Key points
2025 presents a promising landscape for private market investments, with favourable cycle alignments offering return and income potential.
Amidst geopolitical tensions, private markets are key for portfolio resilience.
Despite political changes, we foresee the trend towards decarbonisation continuing, with private markets playing a pivotal role.
We anticipate 2025 to be an attractive environment for new private market investments, offering potential for both return and income generation as cycles related to private market fundraising, technological disruption and the global economy align favourably.
Simultaneously, considering ongoing geopolitical tensions and the elevated risks of escalating conflicts, the role of private markets in providing portfolio resilience remains crucial. Meanwhile, and despite political changes in the US, we expect the trend towards decarbonisation to persist driven by its strong economic rationale, with private market investments continuing to play a pivotal role in driving the global energy transition.
Here we outline private market strategies that we consider particularly well-positioned to achieve the four key goals commonly pursued by our clients in private market investments: capturing return opportunities, generating income, enhancing portfolio resilience, and advancing decarbonisation and impact.
1. Capturing return opportunities
Although timing private market investments can be challenging, and clients are generally encouraged to invest consistently across vintage years, we believe that 2025 may stand out as an especially attractive vintage in which to invest. This is due to the favourable alignment of three significant cycles, which creates investment opportunities across various private market strategies:
Private markets fundraising cycle: Historically, private market fundraising has fluctuated cyclically between euphoria and caution. After the pandemic-induced exuberance, we see evidence that fundraising has bottomed out following a significant correction in the past 2-3 years (see chart). Favourable dynamics are therefore currently unfolding, albeit at a different pace across different sectors, marked by reduced competition for new investments, more attractive entry valuations and greater performance potential.
Technological disruption cycle: We see the emergence of artificial generative intelligence as the start of a new cycle of technological innovation that will span several years. We expect its impact to be as significant as, or even greater than, previous technological disruptions such as the personal computer, internet and smartphone. At the same time, the energy transition and increased penetration of renewable energy is driving an evolution of how power is sourced and used within economies. These developments present new investment opportunities across strategies, with private market investments not only benefiting from, but actively driving disruptive innovations.
Economic cycle: With central bank interest rate normalisation having started in the US, the UK and Europe, alongside new stimulus measures in China and the expectation of more fiscal intervention in the Western world, we believe that the economic cycle is likely to move from contraction to expansion, providing tailwinds across asset classes, including private markets.
Private assets fundraising has slowed
Source: Schroders Capital, Preqin Pro as of 11 November 2024. Fundraising data based on final closes, indexed to Q4 2019.
Small/mid-buyouts and venture capital most attractive in private equity
Buyout valuations have declined in the past three years while stock markets have seen strong rallies, in some cases reaching record highs in 2024. Taken together, this enhances the relative attractiveness of private equity investments. Meanwhile, a correction in fundraising has been most pronounced for venture capital and small to mid-sized buyouts, making these segments particularly appealing for new investments.
Small and mid-market buyouts benefit from direct sourcing from founders and families, and entry multiples that remain more than 4x EBITDA below large buyouts. Additionally, the small and mid-market represents a more than 10x larger investment universe than large buyouts. This brings more opportunities to capture a ‘complexity premium’, which refers to the potential to capture higher returns by using manager skill to execute on complex and nuanced investment theses.
Venture capital has undergone a healthy correction in fundraising, following the exuberance observed during the pandemic. On the other hand, deal opportunities are being driven by the rise of artificial intelligence (AI), with the share of venture investments in this sector rising from 2% in 2022 to an estimated 15% in 2024. We find early-stage AI opportunities particularly attractive, as valuations for later-stage rounds have increased significantly in 2024 and are now just 20% below their 2021 peak.
Continuation fund growth provides compelling opportunities
Continuation funds present a compelling opportunity for accessing private equity, due to low competition from other exit opportunities and high demand for liquidity from investors as distributions remain below historic averages.
Once a smaller segment of the secondaries market, continuation funds — also known as GP-led secondaries — now comprise around half of the annual market volume, with a 24% CAGR from 2016 to 2023 (see chart). We expect this strong growth to persist as more fund managers leverage continuation funds to extend hold periods and provide new capital to support high-quality companies, while providing valuable liquidity solutions to existing investors.
Secondary market sees record H1 deal volume in 2024
Past performance is not a guide to future performance.Source: Preqin Pro. Data as of 12 August 2024; Evercore H1 2024 Secondary Market Review, Schroders Capital, 2024. Current performance trends may not continue or lead to favorable investment opportunities. Note: Includes closed funds only. Data grouped by the year in which the fund held its final close. Fund count includes funds with undisclosed final close fund size.
Our models indicate 2025 will be a strong vintage year for real estate equity
Among different private market strategies, real estate equity has experienced the most severe correction in fundraising, deal activity and valuations (see chart). Globally, the office sector in the US has been most affected for both cyclical and structural reasons.
We see now a bottom building in global real estate valuations and our models indicate that 2025 will be an attractive vintage year. We see a sequential opportunity across regions and sectors that reflects the varied extent of repricing to date. In the UK, for example, repricing is well advanced and has created strong relative value, especially in the industrial sector. Warehousing and logistics also stand out due to solid fundamentals, with demand supported by supply constraints in ESG-compliant spaces and rising construction costs.
Value-add opportunities are prominent, allowing investors to enhance portfolios by creating operational platforms and modernising properties to meet evolving tenant needs. Upgrading buildings for sustainability and tenant-focused functionality is increasingly beneficial amid limited debt capital and regulatory shifts, making these sectors prime for growth in 2025.
Extent of real estate price declines creating a window of opportunity
Source: Green Street Advisors, Schroders Capital, September 2024. Current performance trends may not continue or lead to favorable investment opportunities. The views shared are those of Schroders Capital and may not be verified.
2. Income generation
In an environment anticipating modest reinflationary pressures, a gradual normalisation of central bank policy rates and potential for enhanced economic growth, we foresee steeper yield curves creating sustained income opportunities. With liquid markets offering minimal risk premiums, private markets are poised to deliver attractive alternative income sources and stable cash flows in 2025.
Private debt and credit alternatives continue to offer better risk premiums
Private debt is distinguished by its income potential, offering access to a variety of borrowers, collateral and the ability to structure debt with protective features. It serves both as an opportunistic allocation and an alternative to traditional fixed income.
The broad spectrum of solutions within private debt and credit alternatives is increasingly important, particularly given the lower risk premiums in public markets, offering a compelling investment option even within investment-grade allocations. As banks seek to improve capital ratios, US regional banks navigate commercial real estate leverage challenges, and insurers face pressures from past inflation, these inefficiencies present significant opportunities.
Notably, while public debt market premiums are at historic lows, private debt and credit alternatives continue to offer attractive risk premiums, driven by these ongoing capital inefficiencies (see chart). Several segments are especially interesting in the current environment:
Commercial real estate (CRE) loans offer an opportunistic income potential, driven by elevated interest rates and risk premiums influenced by investor sentiment and weak fundamentals in the office sector. As maturities become challenging with rising interest rates, high selectivity is key.
Infrastructure debt provides stable, defensive income with low-volatility cash flows, and benefits from similar return-enhancing dynamics at a time of higher rates.
Specialty and asset-based finance benefit from inefficiencies in the banking space, offering valuable income, diversification and flexibility through structuring.
Insurance-linked securities (ILS) offer uncorrelated income and capitalise on inefficiency in the insurance provision and reinsurance markets.
Collateralized loan obligations (CLOs) are a very promising opportunity given that lower overnight rates immediately benefit the borrower, and a stronger economy, coupled with lower-margin financing from bond markets, means very attractive equity return potential.
Private debt premium is higher, relative value favors secured debts
Past performance is not a guide to future performance.Source: Schroders Capital, Bloomberg, Giliberto-Levy as of September 2024. The views and opinions shared are those of the Schroders Capital Securitized Products & Asset-Based Finance Team and are subject to change. Current performance trends may not continue or lead to favorable investment opportunities.
Following a valuation reset, infrastructure equity offers attractive yields
Infrastructure equity is another area offering potential for high income and attractive yields, driven by the increasing economic viability, established cash flows and inflation correlation available in renewable energy assets.
Renewables currently exist in a buyer's market, with recalibrated equity returns driven by higher interest rates and reduced dry powder following a fundraising correction. This creates a supply-demand gap between available capital and renewable project development needs to meet net zero commitments, presenting opportunities for strategies that benefit from active management and potential for enhanced cash flows across the energy transition spectrum, from Core/Core+ operational assets to targeted construction and development of newer technologies.
Supply restrictions protect real estate yields
Recent market corrections in real estate equity have improved yields in sectors with limited supply, such as logistics and prime office spaces. As construction costs remain high and debt financing tight, a scarcity of high-quality, ESG-compliant properties supports stable rental income for existing assets, supported by increasing regulatory demand for sustainable infrastructure.
As noted above, opportunities are currently sequential across real estate markets, with repriced opportunities creating attractive valuation entry points to access the traditional benefits of real estate as a source of strong, long-term income. Focus is initially on the UK and Nordic markets, followed by the US and select Continental European markets.
3. Portfolio resilience
In an increasingly volatile economic and geopolitical landscape, private markets demonstrate unique resilience due to their structural and strategic characteristics, differentiated risk premia and long-term horizon. These assets offer a buffer against public market fluctuations, providing stability amidst potential market shocks.
Moreover, thanks to concentrated investments in sectors underrepresented in public markets, such as, for example, healthcare, renewable infrastructure, disruptive technology and microfinance, private markets offer differentiated exposures that provide positive portfolio diversification. This sector mix enables investors to capture uncorrelated growth, further insulating against cyclical risks.
Private equity shined during crises of last 25 years
As an example of the resilience potential of private markets, our recent study highlighted the proven track record of private equity, especially the small and mid-market buyout segment, to outperform during downturns. Amongst other things, this resilience arises from a different industry sector mix compared to public equities, and long-term capital structures that allow fund managers to hold investments and continue to deploy through market disruptions. Crucially, unlike public equities private equity avoids daily price fluctuations, offering more stable valuations based on asset fundamentals.
Private equity has delivered twice the outperformance during crises
Past performance is not a guide to future performance and may not be repeated.Source: MSCI (Burgiss), Schroders Capital, 2024. 1. MSCI’s Burgiss Global Private Equity Funds Index is a capitalization-weighted index consisting of Buyout, Venture Capital, and Growth funds. The performance figures are based on pooled quarterly time-weighted returns in $, net of all fees to Limited Partners. 2. Simulated performance without crises assumes periods with market disruptions are excluded. The CAGR is calculated over a shorter effective period to reflect the removal of these periods.
4. Decarbonisation
Drivers for renewable energy are primarily economic rather than political
Despite the rhetoric of the incoming administration in the US, we expect decarbonisation to continue to be a defining theme globally in 2025, driven by its combined economic, broader geopolitical and environmental rationale. Private markets play a crucial role in funding renewable energy, sustainable infrastructure and innovative climate technologies, bringing investment opportunities that align with environmental goals and present long-term income and return opportunities.
Renewables investment opportunity in target markets
Source: Aurora Energy Research, DUKES, Bloomberg New Energy Finance and Schroders Greencoat Estimates. July 2024. Data included only relevant for onshore and offshore wind, solar and hydrogen energy-generation assets. All GW installed capacity is presented as cumulative. 22023 refers to current market size of the installed capacity. 32030 and 2050 £/€/$ amounts are additional capex numbers, which exclude developer premium. There is no guarantee that these estimations will be achieved.
Beyond traditional renewables, new energy transition technologies such as ‘green’ hydrogen, electric vehicle charging infrastructure and district heating solutions are gaining traction. These innovations address essential decarbonisation needs across industries such as transportation, heavy industry and real estate. As these emerging verticals gain scale, they will offer potentially enhanced return profile for investors with a track record of helping to deliver innovative solutions in the energy transition space.
Data centers will increase renewable energy demand
With the rise of AI and increased digitalisation, data centers are a significant driver of electricity demand that is rising rapidly around the world. Powering data centers driven by the AI boom sustainably justifies premium value for ‘green’ electrons, created from clean energy sources. Private markets are instrumental in supporting the shift to renewable energy for these facilities, providing both a return on investment and alignment with sustainability mandates.
Private markets are also driving impact beyond decarbonisation
Private markets also support the transition to a circular economy through investments in recycling, waste reduction and resource efficiency. Additionally, investments in climate insurance are crucial for enhancing climate adaptation and resilience, mitigating climate-related risks.
Further, microfinance drives financial inclusion and provides stable, uncorrelated returns benefiting from robust financing demand from the micro, small and medium size enterprise (MSME) sector in emerging markets, driven by favourable demographics as well as transformative trends such as digitalisation.
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.
Dr. Nils Rode
Chief Investment Officer, Schroders Capital
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