Higher inflation and slower economic growth in the US, as well as deflationary policies in Europe are not the best conditions for private equity or credit markets. On top of these threats, geopolitical turbulence and the Trump factor compound uncertainty.
Yet, some private market specialists can see reasons to be cheerful.
“We continue to see cyclical tailwinds for private markets, which, following a three-year slowdown in terms of fundraising, new deals and exits, currently offer valuations and yields that are attractive in both absolute and relative terms,” noted Nils Rode, chief investment officer, Schroders Capital, in the firm’s Q2 2025 investment outlook.
Private markets should also provide protection against the months-long volatility in public markets and “can even thrive amid uncertainty,” he added.
But some private market strategies have better risk-return profiles than others.
Rode likes those that have balanced capital and supply dynamics, supporting valuations and yields, and exposure to domestically focused companies that are more insulated from global trade tensions.
“The best strategies will also benefit from additional risk premiums caused by complexity, innovation or market inefficiency, provide downside protection through limited leverage or asset backing, and will have less correlation with listed markets,” he said.
Small is better
In private equity, Rode prefers small and mid-sized buyouts that are accessed through primary fund investments, direct/co-investments and General Partner (GP)-led secondaries because they benefit from favourable capital supply-demand dynamics following a tighter fundraising squeeze in recent years.
“This means small- to mid-buyout managers face lower competition for what is a far wider range of deals in a larger investment universe,” said Rode.
As a result, there are valuation discounts that offer attractive entry points for investment with reduced reliance on debt financing.
“All of this adds up to significant potential for transformational value creation, as well as enhanced downside protection,” he said.
Rode also sees potential in the biotech sector, especially early-stage venture capital which are more attractively priced and isolated from current uncertainties than late-stage venture and growth capital.
Enhanced yields in private debt
In the private debt sector, specialised strategies with extra risk premium and higher yields are appealing and they also have diversification benefits. These include commercial real estate debt, infrastructure (especially energy transition in Europe and Asia) debt, asset-based lending and insurance-linked securities.
“Real estate debt could benefit from strong demand for capital to refinance construction loans, while infrastructure debt offers access to stable, defensive and asset-backed cashflows,” said Rode.
“Meanwhile, specialty finance and asset-based lending capitalise on market inefficiencies and offer additional income and diversify risks by focusing on high-quality, consumer-oriented borrowers and small and medium-sized enterprises,” he said.
Finally, insurance-linked securities “stand out”, because their lack of correlation with the macroeconomy provides a “respite from unstable market performance”.
