Private markets outlook: Five takeaways for private investors
Cyclical tailwinds provide optimism amid uncertainty, while selectivity and diversification across strategies remain paramount. Read the key highlights from our latest private markets outlook.
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Schroders Capital recently published its Q2 2025 investment outlook, sharing our views on the environment for new private markets investments during a period of volatility for the global economy.
In this article, we present the key takeaways for wealth managers and private investors, highlighting the continuing key role private markets can play in strategic asset allocation.
Risks have increased, but cyclical tailwinds support valuations and yields
US government policies could drive domestic inflation higher in the short to medium term, putting pressure on both consumers and companies. Meanwhile, the policies could be deflationary in other parts of the world, for example in Europe.
Overall, growth forecasts are falling – and we could see divergence in central bank policies, with interest rate normalisation moving at different paces in different markets. And all of that is before you consider the impacts of uncertainty more broadly, which have intensified volatility on listed markets in recent weeks.
Set against this, we continue to see cyclical tailwinds for private markets, which, following a three-year slowdown in terms of fundraising, new deals and exits, currently offer valuations and yields that are attractive in both absolute and relative terms.
Private markets also 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.
Selectivity and diversification are key
We do, however, find that in the current market environment some private market strategies exhibit notably better risk/return profiles than others – and, of course, diversification across strategies is paramount.
We see the most attractive allocation options as being characterised by balanced capital and supply dynamics, supporting valuations and yields, and exposure to domestically focused companies and assets that are more insulated from global trade tensions.
Key strategies will also benefit from additional risk premiums driven by complexity, innovation or market inefficiency, provide downside protection through limited leverage or asset backing, and will have reduced correlation with listed markets.
In private equity, small is beautiful
In the private equity space, we favour small and mid-sized buyouts – accessed through primary fund investments, direct/co-investments and GP-led secondaries – over large-cap deals, as they benefit from favourable capital supply-demand dynamics following a tighter fundraising squeeze in recent years.
This means small/mid buyout managers face lower competition for what is a far wider range of deals in a larger investment universe. This in turn leads to persistent valuation discounts that offer compelling entry points for investment (see chart), with reduced reliance on debt financing. All of this adds up to significant potential for transformational value creation, as well as enhanced downside protection.
In venture, while AI investments reached 15% of total deal volume in 2024, innovation and disruption extend far beyond and encompass sectors such as biotech, fintech, climate tech, and deep tech. We see significant potential in the recovering biotech sector – and generally find early-stage venture more attractively priced and isolated from current uncertainties than late-stage venture and growth capital.
In private debt, specialised strategies offer enhanced yields
In private debt, specialised strategies such as commercial real estate debt, infrastructure debt, asset-based lending and insurance-linked securities offer attractive yields, driven by additional risk premiums, and diversification benefits.
Real estate debt could benefit from strong demand for capital to refinance construction loans, while infrastructure debt offers access to stable, defensive and asset-backed cashflows. Meanwhile, specialty finance and asset-based lending capitalise on market inefficiencies and offer additional income and diversify risks by focusing on high-quality, consumer-oriented borrowers and SMEs.
Elsewhere, 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.
Private premium is higher and opportunity varies considerably
Real assets offer access to key growth themes
Within infrastructure equity, 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.
We see the most attractive opportunities in European and Asian renewables investments, given the pushback from the new US government. However, the inherent cost competitiveness of renewable energy is expected to support continued infrastructure development even in the US, albeit at a slower pace.
Meanwhile in real estate equity, we are now seeing increasing evidence of a broad-based recovery, with both deal volumes and transaction pricing showing positive trends in the latter part of 2024 after substantial declines since 2022 (see chart). We are confident that 2025 will be a robust year for deployment, despite the prevailing uncertainties, although we do expect market performance to recover unevenly and sequentially.
Private real estate valuations to correct sequentially
Our portfolio is shifting towards a more neutral stance across real estate sectors, although we do retain 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.
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