The Alternative Outlook for 2025

Having long been the preserve of institutional investors and High Net Worth individuals, private assets are becoming increasingly popular with wholesale investors. That’s according to Julien Dauchez, Head of Portfolio Advisory at Natixis IM Solutions, based on what he’s observing across client portfolios.

Indeed, global private assets under management are expected to double by 2030 – research from Prequin/NIM Solutions found AUM reached $13 trillion at the end of 2023. Both institutional and private investors are looking to the asset class for reduced volatility, a source of diversification, additional expected returns in return for less or no liquidity, and a longer investment horizon than listed assets. But can private assets live up to the hype?

“Naturally, private assets are going to be scrutinised by financial advisers over the coming years,” said Julien. “The expected enhanced return profile is obviously something that is going to be tested. People want to make sure that private equity and to a lesser extent, private debt are effectively delivering on their promise of enhanced performance and new sources of returns.”

We canvassed opinion from our Expert Collective to find out how the risks and opportunities are being assessed across private equity, real estate, infrastructure, and private debt in 2025.

Multi Private Assets outlook

Philippe Faget, CAIA
Head of Private Assets
Vega Investment Solutions

The outlook for private assets in 2025 stands at the intersection of opportunity and transformation, driven by a growth stabilizing but at slow pace. Central banks are easing monetary policies, with rate cuts unlocking more favorable financing conditions, while inflation continues to moderate globally. Despite geopolitical tensions and the potential for policy shifts in key economies, private markets are poised to capitalize on structural trends such as decarbonization, AI, healthcare, energy transition. Private markets could offer a combination of high risk-adjusted returns and the flexibility to navigate in this environment. 

Private Equity
Private equity markets are expected to see improved exit opportunities in 2025, driven by a favorable operating environment and an increase in IPO activity. Fundraising has been concentrated among large funds, with over $50 billion raised YoY in 2024. Valuations will slightly increase as LPs prioritize disciplined approaches focused on operational improvements and cost efficiencies over speculative growth. The buyout segment will continue to dominate, supported by sustained demand for mid-market transactions, while VC investments will concentrate on high-growth areas such as AI, green technology, and life sciences.

Private Debt
Private debt markets seem to be well-positioned to outperform public credit in 2025 and could offer superior risk-adjusted returns through asset-backed financing¹. This asset class is characterized by its illiquidity premium, providing higher yields compared to traditional fixed-income securities, and by shorter-duration instruments, compared to other private assets classes. It offers tailored financing solutions, often with covenants ensuring greater security for lenders and possible takeover in case of restructuring. High-quality private issuers with strong balance sheets will attract investor interest, particularly in Europe and North America, where credit opportunities are tied to robust business models. Infrastructure-linked private debt, which aligns with global decarbonization goals, will remain a key focus area for institutional investors due to its stable cash flows and resilience to economic cycles. 

Infrastructure
Infrastructure remains a cornerstone of private asset allocation, driven by transformative megatrends such as energy transition, digitalization, and sustainability. Investments in renewable energy, energy storage, and grid modernization are set to accelerate, with IRA policy support by the US and European Green Deal in Europe ensuring steady momentum. Clean energy and data centers are projected to deliver the highest returns, fueled by increasing demand for cloud computing, AI, and 5G infrastructure. Waste management and water utilities will also play critical roles in aligning with sustainability goals. While political uncertainty following the 2024 US election introduces risks, the resilience of renewable energy assets ensures continued growth in the sector.

Real Estate
The European real estate market is entering a phase of stabilization, with inflation in the Eurozone projected to normalize around 2% by 2025 and interest rates lowering. This trend, combined with stabilizing bond yields, provides greater visibility for long-term real estate investments. Prime office spaces and industrial/logistics assets remain resilient, driven by demand for e-commerce and supply chain reshoring. Residential real estate continues to face a structural undersupply, and hotel investments are expected to thrive, supported by the resurgence in tourism and dynamic pricing models.

Secondary Markets
Secondary markets should continue to expand in 2025, partially supported by growing popularity of continuation vehicles. Both GP-led and LP-led transactions could provide liquidity for high-performing assets while enabling flexibility for institutional investors. Infrastructure and credit portfolios within secondary markets are particularly well-positioned, benefiting from specialized strategies and dedicated pools of capital. The demand for high-quality, resilient assets with fair valuations will likely remain strong, particularly in consumer, technology, and healthcare sectors.

Private credit outlook

Greg Ward
Investment Director, Private Credit,
Loomis Sayles

We are seeing private credit mentioned in the press on nearly a daily basis at this point. This is due largely to the market’s rapid growth since the 2008 global financial crisis (GFC), with private credit converging with some areas of the liquid markets as the asset class matures. But the growth of this market should not be surprising, as it was by design following increased bank regulation in the wake of the GFC. We are experiencing the evolution of a maturing an asset class in real time.

As private credit has grown, so has the definition and scope of the market. It has expanded well beyond middle market direct lending and today includes opportunities covering both investment grade and below, as well as corporates, infrastructure or project finance, and specialty finance or asset-based lending.

Among this varied opportunity set, we are specifically focused on the investment grade market, which we’d estimate at over $1 trillion, with annual issuance in excess of $100 billion and growing rapidly. This universe includes traditional corporate issuance, infrastructure/project finance and specialty finance, which is a newer segment of the market experiencing significant growth. Opportunities in specialty finance are often unique and complex, requiring specialized structuring expertise. In return for the added complexity, investors are often provided with additional compensation above the illiquidity premium observed generally in private issues.

As we enter 2025, market dynamics remain broadly positive for private credit, and we expect the environment to remain supportive. With the decline in interest rates, inflation appears to be under control and corporate health is strong. This is reflected in recent credit spreads, which remained tight at the end of 2024. However, as the US administration transitions in early 2025, we will be watching for the impact of potential tariffs and a more restrictive immigration policy on businesses and consumers. In the year ahead, we anticipate continued growth in the investment grade private credit market. This is likely to be driven by a broader range of participants (e.g., extending beyond insurance general account investors to include other long-term, yield-oriented investors) and an expanding opportunity set to help satisfy the increased demand, as issuers increasingly come to view private markets as an attractive option for their financing needs.

Bigger picture, we see certain secular shifts driving growth in the supply of private credit along with an increase in the total addressable market. Banks are likely to continue to reduce balance sheet lending, which is driven by both increased bank regulation and a recognition that bank balance sheets are not optimized to house illiquid assets – by way of an example, look at what happened with Silicon Valley Bank in 2023. The next stage of reduced lending will likely be on the asset-based side, related to how banks finance equipment, receivables, and inventory.

From what we’ve seen, increased demand is creating more options for issuers and lenders. Large issuers are not exclusively confined to public markets to efficiently raise large sums of capital, and lenders like the potential benefits – including higher yield, downside protections and diversification – and the ability to execute in size with negotiated terms.

We also believe the so-called 'democratization of private credit' is inevitable. Insurance companies have historically been the dominant buyers in the investment grade private credit space, and they still are. However, we see evidence that traditional asset managers, on behalf of large institutional clients and retail-oriented products, are rapidly emerging as significant buyers alongside other institutional investor types, like pension funds.

We also observe a significant number of public/private interval funds and other retail oriented strategies launching and attracting capital. In short, advisors and investors are drawn to the yield premium that can potentially be achieved versus public markets, and also the diversity of opportunities and potential downside protections available in private transactions – and they are increasingly willing to make the inherent liquidity trade off to achieve these benefits. We expect this trend to continue.

Private equity outlook

Eric Deram
Managing Partner
Flexstone Partners

Activity in the private equity (PE) market has resumed with the fall in interest rates. The level of rates greatly influences the level of activity. Monetary easing has rekindled institutional investors' interest in the asset class. After two years of slowdown, exits are picking up again. We have observed a rebound in transactions in the last quarter and a revival of mergers and acquisitions activities.

Rebound of deal activity in the US

Source: Pitchbook, Q3 2024

We expect a continued decline in rates, but they will remain higher than those of the previous decade. Counterintuitively, high rates can be a necessary evil for PE as they force investors to be more disciplined. We deem that this discipline can translate into better performance.

Of course, private equity is not immune to volatility and periods of recession, such as we have experienced over the last two years. But the long-term outlook remains very positive. Indeed, there are some fantastic investment opportunities not least because of the energy transition and more generally technological innovations that will help deal with climate change.

In short, we think that PE has a bright future ahead. While we estimate that AUM in private assets still represents less than 10% of all investable assets, and private equity specifically remains a fraction compared to listed equities, more than 80% of companies globally are held in private hands and need financing through PE. As a result, the financing of private entrepreneurship will continue to be vital for economic development and innovation.

Individual investors' interest in private equity is also continuing to grow. The Eltif 2 label is expected to support the democratization of private assets in Europe, with the creation of semi-liquid evergreen funds. There are several issues that need to be considered carefully. There’s liquidity for one: despite the emergence of semi-liquid funds, these investment strategies remain fundamentally illiquid and therefore not necessarily advisable to everyone directly – except, through pension schemes.

Then there’s the cost: private equity products manufactured for private individuals are substantially more expensive than the ones for institutional investors. Clearly, we need to be careful how we educate different types of investors on this point or there’s a danger that we spoil the momentum of potentially enhanced investment performance.

At Flexstone, we focus on the Small and Mid-Market segment for Private Equity investing, convinced that it offers some of the most attractive opportunities in this market. Our strategy is built around generating consistent, compelling returns through sustainable value creation, while maintaining leverage levels below market average. Operational value creation and conservative leverage have always been, and will remain, key pillars of our investment approach.

As we celebrate our 20th anniversary in 2025, we reflect on two decades of disciplined and consistent investing across vintages and geographies thanks to our global presence and local coverage of the major Private Equity hubs in the US, Europe and Asia.

Looking ahead, evolving regulations, energy transition, and growing interest from individual investors position Private Equity as the ideal asset class to lead the way forward in 2025 and beyond.

Sustainable Real Assets Outlook

Raphael Lance
Head of Real Assets
Mirova

We believe that, notwithstanding the election of Donald Trump and the rise of populism in many European countries, the transition is now well underway and there is no turning back. Regulation in Europe remains a supportive factor for sustainable investment. For example, since January 2024, the Corporate Sustainability Reporting Directive (CSRD) has required large listed European companies to publish detailed information on their environmental, social and governance (ESG) impacts, risks and opportunities. In addition, the new European Commission, still under the presidency of Ursula von der Leyen, is about to embark on Act II of the Green Deal, launched during the previous legislature. It is committed to mobilising 1 trillion dollars of sustainable investment over the next decade to achieve carbon neutrality by 2050.

Energy decarbonisation alone will require colossal investments of 4.5 billion dollars per year worldwide until 2050. This figure was only 1.8 billion in 2023, according to the International Energy Agency. Renewable energy is one of the fastest-growing segments of the infrastructure market. It is an area in which Mirova is well positioned, with a presence and development beyond Europe's borders, in Australia, Asia andAfrica. The energy transition is not just about the production of low-carbon electricity from wind and solar power stations, but also encompasses electricity networks, storage, mobility, hydrogen, charging stations, etc., all of which are investment opportunities for Mirova.

At Mirova, we are also convinced that technology can play a key role in the various transitions (environmental, economic, social, societal) that we are going through. Through our impact private equity funds, we invest in companies that offer proven technological solutions to the various challenges posed by the environmental and social transitions and which, in our view, offer solid growth prospects. Financial performance and the search for impact are compatible.      

The recent COP 16 in Cali (Colombia) served as a reminder of the existential urgency of investing in solutions to halt the collapse of biodiversity. The scale of the financing needs (around 700 billion dollars a year) gives an idea of the potential for investment in natural capital.

Real estate outlook

Hans Vrensen
Head of Research & Strategy Europe
AEW

Real estate yields tend to be correlated with the evolution of long-term trends of government bonds. Inflation, which had triggered the rise in interest rates, is decreasing and is expected to stabilize around the central bank target of 2% in 2025 in both the eurozone and the UK. As a result, central banks have already started cutting interest rates.

This monetary easing and the anticipated decline in 10-year government bonds should help to further reduce the all-in cost of real estate borrowing in the eurozone (3.8% in Q3 2024), which has fallen below the yield rate of real estate. This gap which is allowing equity investors to use debt in an accretive way, is expected to widen in 2025 in both the eurozone and the UK.

As an indication of the remaining challenges of refinancing legacy loan positions, the estimated debt funding gap in Europe for 2025-2027 has decreased to €86 billion, now accounting for 13% of the originated loans (compared to 17% in April 2024 for the 2024-2026 period).

The confidence of asset management companies, as measured by the IPE Real Assets Expectations in Q2 2024, is on the rise, with the biggest positive quarterly change for both residential and industrial. AEW anticipates a rebound in real estate investment volume in Europe in 2024 (€170 billion) and 2025 (€200 billion), across all types, as the price expectations between buyers and sellers converge, following the capital value declines of 2022 and 2023.

The vacancy rate, which had increased during the lockdown and the pandemic, has started to decline again, falling below 4% across all sectors (retail, residential, logistics) in most European markets, except for offices. This sector shows the highest vacancy rate at 9% but is projected to come down to 7% by year-end 2029.

For the next five years, AEW's base case scenario predicts that prime offices, followed by residential and logistics, will be the most promising segments in terms of annual rental growth of between 2% and 2.5% for 2025-2028.

This rental growth in combination with 20-70 bps of yield tightening leads AEW to project a total annual return of 9.2% on average for real estate in Europe, across all sectors, during the period 2025-2029. Prime offices and France are projected to outperform other property types and countries on a total return basis. In the downside scenario assuming higher inflation and lower GDP growth, total returns come down to 8.6% pa across all sectors and countries for the same period.

These return prospects may seem optimistic to some still absorbing valuation declines but they are consistent with the rebound in capital values observed after the 2008 crisis. In that instance, it took seven years for capital values to return to pre-crisis levels. Our base case scenario predicts that capital values will return to their level from Q2 2022 after 7.5 years, which would be in Q4 2029. This confirms that our base case is reasonable, especially with the higher income yields available in the current market.

Mirova, AEW, Vega Investment Solutions, Loomis Sayles and Flexstone Partners are affiliates of Natixis Investment Managers, and form part of our Expert Collective.