Private markets present opportunities despite US policy uncertainty

Despite current challenges, our outlook for new private markets investments remains optimistic, although we are cognisant of increased risks arising from significant US policy changes and resulting uncertainties affecting growth, inflation and interest rates.

Dr. Nils Rode

US policy changes create uncertainty
Following a three-year slowdown across private markets in terms of fundraising, new deals and exits, private market valuations and yields are generally attractive in both absolute and relative terms.

However, risks and uncertainty have increased sharply since the beginning of the year due to the US government’s policy changes and the uncertainties around their implementation and impact. This is most notable in relation to trade tariffs, immigration, ESG, and a more isolationist stance regarding geopolitics and defense.

This has significantly increased volatility in listed markets and heightens near-term risks to economic growth, inflation and interest rates. The global repercussions of US policy changes are also likely to induce industry- and region-specific challenges, further contributing to continued increased volatility.

Despite a significant increase in uncertainty following major US policy changes, private markets continue to present attractive opportunities. Valuations and yields are appealing given a multi-year slowdown in fundraising and deal activity.

Furthermore, private markets tend to show resilience in times of volatility. To navigate uncertainties, we suggest investors be discerning in selecting strategies with attractive risk/return profiles and to ensure diversification across private market strategies.

Question marks around AI-related capital expenditures
Meanwhile, the efficiency gains potentially showcased by DeepSeek for generative artificial intelligence (AI) models introduce new uncertainties concerning capital expenditure (capex) and the recent rise in valuations of companies benefiting from the AI narrative, which has been followed by a correction in this sector. We suggest selectivity and diversification to navigate change.

Private markets 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. Nevertheless, we find that in the current market environment some private market strategies exhibit notably better risk/return profiles than others. Consequently, we urge investors to be particularly discerning in selecting strategies and investments.
Additionally, diversification across strategies is important.

We see the most attractive allocation options in the current market as being characterised by:

- Balanced capital supply and demand dynamic, leading to favorable entry valuations and yields
- Domestic companies and assets offering some insulation from geopolitical risks and trade conflicts
- Opportunities for additional risk premiums arising from complexity, innovation, transformation, or market inefficiencies
- Robust downside protection through limited leverage or asset backing
- Reduced correlation with listed markets, owing to distinct risk exposures

Private equity: Small is beautiful
In private equity, we see small and mid-sized buyout investments – accessed through primary fund investments, direct/co-investments, and GP-led secondaries – to be attractively priced and less affected by geopolitical and trade conflicts, compared to large-cap buyout. Additionally, early-stage venture capital appears to be more resilient than late-stage venture and growth capital.

Private debt and credit alternatives: Specialised strategies offer attractive yields
In the private debt space, we see promising opportunities in specialty finance, asset-based lending and infrastructure debt, which offer stable, high-income cashflows amid volatility and inflation concerns. We see insurance-linked securities (ILS) as especially attractive. The uncorrelated nature delivers a disproportionately beneficial outcome in an environment where macroeconomic conditions are uncertain or deteriorating.

Infrastructure equity: Renewables focus on Europe and Asia, but don’t count out the US
Within infrastructure equity, we see the most attractive opportunities in European and Asian renewables investments, given the pushback from the new US government. However, we expect the cost competitiveness of renewable energy to support continued infrastructure build-up in this space, even in the US. Additionally, we see a range of complementary opportunities across the energy transition landscape in areas such as hydrogen, heat pumps, batteries, and electric vehicle charging, which play a crucial role in facilitating the decarbonization of sectors across the economy.

Real estate: Broad-based recovery expected
Real estate has undergone a significant correction since the second half of 2022. However, we are now seeing increasing evidence of a recovery in pricing, with both deal volumes and transaction pricing showing positive trends in the latter part of 2024. While investor sentiment has been on an upswing, recent events might cause a temporary setback.

Amidst current challenges and uncertainties, we expect market performance to recover sequentially. We are confident that 2025 will be a robust year for deployment, despite the prevailing uncertainties. We have adopted a neutral stance across most sectors, although we maintain high conviction in various living and operational segments that can provide inflation-protected cashflows.