Private equity: Increasing activity and a healthy secondary market

In 2024, the level of dry powder in U.S. private equity (PE) hovered just below USD 1 trillion, fueling concerns that heightened competition could erode future returns. However, annualized global private equity investments reached USD 1.27 trillion in the first half of 2025, slightly surpassing the previous year’s total. Exit activity is also on track to exceed 2024 levels, suggesting a pick up in activity that will alleviate some of the concerns about the stock of dry powder.

The decline in interest rates is expected to support ongoing transaction and exit activity, as lower financing costs enable greater use of leverage—particularly in larger deals where leverage is more prominent. Additionally, reduced rates facilitate capital investment by portfolio companies and support add-on acquisitions, further enhancing value creation.

Globally, the outlook for lower rates as central banks ease monetary policy is supportive of broader economic activity and corporate revenues. These developments should drive increased transaction volumes and exit activity, with valuation support mirroring the positive impact of lower rates on public equity markets.

Nevertheless, macroeconomic risks that create uncertainty in public markets remain headwinds for private equity. Historically low distributions may dampen investor appetite, and a meaningful increase in public market exits (IPOs and M&A) is needed to boost distributions. In this context, secondary markets have become an essential liquidity tool within the private equity ecosystem. In the first half of 2024, secondary market activity was running at an annualized pace of USD 206 billion, compared to USD 162 billion for the full year 2023. Discounts in the secondary market appear to have stabilized, reflecting a maturing market that provides investors viable options for liquidity and reallocation across managers. 

Private credit: Assessing systemic risk

The rapid growth of private credit lending has attracted attention, with some questioning whether the asset class is truly resilient through a full economic cycle. Attractive yields and the flexibility of deal structures have enticed lenders, while borrowers appreciate the speed of execution and the benefits of negotiating with a smaller, more agile group of lenders.

However, this flexibility can lead to increasingly lenient terms as lenders compete for deals, potentially increasing risk. While cracks began to emerge in October, these have not been sufficient to undermine the private credit story. Most defaults have occurred in leveraged loans—a segment that straddles the public and private fixed income spectrum—rather than in pure private credit.

Signs of stress, such as increased liability management exercises and payment-in-kind arrangements, have surfaced in private credit portfolios. Yet, the floating-rate nature of private credit lending means that expectations of falling rates may help address concerns about rising defaults and broader systemic risk. Declining rates are a double-edged sword: they ease debt service pressures but also reduce yields for investors.

Demand for yield in private credit has outpaced supply, resulting in spread compression. Spreads may widen from historically tight levels if fundraising slows, but the moderate economic backdrop, low level of defaults in private credit and little sign of stress in spreads suggest that the market is taking a relatively benign view of the dramatic headlines.

Direct lending plays a crucial role in financing private equity transactions. Private credit markets should benefit from increased leveraged buyouts and M&A activity.

Meanwhile, additional support may come from the growing use of continuation funds in the private equity secondary market. The increased use of continuation funds was thought to be a sign of stress in private equity, as general partners (GPs) were unable or unwilling to sell portfolio companies, instead rolling them into new funds. However, they are another means to provide liquidity in the PE market and GPs may utilize private credit to finance new continuation funds. 

Diversifying the diversifiers: Hedge funds and real assets

With rising market and economic risks, investors are increasingly seeking alternative strategies to build resilient portfolios that can withstand both growth and inflation shocks. Real assets present valuable diversification against inflation. Infrastructure assets, for example, often feature implicit or explicit links to inflation through regulatory pricing or lease arrangements. These assets are typically uncorrelated with public markets and provide a steady stream of income, enhancing portfolio stability.

Recent focus has shifted to the infrastructure deficit in many economies and the growing demand for assets driven by anticipated AI growth. The rise of artifical intelligence (AI) has accelerated investment in the digital sector, particularly data centers. This trend is spilling over into the need for expanded power generation and stronger energy grids, requiring significant capital and the long-term investment horizon that private capital can provide.

Hedge funds present another avenue for diversification, complementing traditional stock-bond portfolios and capitalizing on increased market volatility. The rising dispersion in equity prices and valuations, coupled with declining correlations between stocks and sectors, creates fertile ground for alpha generation. Asset class valuations have risen in 2025, even as markets remain sensitive to economic policy shifts and risk-off periods. Macro and relative value hedge fund strategies are well positioned to add diversification through their uncorrelated returns.

09pf251811080032