The past two years have been challenging for private market investors. However, with the US Federal Reserve introducing its first rate cut, the mood appears to reflect cautious optimism. What are the pockets of opportunity for the New Year?
In the late 90s, US asset manager BlackRock ventured into the ETF business. At the time, the manager had only $165bn in assets. But the rise of passive funds, combined with a series of strategic acquisitions, helped cement the firm’s place as the largest asset manager in the world.
Fast forward to 2025, and the firm’s latest strategic acquisitions paint a very different picture. In 2024, BlackRock, which now manages a staggering $11.55trn in assets—more than the GDP of India, the UK, and Germany combined—has increasingly turned its attention towards private markets.
Just last year, the manager announced a $12.5bn acquisition of Global Infrastructure Partners, instantly making it the second-largest manager of private infrastructure assets. Later that year, BlackRock also acquired UK private markets data provider Preqin in a £2.55bn deal and the private credit firm HPS Investment Partners in a $12bn transaction. These deals are indicative of a wider trend: private markets have increasingly become a mainstream asset class, with mega managers such as BlackRock entering the space.
Indeed, over the past decade, global private market assets have skyrocketed from just over $5trn to more than $20trn in assets, according to Preqin estimates. A key driver of this trend has been regulation. With banks scaling back on their lending activities in the wake of the 2008 financial crisis, private lenders have increasingly taken on the role of providing loans to unlisted firms. Another factor has been the low-interest environment, which made investments in listed fixed-income assets comparatively less attractive.
Rollercoaster rates: transaction volumes slump
Enter 2022 and the beginning of the Fed rate-hiking cycle—could this spell the end of a private markets bubble that had grown too fast? Economists warned that mounting levels of dry powder and increasingly complex deals could soon lead to disaster. However, these fears did not manifest—at least, not yet.
Default rates in private credit ticked up somewhat, reaching 2.7% by the summer of 2024, but have since come down, according to Proskauer’s quarterly Private Credit Default Index. Nonetheless, caution over interest rates was reflected in significantly lower transaction volumes across most private market asset classes.
Optimists might argue that the US Federal Reserve’s first rate cut at the end of the year could spur a turnaround. But on the other hand, tariffs in the US could have an inflationary effect. What are investors expecting from key private market asset classes?
Private equity
Higher interest rates have undoubtedly been a challenge for private equity investors. Mounting borrowing costs drove up private equity discount rates, causing lower valuations. Consequently, dealmaking slumped to just under 70% of 2023 levels, according to Preqin. However, investor sentiment improved towards the end of the year as the first rate cut brought some relief for discount rates.
Nadeem Hussain, co-CIO at LGPS Central, argues that 2025 offers the potential for a positive turnaround. “More recently, particularly in private equity, the market has experienced a relative slowdown in distributions from business exits. However, this trend has started to show signs of recovery this year. We anticipate this positive momentum to continue over the next couple of years, creating additional opportunities and generating realised returns.”
His optimism is echoed by Eamon Ray, head of Private Credit and Alternative Income at USS Investment Management. “We expect M&A activity to continue to increase in 2025, which will see an increase in distributions to LPs, driven by improved investor confidence supported by a lower interest rate environment and a more stable inflation picture,” he predicts.
Indeed, Preqin data at the year-end suggests a turnaround, with investor appetite for small- and mid-market deals returning in anticipation of a more liquid market environment.
However, Hussain acknowledges that structural risks persist: “It has been easier to get good returns in an environment where interest rates were a lot lower and there was multiple expansion with some financial engineering. I do think that will be more difficult over the short to medium term, where real value being created in businesses will be tested .”
Private credit: defensive, but optimistic
Higher rates have also left their mark on the private credit sector, with 2024 fundraising remaining significantly lower compared to the previous year. By the end of Q3, it stood at $118bn compared to $214bn the previous year, according to Preqin. Amid a more challenging market environment, investors gravitated towards what they perceived to be the relatively safer segments of the market, with direct lending remaining a strong favourite.
Investors predominantly committed to North American markets, with manager concentration increasing significantly as the ten largest funds attracted 60% of all new investments, according to Preqin.
Investor demand for direct lending is likely to continue, predict Noa Shoham, head of Research and co-portfolio manager Private Assets, and Neil Cable, head of European Real Estate at Fidelity International. “All of the European and US general partners (GPs) we’re speaking to report their direct lending funds are still growing. Returns are fading from the 10-11 per cent that was offered a year ago when liquidity was more stretched, but direct lending GPs’ returns are holding at around 7-9 per cent—clearly still very compelling.”
Infrastructure: focus on megatrends
Higher interest rates and lower valuations have also impacted the infrastructure sector, where transaction levels have slowed significantly over the past two years. In 2023, fundraising levels almost halved compared to 2022, and 2024 figures are set to be even lower.
Katya Romashkan, portfolio manager Infrastructure for the Australian Superannuation Fund, argues that interest rates were a factor. “Owners of high-quality assets who don’t need to sell have held back, unwilling to accept lower valuations. At the same time, buyers are exercising price discipline. This bid-ask spread has tempered transaction activity, but we’re still seeing good assets trade at fair prices.”
Despite these challenges, Romashkan is cautiously optimistic, citing opportunities in energy storage, battery storage, and smart meters. Ray similarly highlights opportunities in social housing, healthcare, and digitalisation infrastructure such as data centres.
Real estate
The real estate sector also experienced a slump in deal volumes, with capital raised dropping from over $250bn to less than $100bn by Q3 2024, according to Preqin. Investors appeared to favour the North American market, which attracted more than half of all funds raised.
However, Fidelity International’s Shoham and Cable predict a European turnaround. “The turnaround in private assets in 2025 is likely to be most noticeable in European real estate. Now is a wise time to get into the market given there are low prices and plenty of assets available.”
They also identify growing opportunities in logistics and offices, particularly in renovating buildings to meet carbon-neutral standards.
Identifying long-term value drivers
As private markets enter 2025, the mood seems to be dominated by cautious optimism. The prospect of lower interest rates and a more stable inflation outlook offer a potential tailwind for dealmaking and fundraising across private equity, credit, infrastructure, and real estate. Yet, structural challenges and geopolitical uncertainties remain. For investors, the focus will likely shift towards identifying long-term value drivers, emphasising quality assets, and navigating the complexities of an evolving market landscape.