rise. Managers with strong restructuring capabilities will fare better. Private debt remains an attractive asset class, and if M&A activity rebounds as anticipated, more deals are expected.
Source: alterDomus
Four predictions for private equity
As private equity looks toward 2025, the industry faces a dynamic landscape influenced by economic, political, and technological forces. Four key predictions are highlighted:
- Tariff shake-up: President Trump is expected to use executive authority to impose tariffs, mainly targeting China and Mexico, to negotiate trade issues and encourage domestic production. This strategy may lead to market disruptions, with companies stockpiling products and reevaluating supply chains.
- Private credit’s next chapter: Private credit continues to grow, with direct lending reaching a $600 billion asset class. Fundraising is strong, but there is concern over eroding credit quality due to aggressive borrower-friendly provisions and a surplus of lending capital. The imperative for 2025 is to deploy significant amounts of capital despite potential risks.
- Cyber risks rise: Geopolitical shifts are expected to increase cyber threats to PE investments. PE firms must enhance their cybersecurity measures as military-focused cyber resources shift to financially motivated operations. The proliferation of AI tools among threat actors further exacerbates these risks.
- AI driving value creation: AI is set to revolutionize PE, with 59% of firms viewing it as a key driver of value creation. AI will enhance operational efficiencies, optimize portfolio companies, and influence deal sourcing. PE firms will increasingly consider AI readiness in their investment strategies.
To thrive in 2025, PE firms must navigate protectionist trade policies, manage private credit risks, bolster cybersecurity defenses, and leverage AI for value creation. Proactive strategies will enable firms to capitalize on opportunities while safeguarding investments in a rapidly evolving global environment.
Source: FTI Consulting
Five key themes: Forecasting alternative investments
Navigating financial markets in 2025 requires agility and staying informed due to constant changes. Investors in private markets should focus on five key themes driving new opportunities. Real estate presents a structural chance, especially in the US, with a significant housing shortage. This includes single-family homes, multifamily apartments, senior residential accommodation, and workforce housing. Commercial real estate is also recovering, with growth in industrial, power-related real estate, specialized workspaces, and net-lease investments.
The reindustrialization of US manufacturing drives energy infrastructure development, increased electrification in clean energy solutions, and the adoption of AI and digital infrastructure. This has created a surge in demand for power generation, presenting opportunities for investors in power generation and distribution projects.
Private equity benefits from lower rates, deregulation, and resilient growth, leading to increased capital market activity and strategic acquisitions. Large-cap and middle-market private equity managers are expected to perform well by making operational improvements and expanding balance sheet margins. Growth equity and venture capital offer exposure to future technology, with valuations down from their 2021 peak, creating the potential for higher future returns.
Private credit managers have opportunities due to the growing volume of distressed exchanges despite a low percentage of company defaults. Direct lending also presents opportunities. Investors must remain nimble and aware of risks as economic growth strengthens in the US. Detailed analysis and on-site visits are crucial for evaluating investment opportunities. This material is for informational purposes only and should not be relied upon for investment decisions. Independent professional advice is recommended.
Source: JP Morgan
Expected trends in private market funds
In 2025, the private market fund landscape is set to be shaped by several key trends, as highlighted by Shani Unantenne, Head of Funds and Sponsors at NatWest. Following a period of instability, there is cautious optimism for the year ahead despite ongoing challenges in fundraising and investing. Macroeconomic conditions and political clarity are expected to provide a more stable environment, boosting dealmaking activities. Interest rates are anticipated to remain steady, which should drive increased M&A activity, although inflation remains a concern.
Key trends include increased competition due to high levels of unallocated capital and more extended asset hold periods, leading to greater demand for deals and a rise in the secondary market. Industry consolidation is expected as more prominent managers acquire smaller competitors, and capital allocation will favor more prominent managers. High Net Worth (HNW) capital will become a significant focus, with innovative fund structures like evergreen and semi-liquid vehicles targeting these investors.
Fund managers must protect returns by exploring new markets and developing innovative structures, increasing the demand for currency sleeves, feeder funds, and fund-level FX hedging. Regulatory scrutiny will continue, focusing on transparency, although the regulatory environment may vary by region. Technological innovations like blockchain and AI will streamline operations and enhance risk and investment analysis.
Infrastructure investments will be a key opportunity driven by the need for upgrades and new technologies, including AI and renewable energy. ESG considerations will regain prominence, particularly in decarbonization and green infrastructure, with disciplined approaches to ESG investing becoming more common. Fund financing will evolve to meet the diverse needs of fund managers, requiring lenders to be adaptable and innovative.
Source: RBS International
Sector Update
Healthcare private equity market 2024: Year in review and outlook
In 2024, global healthcare private equity reached an estimated $115 billion, the second highest on record, driven by large deals, including five transactions exceeding $5 billion. North America led with 65% of global deal value, followed by Europe (22%) and Asia-Pacific (12%). Biopharma dominated deal value, with significant transactions like Catalent ($16.5 billion) and Sanofi ($17.3 billion). European dealmaking hit record highs, focusing on smaller deals in biopharma and MedTech, with notable acquisitions by Novo Holdings and Ardian. Despite global R&D budget contractions, pre-clinical investments continued, exemplified by Partners Group's acquisition of Fair Journey Biologics.
Healthcare IT deals rebounded due to financial pressures on providers and shifting reimbursement models, with investments in workflow improvements and payment integrity. GenAI is transforming the sector by enabling automation and improving decision-making. Mid-market funds continued to innovate, and carve-outs gained prominence as alternative deal sources. Due to favorable macroeconomic conditions, Asia-Pacific investment shifted towards India, Japan, and South Korea.
Key questions for the future include the impact of bid-ask convergence, macroeconomic factors on biopharma investing, and the evolution of the Asia-Pacific landscape. Regulatory changes could affect innovation and healthcare delivery globally, particularly in the US. Investors are also exploring alternative capital deployment avenues. The US Federal Reserve's interest rate reductions and stable economic growth in Japan and India suggest an optimistic outlook, with increased sponsor exits anticipated due to asset buildup and LP liquidity pressures.
Source: Bain & Company
Rise of mid-market healthcare-focused PE funds
Mid-market healthcare-focused private equity funds, managing between $500 million and $4 billion, have historically outperformed the broader market due to innovative investment strategies. These funds have maintained buyout deal activity and exits since 2020, even as the wider healthcare buyout market struggled. This strong performance has translated into robust fundraising, with healthcare-exposed mid-market funds raising about $59 billion since 2022, a 40% increase over the previous three years.
Provider deals, traditionally 55% of mid-market deal volume, are shifting towards derivative acquisitions in services and healthcare IT due to changing market conditions. Investments in these derivatives have surged since 2022, growing at a CAGR of about 36%. Mid-market activity in biopharma has also remained strong, with PE firms leveraging specialized knowledge to close deals and take on technical risks. These firms are broadening their focus to include assets supporting testing, compliance, and healthcare IT.
Many mid-market PE firms have used a "buy-and-build" strategy, but broader value-creation levers are becoming more critical. Tailored strategies for each asset and subsegment are crucial, such as expanding ancillary services for physician practices, building capacity for CROs and CDMOs, and investing in product capabilities for healthcare IT.
To remain competitive, mid-market firms need to deepen their expertise and develop robust value-creation strategies, especially given current macro challenges. Limited partners are attracted to mid-market funds due to their strong performance and innovation. However, firms must adapt to the increasingly complex deal climate to sustain strong returns.
Source: Bain & Company
Artificial Intelligence Scope/Trends
Role of AI in effective portco sales
Private equity firms are increasingly using AI to enhance purchase decisions and exit preparations, aiming to maximize investment returns. AI accelerates due diligence, generates quick cash, and improves post-merger integration, preparing for sale faster and more comprehensively. This is particularly valuable in a soft deal market. When used by market-savvy experts, AI tools can significantly improve sale prices and reduce holding periods.
Three key AI applications can make companies more attractive to buyers: improving commercial operations, cleaning up legacy technology, and identifying opportunities in vendor agreements and contracts. AI can identify and quantify opportunities in salesforce effectiveness, customer churn, pricing, and customer service, revealing revenue growth opportunities and problems with solutions. For example, AI models can analyze sales and marketing data to improve promotional campaign effectiveness and plot revenue scenarios.
AI also addresses "technology debt" by flagging outdated code, conducting security assessments, and assisting in code refactoring, reducing time and labor costs. This is crucial as buyers scrutinize tech debt during due diligence. In vendor and contract management, AI can quickly extract critical details from agreements, including terms, penalties, and guarantees, even from obscure documents. This helps sellers understand their vendor landscape and manage contracts efficiently.
Strategic AI deployment provides data-driven insights that make companies more attractive to buyers, improve business operations, and demonstrate effective AI use, potentially commanding a premium in acquisition scenarios.
Source: Alix Partners
