Executive Summary
High inflation and escalating interest rates have tempered enthusiasm in private markets. These factors induced investor caution and lowered return expectations last year, breaking a decade-long asset class growth (~13% AUM yearly). Despite this, private assets remain attractive to institutional and retail investors seeking higher yields, inflation hedging, reduced market volatility and diversification. The persistence of relatively higher long-term interest rates, combined with stronger-than-anticipated corporate earnings, is expected to maintain interest in private asset segments, such as private debt, among a diverse investor base.
Easing monetary policy and modest growth are expected to renew interest in private markets. Anticipated monetary policy easing later in the year could stimulate some parts of the private marketplace such as private equity through improved valuations and renewed IPO activity. For private debt, a lower yield environment could improve debt repayment capabilities and help avoid prolonged defaults if interest rates remain high for too long or even climb to higher levels. However, private markets remain vulnerable to several external pressures that could dampen investor confidence. The prospect of enduring high interest rates, rising default risks, geopolitical tensions, and widespread liquidity shortages are significant concerns that could negatively impact sentiment if conditions worsen.
Private debt as an asset class grew by 60% to USD1.6tn in the last 5 years, transforming a niche financing option for small and medium-sized enterprises (SMEs) into a crucial element of the alternative investment scene. This asset class now encompasses roles from rescue financing and aiding in corporate restructurings to supporting acquisitions and covering capital and operational expenses. We anticipate continued growth (+15% AUM growth yearly), driven by “ex-ante” liquidity premium and returns, although some defaults in pro-cyclical sectors are likely. Direct lending is expected to remain dominant (~50% of private debt market) and to keep evolving into a democratized asset class.
Economic downturn and regime changes often create opportunities in private markets, particularly for distressed debt. As a fact, the largest fundraising increases recorded ever for distressed debt funds occurred during recession years such as 2008 (+504% y/y), 2020 (+211%) and 2023 (+77%). While most funds have been raised in the US, a greater volume of distressed companies is expected in Europe. Indeed, European firms have been feeling more the shock from geopolitical conflicts, with SMEs in parallel being more exposed to imminent debt maturities than US peers. According to our research, ten out of the 15 countries expected to see a double-digit rise in business insolvencies in 2024 are European, with the Netherlands leading with a +31% year-over-year increase. Credit rating agencies also echo this view, with the number of rating downgrades outpacing upgrades in the high-yield segment. If high interest rates persist, highly leveraged companies, particularly in real estate, will face a distressed cycle.
Private equity continues to scout for transformational growth agents like AI,ESG, healthcare, platforms and reshoring despite recent market volatility. Sharp interest rate increases in the past two years have significantly reduced private equity (PE) activity, with global exit values plummeting more than 60% from their 2021 peak. However, renewed earnings resilience and mega-trends like artificial intelligence (AI), ESG and reshoring, alongside a shift in monetary policy, suggest a rebound in PE activity with improved valuations (~+15% in 2024) and an uptick in IPO activity, although distributions (income and capital to investors) might remain sparse in 2024 but reaccelerate in 2025.
As private assets become more accessible and widespread, the distinct behavior of liquid and private assets will blur and potentially reduce the liquidity premium associated with private markets. This trend is likely to persist, especially with the expansion of secondary markets. Nonetheless, in times of economic downturns and market volatility, the inherently riskier characteristics of private assets are expected to emerge, resulting in underperformance vis a vis its traded counterparts.