Private Markets Investment Outlook Q3 2025: How to navigate uncertainty
Amid persistent uncertainty related to ongoing trade and geopolitical tensions, the return and resilience potential of private markets, driven by a combination of structural and cyclical factors, has arguably never been more valuable for investors – but selectivity and diversification remain key.
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Uncertainty remains the dominant theme for the global economy. Significant US policy changes since the start of the year, especially related to trade tariffs, immigration and defence, continue to present risks that can impact growth, inflation and the path of interest rates.
Additionally, recent accommodative fiscal and budget legislation in the US, UK and continental Europe, while presenting short to mid-term opportunities by potentially supporting growth, has generated concerns over government debt sustainability. Last quarter’s escalation of hostilities in the Middle East, coupled with the ongoing conflict in Ukraine, are additional risk factors.
In the face of these headwinds, the potential of private markets to help investors to navigate prevailing global uncertainty has arguably never been more important for investors.
With a broader private market slowdown in terms of fundraising, new deal activity and exits now into its fourth year, private market valuations and yields are generally attractive in both absolute and relative terms – and there are specific opportunities across private asset classes to boost portfolio diversification, resilience and returns.
Selectivity and diversification key to navigate change
Private markets have historically offered some protection against public market volatility and have often thrived amid environments of uncertainty. We have shown this previously in our study on private equity performance during crisis periods over the past 25 years.
We believe that, in the current market environment, there will be some private market strategies that exhibit notably better risk/return profiles than others. Consequently, we urge investors to be particularly discerning in selecting strategies and investments.
Additionally, diversification across private market strategies is important. In a market with heightened idiosyncratic risk related to announcements and policy changes, diversifying risk premia is very beneficial. This can be done by combining strategies that are less correlated, or uncorrelated, to both each other and to listed market alternatives, as well as through strategies and solutions that themselves offer inherent diversification through pooling a variety of exposures.
We see the most attractive allocation options in the current market as being characterised by some or all of the following:
- 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 to earn 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 a focus on transformative growth, local companies and multi-polar innovation – that is, innovation happening in multiple locations around the world, often complementing each other– as a way to navigate uncertainty.
Specifically, we see small and mid-sized buyouts, GP-led secondaries and early-stage venture capital as strategies that can access these interrelated trends, and are particularly attractive and resilient in the current environment.
Private debt and credit alternatives: Specialised strategies offer attractive yields and diversification
We see attractive opportunities in specialty finance, asset-based lending and real assets debt, each providing access to stable, high income or diversifying cashflows, in many cases capitalising on market inefficiencies as a result of continued volatility and inflation.
From an income diversification perspective, insurance-linked securities (ILS) are attractive for their combination of strong returns and low correlation with traditional markets.
Infrastructure equity: Energy transition remains a key theme to access potential long-term returns
The energy transition segment in infrastructure remains particularly compelling in the current, uncertain macro environment, due to its strong inflation correlation and secure income traits.
We currently see the most attractive opportunities in Asia and Europe, where governments are continuing to strengthen their decarbonisation commitments. In the US, it does appear that the federal tax credit support for renewables will be phased out on a much more rapid timeline, which could initiate a rush of activity to get new plant in the ground.
Real estate: Continued expectations that 2025 will be a strong vintage
We continue to anticipate that 2025 will be a strong vintage year for real estate investment, with opportunities across sectors and geographies.
Tight supply and high construction costs are supporting rental income even as the economic outlook remains clouded by uncertainties, including tariff changes and stagflation risks. Meanwhile transaction volumes across the asset class remain subdued but have stabilised, suggesting a market floor.
Private equity: Small is beautiful
For more than three years, reduced investment activity, slower exits and tighter fundraising have coincided with heightened macro volatility, geopolitical tension and policy shifts.
Rather than retreat, we believe investors can navigate this by focusing on three complementary levers that mitigate today’s challenges:
- Local champions: Backing companies whose revenues are overwhelmingly domestic, limiting exposure to tariff, supply-chain and geopolitical uncertainties.
- Transformative growth: Investing in businesses where operational complexity or innovation agendas create controllable value-creation paths and extra return premia, offsetting broader market turbulence.
- Multi-polar innovation: Allocating to the widening set of regional technology hubs so portfolios capture breakthrough growth wherever it emerges, diversifying away single-market concentration risk.
Below we highlight strategies that utilise these levers – namely small- and mid-sized buyouts, continuation investments and early-stage venture.
Small- and mid- buyouts: private equity’s “resilience engine”
Small- and mid-sized buyouts remain a private equity portfolio’s primary source of resilience, pairing attractive entry valuations with operational flexibility, a defensive earnings profile and less cyclical exit routes.
Average purchase price multiples for these deals are roughly 7.7x EV/EBITDA, more than 40% below the level commanded by large-cap counterparts and even more below that of comparable listed companies, creating meaningful headroom for value creation. Relatedly, smaller buyouts typically employ modest leverage.
The geographic and sector mix of these deals further strengthens defensiveness: more than four-fifths of new transaction value is now service-oriented, while private equity-backed companies also have a predominantly local revenue base, cushioning supply-chain disruptions and tariff changes.
Service and local revenue-orientated portfolios buffer against trade shocks
Past performance is not a guide to future performance and may not be repeated. Source: Pitchbook, data as of 27 May 2025, S&P Capital IQ 21 May 2025, Schroders Capital, 2025. For Private Equity, the percentage of services is based on capital invested in buyout and venture capital deals. 41 sectors have been split into goods and services. Local revenue share is based on Capital IQ’s ‘Segment 1’ revenue field, which is mostly country specific though some entries reflect broader regions. The views shared are those of Schroders Capital and may not be verified. Forecasts and estimates may not be realised.
Exit markets also prove less volatile in this segment; small- and mid-cap managers rely mainly on trade sales and secondary buyouts rather than IPOs on listed markets, reducing dependence on equity-market windows and smoothing realisation timing.
Continuation investments: extending the value-creation runway
Complex corporate transformations often extend beyond the conventional four-to-five-year holding period, and continuation vehicles have emerged as an effective – and cost-effective – way for investors to remain exposed to the same manager and the same asset.
By offering an alternative to traditional secondary buyouts – historically a major source of deal flow, particularly for larger funds – continuation vehicles allow the existing fund manager to carry a business through its next phase of growth, without disrupting the value-creation plan.
Interest has accelerated in today’s muted exit environment, though the segment has compounded at roughly 27 per cent a year since 2013, reflecting structural drivers in an evolving buyout market. Investors are also attracted by the potential for more predictable outcomes and faster return of capital: average time to liquidity is about 18 months shorter than conventional buyouts.
Early-stage venture: accessing multi-polar innovation
Early-stage venture capital offers exposure to an increasingly multi-polar innovation landscape, while having less correlation to public markets than later-stage growth investments.
Breakthrough research and new-company formation now cluster in at least five technology hubs – the US, Europe, China, India and a broader Asia-Pacific group of countries – each driven by distinct themes and producing region-specific champions, contributing to diversification within a portfolio.
Artificial intelligence absorbed about 15% of global venture funding in 2024, but disruptive progress reaches far beyond this into biotechnology, fintech, climate technology and deep tech. We see notable opportunities in biotechnology, a segment that has endured several years of risk aversion and now appears attractively priced, as well as selective potential in LP-led venture secondaries.
Private debt and credit alternatives: Specialised strategies offer attractive yields
While we expect uncertainty will weigh on growth, the consumer and companies in advanced economies are less leveraged than in prior growth declines. We also expect central banks to have one eye on accommodation.
In this environment, we feel that pockets of volatility, such as the more attractive yields on offer following the US trade tariff announcements, are opportunities that are interesting across the debt spectrum.
Policy changes have introduced volatility into a market with a large number of regulated players (banks and insurers). Additionally, with more semi–liquid and liquid vehicles, market opportunities move faster and often at points wherein liquidity or capital is less available through these channels. As such, non-public channels are now the backbone of a borrower’s financing options; the more volatility and the more disrupted the liquidity, the more opportunity we will see in private credit.
Refinancing creates opportunities in commercial real estate debt
We are not seeing a decrease in commercial projects. In fact, as valuation declines stabilise – and as rates have ceased rising – transaction activity has increased in the US. There is a need 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 uncertainty that has impeded issuance in syndicated markets, such as commercial mortgage-backed securities.
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
The solid, “boring as usual” and comparatively high income available from infrastructure debt looks particularly appealing in today’s uncertain environment. Although demand in the US has softened, appetite elsewhere remains robust, underscoring the strategy’s role as a valuable portfolio diversifier.
Speciality finance and asset-based lending provide diversification and benefit from market inefficiencies
Specialty finance and asset-based finance investments are typically diverse on their own, comprising pools of many loans, leases, contracts or receivables. This provides another dimension of diversification, in addition to different risk premiums and different fundamentals. This area is most likely to see inefficiencies due to unique underwriting skills, structuring requirements, and positioning in a market with large, regulated payers.
As liquid market volatility brings opportunities in adjacent private markets for real estate and infrastructure debt, specialty finance and asset-based finance markets offer additional income and diversify risks by focusing on different asset sectors and a wider range of borrowers.
Insurance-linked securities: The ultimate diversifier
Insurance-linked securities continue to stand out. Their unique advantage lies in their lack of correlation with the macroeconomy, providing a much-needed respite from unstable markets.
This advantage is further enhanced by attractive current 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 – and we expect risk premium will remain near the current historically high levels.
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 or, on the private side, more extensions of maturities.
The ability to select well-collateralised debt, backed by strong borrowers and robust security packages, is a significant advantage of private debt markets. We expect attractive opportunities to be found where capital is scarcer, such as continuation vehicles, seasoning (warehousing) vehicles, and asset-based lending.
Private premium is higher – but quality is not constant
Past performance is not a guide to future performance. Source: Schroders Capital, Bloomberg, CS, Swiss Re, Bank of America as of December 2024. The views and opinions shared are those of the Schroders Capital Securitized Products & Asset-Based Finance Team and are subject to change. Shown for illustrative purposes and should not be viewed as investment guidance.
Infrastructure equity: Renewables focus on Europe and Asia, but don't count out the US
The energy transition segment in infrastructure remains particularly compelling in the current, uncertain macro environment, 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.
We see continued flow of transaction opportunities in this segment, driven in part by an ongoing focus on decarbonisation across global regions and a recognition of the investment potential in this key global theme. According to Schroders' Global Investor Insights Survey 2025, 86% of investors are already investing in the global energy transition – or plan to do so over the next year. Long-term return potential is cited by more than three-quarters of those investors (77%) as a primary reason for doing so.
This also comes amid a broader pick up in infrastructure investment activity; after two years of relatively muted transaction flow, we are picking up signals suggesting increased level of activity in the traditional and diversified infrastructure segment,
Renewable energy benefits from decarbonisation and energy security
The push for decarbonisation across global regions, coupled with energy security concerns amplified by the ongoing conflict in Ukraine and heightened tension in the Middle East, continues to benefit renewable energy build-out. 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 in the US (on which more below), we currently see the most attractive opportunities in Asia and Europe, where governments are continuing to strengthen their commitments to renewable energy.
Currently, in Europe specifically, renewable energy represents a ~€600 billion base and accounts for close to half 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 hard-to-abate sectors such as transport, heating, and heavy industries. Meanwhile, advances in AI continue to add to underlying demand for renewable power due to increased electricity consumption and the growing number of data centres.
Renewables build-out will continue in the US, but at a slower pace
In the US, following the passing of new fiscal and budget legislation, the federal tax credit support for renewables will be phased out on a much more rapid timeline.
In the very near term, this could initiate a rush of activity to get new plant in the ground before the tax credits fall away, after which we would expect a slowdown, but not a stoppage, of new wind and solar buildout. The inherent cost competitiveness of renewable energy and the robust demand for new generating capacity is expected to support continued infrastructure development, including renewables.
Overall, we remain convinced that portfolio construction for renewables benefits from geographic diversification, with an overweight towards operating or construction assets that offer a high degree of cashflow visibility and enhanced returns.
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 more than 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 are noticing a slow re-rating of the asset class in listed markets.
Infrastructure asset returns have materially re-rated
Past performance is not a guide to future performance. Source: Listed Greencoat fund quarterly reports Q1 2015 - Q1 2025 (Total Return Index NAV, (NAV + Reinvested Dividends). Past performance is not a reliable indicator of future results. There is no guarantee that this rate trajectory will remain the same in the foreseeable future. Discount rate refers to UK wind assets.
Real estate: We expect 2025 to remain a strong vintage
There is now increasing evidence of positive real estate market movements – and our proprietary valuation framework points to investment opportunities across multiple sectors and geographies.
Performance is expected to improve sequentially across markets, and we continue to believe that 2025 will be a strong vintage year for deployment despite the impact of tariff changes and wider uncertainties, although we recognise the stagflationary risks that could manifest.
Tight supply supporting income
Although the economic outlook for our rental growth projections was already muted and is now further obscured by ongoing market uncertainties, operating conditions remain well supported by broadly constrained supply.
Elevated construction costs have been a major factor in subdued supply pipelines. Additional rises in construction costs could contribute to a 'cost-push' effect on rents, a dynamic we have already observed emerging to make new projects economically viable. Should economies find paths to more sustained growth, then real estate will be well positioned to deliver real income growth.
Transaction volumes and pricing have found a floor
The investment market activity remains subdued and, while investor sentiment has improved, volumes were muted in Q1 2025. We expect the various geopolitical events that unfolded during Q2 2025 to further dampen sentiment and slow the emerging positive momentum that was witnessed during the latter part of 2024.
However, our proprietary market valuation framework continues to signal opportunities across multiple geographies and sectors. Several markets, notably the UK and the industrial and logistics segments more broadly, have rebased to attractive price points.
Both transaction pricing and valuations have shown modest improvements in the first quarter of this year following recoveries across regions and segments, albeit the extent of these varies considerably across markets.
Real estate pricing recovers modestly in Q1 2025
Sources: Green Street Advisors, Schroders Capital, May 2025. Data last updated on the 22nd of April 2025.
Neutral stance across sectors
Our recommended portfolio positioning remains in a neutral stance across real estate sectors. This strategy is driven by a clearer picture surrounding the operational performance of retail and office formats, and particularly the relatively attractive high yields available from future-proofed assets that meet heightened sustainability standards and are operationally optimised.
We retain conviction in a variety of 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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