2025 Private Markets Outlook

Key Points

Secondaries exhibit attractive fundamentals and structural advantages. Real estate has been beaten down and valuations are now more attractive. Private credit has filled a void that traditional lenders have created. Dispersion of returns is likely to increase, separating the winners and losers. This is a better environment for allocating capital than in recent years.

We will cover these key points throughout the outlook. We believe that secondaries will continue to benefit from the slowed exits and institutions’ need for liquidity. We believe that private real estate valuations have come down to more realistic valuations and there are opportunities in industrials, multi-family housing, and life sciences. Private credit managers are well-positioned to fill the void banks have left and to negotiate favorable terms and covenants. Given the amount of capital that has been raised in the private markets, and the changing regimes, from an environment with easy money and benign inflation, to rapidly raising rates and high inflation, to falling rates and stubborn inflation, we anticipate a larger disparity between the winners and losers in the coming decade. With that said, we believe that managers putting capital to work today can take advantage of more attractive valuations and being a “term-maker” versus a “term-taker” (i.e., the ability to dictate terms).

The Global Markets

In last year’s outlook, we discussed the global backdrop of elevated geopolitical risks, a changing interest-rate environment, tensions due to presidential elections, stubborn inflation, and the Federal Reserve’s (Fed’s) attempt to navigate a soft landing. Geopolitical risks remain elevated. The war in Ukraine shows no signs of abating anytime soon, the battle in the Middle East is expanding, and Russia, North Korea, and China have taken provocative actions. Going into 2024, many pundits were calling for rate cuts to begin early in the year, and several were calling for as many as six cuts in 2024. The Fed was much more deliberate than expected, waiting until September before beginning to cut, and then making a larger-than-normal cut of 50 basis points (bps). The expectation is that the Fed will continue to cut rates into 2025. Inflation has leveled off and a recession seems to have been avoided.

Global elections provided changes in leadership in the United Kingdom, France, and the United States among others. The US elections were divisive and unprecedented in many ways. In a rare move, President Joe Biden stopped his presidential campaign after growing concerns about his mental acuity and ability to serve four more years. Former President Donald Trump survived an assassination attempt, while another plot was thwarted. The rhetoric between the two parties was heated throughout, serving to divide America and to splinter the parties themselves. With the elevated risks, tensions, and uncertainty, the US markets shrugged off the noise and soared to new heights. The S&P 500 Index was up 21% for 2024 (total return, as of October 31, 2024), and bonds, as represented by the Bloomberg US Aggregate Bonds Index, were up 1.9% for the same period. Valuations are elevated, at 24x forward price-to-earnings (P/E) ratio, and the market is anticipating another 120 bps of cuts through 2025.

Private Markets Results

We have been focused on a few macro themes over the last several years. As private market valuations have reset from their lofty 2021 levels, we believe that allocating capital in the coming year looks attractive across much of the private market’s ecosystem. We believe that funds that deploy capital in today’s market environment can negotiate favorable pricing, terms, and covenants. Over the long run, based on historical results, we think investors should consider allocating capital to private markets. To illustrate the short- and long-term results of private markets and traditional investments, we have compared the one-, three-, five-, 10- and 15-year results of private equity, private credit, real estate (equity), real estate debt, and secondaries to the MSCI ACWI Total Return Index, and Bloomberg Global Aggregate Total Return Index.

We have highlighted the top three asset classes and sub-asset classes for each period in green, and the bottom three in red, to draw attention to the long-term results. Note, that recent performance has impacted real estate (equity), and while traditional equity results have been strong recently, they lag private equity and secondaries over the long run. We believe that real estate (equity) results may likely be more like long-term historical averages, (high single-digit) with higher income than traditional bonds, and a low-negative correlation to most traditional investment options. Concerning the long-term outperformance of private equities versus public equities, we think it is important to explore why this has occurred, and why we think it will persist. According to research from Hamilton Lane, there is a shrinking universe of public companies (roughly 4,000), and a growing universe of private companies. In fact, of all the companies with over US$100 million in revenues, 87% of them are private, and they are remaining private longer. Some will never go public due to the abundance of capital available to them.

The other important consideration is how private capital can be used to help unlock value over time. In addition to money that can be used to fuel growth, support expansions, investments in research and development, and/or make acquisitions, private equity firms are often deploying seasoned managers who provide valuable human capital to these startups. The long-term commitment to growth is crucial for their ability to unlock value. Rather than answering to shareholders every quarter, private companies can execute their multi-year strategy.

Key Insights and Predictions

·???????? Real estate will likely see an influx of investments, particularly in industrials, multi-family housing, and life sciences.

·???????? Private credit will continue to provide crucial funding where traditional lenders have pulled back.

·???????? The dispersion of returns will create clear distinctions between successful and struggling investments.

·???????? The changing economic environment will favor savvy investors who can navigate new regimes.

FAQs

1. What are secondaries in private markets?

Secondaries refer to transactions involving the sale of pre-existing investor commitments to private equity and other alternative investment funds. These transactions offer liquidity to investors.

2. Why are private real estate valuations more attractive now?

Valuations have come down to more realistic levels, presenting opportunities for investments, particularly in industrial, multi-family housing, and life sciences sectors.

3. How does private credit fill the void left by traditional lenders?

Private credit managers provide funding where banks have pulled back, negotiating favorable terms and covenants to fill the gap left by traditional lenders.

4. What is the significance of the dispersion of returns in private markets?

Increased dispersion of returns means there will be a greater distinction between successful and less successful investments, allowing investors to identify and capitalize on high-performing assets.

5. How can investors benefit from the current private market environment?

Investors can take advantage of more attractive valuations and the ability to negotiate terms, positioning themselves as "term-makers" rather than "term-takers."

Conclusion

The outlook for private markets in 2025 is promising, with several key factors driving growth and investment opportunities. The reset in valuations, particularly in real estate, provides an attractive entry point for investors. Private credit continues to fill the funding gap left by traditional lenders, while the dispersion of returns will differentiate successful investments from the rest. Overall, the current environment favors investors who can navigate the changing economic landscape and capitalize on attractive valuations.

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