Private Markets Investment Outlook Q2 2025: Opportunities amid uncertainty
Despite heightened risks from policy changes and economic uncertainties, private markets continue to present attractive opportunities. Investors should be discerning in selecting strategies with attractive risk/return profiles, and prioritise diversification.
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Despite current challenges, our outlook for new private markets investments remains optimistic, although we are cognisant of increased risks arising from significant US policy changes and resulting uncertainties affecting growth, inflation and interest rates.
US policy changes create uncertainty
Following a three-year slowdown across private markets in terms of fundraising, new deals and exits, private market valuations and yields are generally attractive in both absolute and relative terms.
However, risks and uncertainty have increased sharply since the beginning of the year due to the US government’s policy changes and the uncertainties around their implementation and impact. This is most notable in relation to trade tariffs, immigration, ESG, and a more isolationist stance regarding geopolitics and defense.
This has significantly increased volatility in listed markets and heightens near-term risks to economic growth, inflation and interest rates. The global repercussions of US policy changes are also likely to induce industry- and region-specific challenges, further contributing to continued increased volatility.
Question marks around AI-related capital expenditures
Meanwhile, the efficiency gains potentially showcased by DeepSeek for generative artificial intelligence (AI) models introduce new uncertainties concerning capital expenditure (capex) and the recent rise in valuations of companies benefiting from the AI narrative, which has been followed by a correction in this sector.
We suggest selectivity and diversification to navigate change
Private markets generally offer protection against public market volatility and can even thrive amid uncertainty, as we have shown previously in relation to private equity in particular. Nevertheless, we find that in the current market environment some private market strategies exhibit notably better risk/return profiles than others. Consequently, we urge investors to be particularly discerning in selecting strategies and investments. Additionally, diversification across strategies is important.
We see the most attractive allocation options in the current market as being characterised by:
Balanced capital supply and demand dynamics, leading to favorable entry valuations and yields.
Domestic companies and assets offering some insulation from geopolitical risks and trade conflicts.
Opportunities for additional risk premiums arising from complexity, innovation, transformation, or market inefficiencies.
Robust downside protection through limited leverage or asset backing.
Reduced correlation with listed markets, owing to distinct risk exposures.
Private equity: Small is beautiful
In private equity, we see small and mid-sized buyout investments – accessed through primary fund investments, direct/co-investments and GP-led secondaries – to be attractively priced and less affected by geopolitical and trade conflicts, compared to large-cap buyouts. Additionally, early-stage venture capital appears to be more resilient than late-stage venture and growth capital.
Private debt and credit alternatives: Specialised strategies offer attractive yields
In the private debt space, we identify promising opportunities in specialty finance, asset-based lending and infrastructure debt, which offer stable, high-income cashflows amid volatility and inflation concerns. We see insurance-linked securities (ILS) as especially attractive. The uncorrelated nature of these investments delivers a disproportionately beneficial outcome in an environment where macro-economic conditions are uncertain or deteriorating.
Infrastructure equity: Renewables focus on Europe and Asia, but don't count out the US
Within infrastructure equity, we see the most attractive opportunities in European and Asian renewables investments, given the pushback from the new US government. However, we expect the cost competitiveness of renewable energy to support continued infrastructure build-up in this space, even in the US.
Additionally, we see a range of complementary opportunities across the energy transition landscape in areas such as hydrogen, heat pumps, batteries, and electric vehicle charging, which play a crucial role in facilitating the decarbonisation of sectors across the economy.
Real estate equity: Broad-based recovery expected
Real estate has undergone a significant correction since the second half of 2022. However, we are now seeing increasing evidence of a recovery in pricing, with both deal volumes and transaction pricing showing positive trends in the latter part of 2024. While investor sentiment has been on an upswing, recent events might cause a temporary setback.
Amid current challenges and uncertainties, we expect market performance to recover sequentially. We are confident that 2025 will be a robust year for deployment, despite the prevailing uncertainties. We have adopted a neutral stance across most sectors, although we maintain high conviction in various living and operational segments that can provide inflation-protected cashflows.
In the following sections, we highlight the most attractive opportunities within each private market class.
Private equity: Small is beautiful
In 2024, the prolonged slowdown in private equity deal, exit and fundraising activity that has persisted since 2022 showed signs of bottoming out. In our view, this creates an attractive environment for new investments as, historically, private equity has delivered particularly strong performance when capital supply and demand dynamics are favourable.
As we have shown previously, over the past 25 years, private equity has thrived during periods of market disruption, achieving twice the outperformance in times of high volatility compared to more stable periods. Importantly, in four of the five major market disruptions within this timeframe, small and mid-sized buyouts were key contributors to private equity’s resilience. In 2025, we again expect small and mid-sized buyouts to offer particularly attractive opportunities for enhancing portfolio resilience
Small and mid-sized buyouts look especially attractive for multiple reasons
We prefer small to mid-sized buyouts over larger transactions, as they benefit from a favourable capital supply-demand dynamic and face lower competition for a broader range of deals. Additionally, this market segment offers compelling entry points for investment, with less reliance on debt financing and significant potential for value creation. Furthermore, small to mid-sized buyouts can grow to become acquisition targets for larger buyout funds, providing an additional exit path.
In the current market context, it is especially beneficial for smaller buyouts that they typically focus on domestic companies, making them less susceptible to trade and geopolitical tensions.
Private equity strategy performance during market crises
Continuation funds poised to continue strong growth trend
The secondaries market saw a record transaction volume of $160 billion in 2024. Continuation funds remained a key growth area, providing valuable liquidity options to investors and accounting for a record $71 billion in transaction value.
Continuation funds are a compelling exit route for portfolio companies, especially small and mid-market firms with significant transformational growth potential. In the short term, this appeal is amplified by current uncertainties that are slowing the recovery of exit markets.
In the long term, considering the ongoing growth of private equity and the trend of companies staying private longer, we project that the continuation fund market segment could reach an annual transaction value of $250 billion within the next decade.
Despite exuberance around AI, innovation dynamics remain attractive
Efficiency gains demonstrated by DeepSeek have sparked concerns about the significant capital expenditure related to AI, contributing to valuation pressures for certain AI companies, particularly in the US. We view these risks as relatively contained for private companies, as venture and growth capital investments typically favour capex-light investments focused on the application layer of the AI stack. Companies leveraging AI models can benefit significantly from the associated efficiency gains.
Moreover, while AI investments reached 15% of global venture investment in 2024, innovation and disruption extend beyond AI, encompassing sectors such as biotech, fintech, climate tech, and deep tech. Accelerating innovation dynamics across various sectors are supported by increased political focus on venture capital as a strategic tool to bolster national competitiveness.
We see significant potential in the recovering biotech sector, which has faced years of risk aversion, and generally find early-stage venture more attractively priced and isolated from current uncertainties than late-stage venture and growth capital.
Private debt and credit alternatives: Specialised strategies offer attractive yields
Volatility has significantly increased due to the uncertainty surrounding US policy changes. In the short term, we anticipate that inflation may remain elevated or even rise, thereby exerting pressure on both consumers and companies. If businesses are unable to pass these higher costs onto consumers, profit margins could decline, potentially leading to increased unemployment in the US and exerting additional pressure on the global economy.
Given the Federal Reserve's dual mandate, we would expect to see a substantial decline in the Federal Funds rate in the latter half of the year should unemployment rise. Additionally, we believe that increasing uncertainty may hinder investment in property development, consumer spending, corporate capital expenditure, and project investments.
Refinancing creates opportunities in commercial real estate debt
While we anticipate a decrease in the initiation of commercial real estate development projects, we foresee a strong demand for capital to refinance construction loans for completed projects, as well as for maturing loans. These needs are likely to be urgent, coinciding with a period of market uncertainty that has impeded issuance in syndicated markets, such as Commercial Mortgage-Backed Securities (CMBS).
Considering the varying attractiveness of fundamentals across regions and property types, selectivity remains crucial. We generally favour lending for multi-family properties, such as apartments, and providing transitional financing for completed projects.
Infrastructure debt provides stable cashflows amid volatility
As inflation concerns resurface and volatility increases, stable defensive cashflows become crucial portfolio additions. In this context, infrastructure debt offers a unique opportunity for high-quality, stable and high-income investments.
Specialty finance and asset-based lending provide diversification and benefit from market inefficiencies
Specialty finance and asset-based lending provide diversification and benefit from market inefficiencies. Just as liquid market volatility brings opportunities in adjacent private markets for real estate debt and infrastructure debt, specialty finance and asset-based lending offer additional income and diversify risks by focusing on consumer-oriented borrowers and SMEs.
The variety of investment opportunities adds to diversification benefits. They can be sole originated or syndicated to a club, allowing for a variety of tenors and the creation of solutions that span both illiquid and liquid allocations.
Insurance-linked securities: The ultimate diversifier
Today, insurance-linked securities stand out. Their unique advantage lies in their lack of correlation with the macroeconomy, providing a much-needed respite from unstable market performance. This advantage is further enhanced by attractive valuations, as insured events offer opportunities for re-pricing. The Palisades and Eaton wildfires in California, expected to result in significant losses estimated at $40 billion, exemplify this potential. We foresee that the consistent level of catastrophe losses experienced by the insurance industry will continue to fuel the demand for protection.
This demand is likely to maintain spreads of insurance-linked securities at historically high levels, positioning it as one of the most attractive options among alternative fixed income asset classes due to its appealing risk premiums.
Well-collateralised debt helps navigate current uncertainties
Over the past five years, corporate balance sheets have deleveraged, and incomes remain robust. However, given the prevailing uncertainty, it is crucial to focus on strong borrowers and higher-priority collateral. We anticipate that weaker or more leveraged consumers and companies may face increased challenges, potentially leading to higher default rates. The ability to select well-collateralised debt, backed by strong borrowers and robust security packages, is a significant advantage of private debt markets.
Private premium is higher: Quality in private markets is not constant, and opportunity varies considerably
Infrastructure equity: Renewables focus on Europe and Asia, but don't count out the US
The energy transition segment in infrastructure remains particularly compelling, also given current uncertainties, due to its strong inflation correlation and secure income traits. It also provides positive diversification to portfolios through exposure to distinct risk premia, such as energy prices.
Renewable energy benefits from decarbonisation and energy security
The push for decarbonisation, coupled with energy security concerns amplified by the ongoing conflict in Ukraine, continues to benefit renewable energy. Continued concerns over cost-of-living across a number of economies also highlight the issue of energy affordability. In many regions globally, renewables are the most cost-effective option for new electricity production.
Attractive opportunities in Europe and Asia
Given the pushback against renewable infrastructure spending by the Trump administration, we currently see the most attractive opportunities in Asia and Europe, where governments are strengthening their commitments to renewable energy, including the UK following the recent election. Currently, renewable energy in Europe has a €600 billion base, representing 45% of infrastructure transactions. By the early 2030s, this is forecasted to more than double to €1.3 trillion, potentially making renewables and energy transition infrastructure the majority of investable assets in the sector.
Additionally, renewable-related technologies, such as hydrogen, heat pumps, batteries and electric vehicle charging, will play a crucial role in facilitating the decarbonisation of sectors like transport, heating, and heavy industries.
Renewables build-out will continue in the US, but at a slower pace
In the US, although we are cautiously optimistic about tax credits and state support for renewables, the current political environment – including tariff escalation – increases capex costs and development project uncertainty, which may slow the build-up of solar and, to a lesser extent, wind new capacity. However, the inherent cost competitiveness of renewable energy is expected to support continued infrastructure development, albeit at a slower pace.
Despite this, we remain convinced that portfolio construction for renewables benefits from geographical diversification, with an overweight towards operating or construction assets that offer a high degree of cashflow visibility and enhanced returns.
AI advances boosting renewable demand
Despite the uncertainties created by DeepSeek around AI capex spending, advances in AI will continue to drive underlying demand for renewable power. This is largely due to increased electricity consumption and the growing number of data centres. This shift in demand bolsters long-term green electricity pricing, supported by corporates' net-zero ambitions.
Renewable energy has become a buyer’s market
The market shifted to a buyer’s market during 2024, recalibrating expected equity returns due to higher interest rates and reduced dry powder, creating a capital supply and demand gap. The current environment remains attractive for core/core+ strategies, with equity returns up by over 200bps since the beginning of 2023.
We favour strategies that benefit from strong asset performance and enhanced cash generation via active management. Selectively, there are higher return opportunities in infrastructure projects like hydrogen, although we remain cautious on early-stage developments.
The return dislocation, with listed assets trading at a discount, has spurred many take-private transactions. As interest rates gradually normalise, though slower than anticipated and possibly further delayed by current uncertainties, we expect a re-rating of the asset class in listed markets.
Infrastructure asset returns have materially re-rated
Real estate equity: Broad-based recovery expected
There is now increasing evidence of positive real estate market movements in both activity and transaction pricing. Our proprietary valuation framework points to investment opportunities across multiple sectors and geographies. Performance is expected to be sequential across markets, and we believe that 2025 will be a strong vintage year for deployment despite the impact of tariff escalations, although we recognise the stagflationary risks that could manifest.
Private real estate valuations correcting sequentially
Tight supply creates attractive opportunities
Although the economic outlook for our rental growth projections was already muted and is now further obscured by current uncertainties, operating conditions remain buoyed by ongoing tight supply. The growing scarcity of modern, sustainability-certified spaces across sectors continues to support income levels for these assets.
Elevated construction costs have been a major factor in the subdued supply pipelines. This situation could be further exacerbated by announced tariffs affecting raw materials and the potential for large-scale rebuilding programmes, assuming a cessation of ongoing conflicts. Additional rises in construction costs could significantly contribute to a 'cost-push' effect on rents.
Transaction volumes and pricing have found a floor
Investment market activity remains subdued; however, improving investor sentiment—indicated by various metrics and a more favourable interest rate environment—should drive higher volumes this year. Investment volumes have already shown early signs of recovery in 2024. Nevertheless, we are mindful that recent uncertainties could dampen sentiment more broadly and slow this emerging positive momentum.
Our proprietary market valuation framework signals opportunities across multiple geographies and sectors. Several markets, notably the UK and industrial and logistics segments more broadly, have rebased to attractive price points – and there was evidence of transaction pricing recovering in the second half of 2024 across regions and segments.
Neutral stance across sectors
Our portfolio is shifting towards a more neutral stance across real estate sectors. This strategy is driven by greater clarity on 'rental floors' in the retail and office sectors, as well as the appealing yields from future-proofed assets.
We have strong conviction in various living and operational segments that offer direct or indirect inflation pass-through, demonstrate attractive value, and are supported by favourable structural trends. These segments enjoy operational performance that is less sensitive to broad economic fluctuations.
Additionally, we anticipate that asset and location factors, such as sustainability profiles, will increasingly influence performance. Furthermore, we regard all real estate as inherently operational, and by adopting a hospitality-led approach, investors can enhance income through services that foster tenants' success.
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