06 Jan 2025
Top private market fund trends for 2025
From an expected uptick in fund activity to the growing influence of High Net Worth (HNW) capital and evergreen structures, alongside the ongoing use of continuation funds, Shani Unantenne, Head of Funds and Sponsors at NatWest, hightlights the key market trends set to shape the months ahead.
After an extended period of instability, it’s refreshing to look forward this year with a degree of optimism. While the fundraising and investing environment remains challenging, a number of positive trends nevertheless look set to emerge.
Macroeconomic conditions will continue to be a key factor in shaping fund managers’ and institutional investors’ investment strategies. Following a year in which a record number of elections took place, the prospect of political clarity should now allow markets to experience reasonable stability, with a reduction in global uncertainty boosting the deal-making environment.
Likewise, the outlook for interest rates – a significant issue for the sector over the last few years – is steadier, with a general consensus of ongoing stability. This should drive increased M&A activity, buoying a number of sectors. And while inflation remains a potential cause of volatility in the markets, we expect to see fewer dramatic fluctuations.
More predictable conditions will strengthen the alternative investment market, and 2025 will present opportunities for agile fund managers.
Against this backdrop, there are a number of distinct trends we expect to see play out in 2025.
Increased competition: Following an extended period of relatively benign markets, fund managers are likely to experience pressure to increase the velocity of their investment portfolios. In 2025, fund market dynamics will be dictated by record amounts of ‘dry powder’ – unallocated capital – combined with a high average hold period for many assets. There will consequently be greater competition for deals and increasing demand for funds to both deploy capital and begin looking at how to exit assets. The pace of exits for older investment vintages in particular will increase as managers aim to return capital to investors. We expect this will result in further growth of the secondaries market and ongoing use of fund structures such as continuation funds.
Consolidation and disproportionate allocation of capital: Increased competition is expected to drive consolidation of the industry. M&A activity will continue to grow, with larger managers expanding their product offering by acquiring smaller competitors. We will also see a continuation of the trend for capital being allocated disproportionately towards larger managers at the expense of smaller firms as investors lean towards those offering a broader asset class, choosing to deploy their capital via a smaller number of GPs for trust and efficiency reasons.
A focus on HNW capital and more innovative fund structures: The need for capital will also see managers actively targeting the pool of high net worth retail capital. According to research by Bain, the retail share of assets under management (AUM) is expected to grow to 22% of total invested capital by 2032. The increased appetite for private equity among HNWIs will lead to greater creativity in the structuring of funds and a growth in evergreen structures and other new products targeting these high equity individuals with semi-liquid vehicles supplementing more traditional LP structures, and open-ended and interval funds designed to attract this investor base.
Protecting returns: Achieving competitive returns is becoming increasingly challenging, requiring fund managers to rethink their strategies. Exploring new markets and developing innovative structures will be key to attracting new investors. Fundraising challenges and the need to diversify investor capital globally will further heighten demand for currency sleeves, feeder funds and single-investor vehicles, in many cases increasing the currency mix and requirement for fund-level FX hedging.
Greater regulatory scrutiny: Regulation is likely to be a continuing theme in 2025. Regulators recognise that private markets play an increasingly impactful role in world economies, and they therefore want to mitigate against shocks to the system. This heightened interest is creating uncertainty around the level of regulation that might be introduced. While in the US the second Trump presidency may see a more relaxed regulatory environment, we still expect regulators to require increased transparency from all market participants.
Technological innovations continuing to impact: Blockchain, AI and other innovations will continue their transformation of the funds industry by streamlining operations, improving data management, shaping investor relations, and enhancing risk and investment analysis. According to a global survey of asset and wealth managers by PwC, 84% believe new technologies will impact operational efficiency, with 70% expecting to see an effect on product and service innovation. As technological development continues, we will see it changing how funds go to market and how office functions are set up, shaping the sector’s evolution.
Infrastructure investments as a key area of opportunity: Many economies need to upgrade core infrastructure; and there will also be a growing call for new infrastructure needed for developing technologies including AI, such as data centres and energy provision. In addition, as the transition economy expands, renewables and green infrastructure will be a significant element of the investment thesis for many fund managers. Within ESG fundraising, Preqin reports that infrastructure along with private equity accounted for 55% of funding raised in the first quarter of 2024, a trend that looks unlikely to slow.
A higher profile for ESG: It had slipped down the priority list recently, with fewer ESG labelled funds launched in 2024 than 2023 – a drop of 57%, according to Preqin. However climate funding and finance were the focus at COP29 at the end of 2024, with delegates stressing the need for the private sector to play its part in financing the green transition. Private capital will have a key role in a number of areas. Decarbonisation, for example, is likely to become more prominent as an investment opportunity. Approaches to ESG investing will become more disciplined, with a growing number of GPs using industry methodologies and frameworks such as the Science Based Targets initiative and the Private Markets Decarbonisation Roadmap.
Fund financing will continue to evolve: Fund managers’ needs will continue to develop in the coming year as they navigate different challenges and also grasp new opportunities in order to differentiate themselves. Lenders, in turn, will have to be nimble and similarly open to innovative ways of working in order to meet the expected volume and diversity of borrower need.
Backing the sector
As one of the biggest banks supporting private market funds, our priority is remaining attuned, and adapting, to what our clients need from us. We recognise that the industry is continuing to evolve, with fund managers having emerging requirements for new capabilities and products, which we will continue to develop to service our clients’ needs.
To discuss any of the themes raised here, and how we can support you, please reach out to your relationship director.
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