Private equity has encountered its fair share of difficulties lately, but the worst of it now seems to be over for the $5.8 trillion industry.
Enabled by an increasingly favorable macro environment and growing retailization, Preqin is forecasting that private equity’s Assets under Management (AUM) will more than double to $12 trillion over the next five years – corresponding to an annualized growth rate of 12.8%.[1]
Stability returns
Between 2022 and 2024, inflation, interest rate hikes and recessionary fears caused repeated problems for private equity, resulting in a sharp drop off in deal-making and exits, and with it LP distributions and fundraising.
The good news is that markets are beginning to stabilize, which should make for a more conducive private equity investment environment in 2025.
“The changing market conditions will make refinancings and IPOs more attractive in 2025. Many managers will likely be striving to create liquidity in their portfolios for LPs. As a result, an increase in IPOs, M&A activity, and secondary transactions can be anticipated. A lot of managers are scoping out opportunities in healthcare and technology, two sectors where valuations are rising, and we expect this trend will continue in 2025,” said Michael Richards, Head of Fund Administration – US at JTC.
Private equity flows: Due a boost
Allocations into private equity are likely to recover in 2025, if investor sentiment is to be believed.
Unlike other investment strategies, private equity has not suffered from heavy outflows recently, although fundraising has slightly stalled. According to Preqin, private equity raised $482 billion by the end of Q3 2024, compared to $780.7 billion during the whole of 2023.[2]
However, Preqin also found that 50% of investors plan to allocate more capital to private equity over the next 12 months, compared to just 28% last year.[3]
This comes as 49% of investors told Preqin they believed private equity would outperform in 2025, partly reflecting their receding concerns about inflation and interest rate risk.[4] Whereas 58% of investors were worried about interest rates in 2023, this has since fallen to 36%, while only 7% said inflation is an issue today, versus 27% back in 2023.[5]
Going after retail
One of the biggest catalysts behind private equity growth moving forward will be retailization, as more private wealth managers and family offices ramp up their exposures to illiquid assets.
Preqin’s data shows that family offices currently account for roughly a quarter of all private equity allocations, and wealth managers 8.7%, an increase from 8.3% in 2023.[6] “We believe there will be greater democratization of private assets, including private equity, as more retail investors enter the market. For lower to mid-cap managers who are struggling to access big institutional investors, the retail market is a huge untapped opportunity,” noted Richards.
For example, data from Bain & Co indicates that individual investors hold approximately 50% of the $275 trillion – $295 trillion of global AUM, yet account for just 16% of the AUM in alternatives.[7]
In order to grow within a competitive market for attracting capital, private equity managers are developing new, more retail-friendly fund structures.
In the US, there is growing retail interest in tender offer and interval funds, which are effectively closed-ended funds that continuously offer shares at Net Asset Value (NAV).[8] Both structures have seen impressive growth lately, with interval funds now managing around $80 billion, corresponding to a 40% year-on-year growth over the last decade.[9]
As such, expect private equity inflows – driven by retail investors – to pick up the pace in 2025.
Private equity doubles down on technology
Private equity will continue to take an active interest in technology in 2025.
By interrogating data, Artificial Intelligence (AI) can quickly spot investment trends and hard-to-detect patterns, which could help firms enhance their returns.
This comes as research from Deloitte shows that 10% of private investment firms are already deploying AI to handle activities, including identifying investment opportunities, research, deal-sourcing, contract management and due diligence, a figure the consultancy expects will only increase.[10] AI can also be used to populate reports, including client and regulatory disclosures.
Automated KYC solutions will become increasingly valuable as more managers begin scaling up and digitalizing their internal processes to deal with increasing data demands from investors, boards and regulators alike.
Longer-term, experts believe asset tokenization, namely the fractionalization of fund units on distributed ledgers, could make waves in private equity. By fractionalizing these assets, it will become cheaper for investors – including retail – to buy private funds. However, adoption of tokenization will only happen if and when a proper regulatory framework emerges, and this is not expected to materialize for another few years.
Regulation
Regulation will take its toll on European private equity managers in 2025, in marked contrast to the US.
In the US, private equity managers will likely be given a reprieve with the Republicans now controlling all branches of government. “There could be some changes in the next four years, but we strongly believe there is going to be a dialling down of regulation in the US. For example, we do not see any changes being made to carried interest rules,” commented Richards.
Environment, Social, Governance (ESG) investment and reporting rules for asset managers could also be scaled back by the new administration, especially as a number of Republican leaning states have already enacted anti-ESG laws.
This comes not long after a US Appeals Court struck down proposals from the Securities and Exchange Commission (SEC) to introduce tougher disclosure requirements for private equity and hedge fund managers.[11]
Zeroing in on 2025
Private equity managers have gone through a turbulent period.
As markets begin to improve, the industry’s prospects are also expected to recover. This comes as falling interest rates will likely create better conditions for investing, while investors – both old and new – are piling into the asset class.
In order to win mandates though, managers need to do more than just deliver returns. They must ensure that the investment experience is enjoyable and user friendly. This can be done by digitalizing their operating models, whether it be through AI or automation. Reassuringly, a lot of managers are now taking digitalization and automation seriously.
The signs are looking positive that 2025 will be the year in which private equity stages a turn-around and return to a state of full health.
To discuss this article in detail, or to find out about JTC’s private equity services, contact Michael directly.
[1] Preqin – September 18, 2024 – Global alternatives markets on course to exceed $30tn by 2030 — Preqin forecasts
[2] Preqin data
[3] Preqin data
[4] Preqin data
[5] Preqin data
[6] Preqin data
[7] Bain & Co – February 27, 2023 – Why Private Equity Is Targeting Individual Investors
[8] Foreside – Product Spotlight: Interval and Tender Offer funds (PDF via AIMA)
[9] Morningstar – June 24, 2024 – Interval Funds: Are They Worth What You Give Up?
[10] Deloitte – May 29, 2024 – Private capital innovation: Using artificial intelligence can accelerate the portfolio valuation process
[11] White & Case – June 6, 2024 – 5th Circuit Strikes Down Private Fund Adviser Rules
