Alignment of three cycles provides a tailwind for private markets

2025 is shaping up to be a strong vintage in which to invest in private markets, according to Nils Rode, Chief Investment Officer at Schroders Capital. 

Schroders anticipates 2025 to be an attractive environment for new private market investments. This is due to the favourable alignment of three significant cycles, which creates investment opportunities across various private market strategies:

• Private markets fundraising cycle:  After the pandemic-induced exuberance, Schroders sees evidence that fundraising has bottomed out following a significant correction in the past 2-3 years. 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: Schroders sees the emergence of artificial generative intelligence as the start of a new cycle of technological innovation that will span several years. 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.
• 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, Schroders believes that the economic cycle is likely to move from contraction to expansion, providing tailwinds across asset classes, including private markets.

Private equity : small/mid-buyouts and venture capital most attractive

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. Nils Rode : “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.”

Real estate equity : 2025 will be a strong vintage year

Among different private market strategies, real estate equity has experienced the most severe correction in fundraising, deal activity and valuations. 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,” says Nils Rode. “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.

Private debt and credit alternatives continue to offer better risk premiums

While public debt market premiums are at historic lows, private debt and credit alternatives continue to offer attractive risk premiums, driven by ongoing capital inefficiencies. 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.

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.

Decarbonisation : drivers for renewable energy are primarily economic rather than political

Despite the rhetoric of the incoming administration in the US, Schroders expects decarbonisation to continue to be a defining theme globally in 2025, driven by its combined economic, broader geopolitical and environmental rationale. 

• 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.
• 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 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 reading

• Outlook 2025: Private markets, by Nils Rode, Chief Investment Officer at Schroders Capital. 
• Schroders’ Outlook 2025 website : with in-depth articles about the outlook for equities, fixed income and private markets.