The Private Equity Revolution 

Overview 

While public equity investors enjoyed strong returns over the last two years, the concentration of those returns nonetheless suggests the need for greater equity diversification going forward. That is one reason why investors—including individual investors—are becoming more focused on incorporating private market assets to complement their public equity holdings, one of which includes private equity (PE).

As the name suggests, Private Equity generally involves equity investments in companies that are not publicly traded. It is the leading private market asset class, accounting for over 67% of the $15.1 trillion global private asset market,⁴ a testament to its ability to tap into the world’s growth engine—private companies. Institutional investors have long relied on private equity as a cornerstone of their portfolios, leveraging its capacity to deliver robust returns and foster long-term growth. However, in recent years PE has become more accessible to individual investors, with new opportunities and vehicles in which to invest. Although average individual investor allocations to PE are still less than 2%, we believe that we are on the brink of a paradigm shift, with individual investors increasingly embracing private equity, thanks to a deeper understanding of the potential benefits and improved access.

A Broader Opportunity Set 

PE offers access to a broader investment universe. Globally, more than 85% of companies with revenues exceeding $100 million remain privately owned. Therefore, investors deploying capital into both private and public equity markets are utilizing a larger investment universe, resulting in greater diversification and potential for improved investment outcomes.

At the same time, fewer companies are now going public because the trade-offs have been tilted toward staying private. Companies planning to go public face regulatory burdens and compliance costs, while firms in the knowledge-based economy may hesitate to reveal proprietary information. Meanwhile, companies now can access deeper capital markets, with the size of private credit doubling and private equity tripling since 2003.

Put simply, more and more companies have decreased dependency on public money. This helps explain why the number of public companies has dropped this century, while PE-backed companies have steadily grown. Consequently, with more capital competing for a dwindling number of stocks in the public markets, there’s a growing need to diversify into private equity and explore opportunities beyond the increasingly concentrated public equities.

Potential Benefits of Private Equity 

PE has the potential to strengthen portfolios with better risk-adjusted returns and higher absolute returns compared to public equities as well as other alternative investments, along with enhanced portfolio diversification. Indeed, PE has historically provided investors with strong performance relative to public equities, whether looking at performance for the past three, five or 10 years. 

The reasons behind this historical outperformance are many and are not limited to: 

• Active involvement. Private equity General Partners (GPs) play a hands-on role in driving value creation within portfolio companies through financial and operational improvements. In contrast, public investment fund managers typically adopt a more passive approach, with minimal involvement in the day-to-day operations of the companies in which they invest.
• Long-term focus. Private firms prioritize long-term value creation and are better positioned to make future-oriented investment decisions. Conversely, public firms often face pressure to meet short-term earnings expectations, which can lead to suboptimal valuation and decision-making strategies driven by immediate performance concerns.
• Market inefficiencies. Relative to public markets, private equity markets are more complex, less transparent, and have fewer investors to arbitrage away market inefficiencies, potentially creating conditions for additional returns.

The Bottom Line

To be clear, we believe that investors should consider PE alongside public equity, and not as a replacement for public stocks. While some investors may focus on improving their portfolio’s return potential, others prioritize private equity’s ability to diversify traditional equity and bond holdings. Either way, investing in PE alongside public stocks aims to offer an effective way to enhance equity returns in a portfolio. And individual investors now increasingly have the ability to access this critical asset class and achieve its benefits.

Asset-Backed Finance: The Next Frontier of Private Credit 

Overview

Asset-backed finance (ABF) is a form of private credit that is backed by self-amortizing pools of contractual assets (for example, loans, leases and mortgages), in contrast to traditional corporate private credit in which repayment relies on the individual company’s fundamentals and ability to refinance. Financing the breadth of the global economy–everything from transportation to consumer finance–through these structures has been a cornerstone of bank and insurance business. 

We believe ABF will become an increasingly important private asset class in the coming years as banks pare back their activity in the area, giving rise to a significant opportunity for alternative lenders. We think it’s the early moments of a new chapter in the evolving private credit story, with private lenders estimated to currently provide less than 5% of asset-backed financing within the $5.5 trillion universe. Much of the private capital growth in the last decade has tilted towards direct lending.⁵

Poised for Growth 

We believe ABF is on the verge of significant growth for alternative lenders as a result of banks continuing to reduce their footprint in response to various headwinds in a wide range of lending activities. Fiscal tightening, questions around the reliability of deposits and the value of assets on their balance sheet and compounding regulatory pressures have resulted in a general conservatism and risk repositioning by banks. The continued decline of banks willing to participate as the primary providers of asset-backed financing is creating an opening for private ABF lenders to fill the void.

At the same time, demand for non-bank lending is increasing and there is a tremendous amount of opportunity, given the ABF funding gap. Mutual funds and hedge funds prefer assets with greater liquidity, insurers favor instruments with term funding and are often limited to investments that may be “rated,” and private equity typically pursues investments with higher risk/return profiles. This underscores the significant opportunity ABF presents for private lenders, particularly experienced ones who can navigate the complexity of ABF borrowers’ financing needs, to earn a “complexity premium” (over available spreads for traditional corporate lending or comparable asset-backed securities) in this currently underserved area. 

ABF has several features that distinguish it from corporate direct lending and may represent attractive investment features. Direct lending depends on a single company’s EBITDA⁶ to support repayment, while ABF relies on a pool—of both income and principal from often multiple borrower cash flows, typically on a diversified portfolio of credit receivable “assets.” As a result ABF is less reliant on a single borrower’s performance and may represent a more broadly diversified portfolio given the breadth of asset sectors served. ABF investments typically also include various structural protections, with assets housed in bankruptcy remote special purpose vehicles. Unlike the sometimes “covenant light” corporate direct lending market, ABF is currently a “covenant heavy” market, with creditor rights helping to further mitigate risk. 

These features of ABF support a broad range of potential benefits, including strong income and attractive risk-adjusted returns.

The Bottom Line 

We believe that ABF should be viewed as a complement to direct lending in a portfolio’s private credit allocation. Diversifying across private credit strategies, by combining both direct lending and ABF strategies, may be crucial for optimal portfolio construction and can help strengthen portfolios by offering compelling income streams, attractive risk-adjusted returns, and important diversification benefits. Still, while ABF is emerging as a significant, long-term opportunity, it is not a homogenous, easily accessible asset class. We believe that working with an experienced manager is essential to navigate the complexity of the asset class. Those managers who can cast a wide net for attractive opportunities and keep risk control at the forefront without sacrificing on achieving strong returns stand to capitalize on what we believe is the next frontier of private credit.

A Start of a New Cycle in Real Estate 

Overview 

Historically, real estate and economic cycles have been highly correlated. However, unlike prior cycles, the end of the last real estate cycle was not accompanied by an economic recession. A relatively strong economy is continuing to drive improvements in real estate fundamentals, such as consistent tenant demand and rent growth, fueled in part by the recent alleviation provided by lower interest rates. 

As a result, we are at the start of a new real estate cycle. We believe solid economic growth will further drive positive fundamentals in real estate in 2025, as lower interest rates should continue to support economic growth. Indeed, transaction volumes have already increased from 2024 and are estimated to move higher in 2025, driven by renewed investor interest as markets stabilize (Figure 7). Estimated transaction volumes for 2025 exceed $400 billion, which is well above the pre-Covid annual average from 2009-2019. Meanwhile, the relatively low consumer loan delinquency rate is evidence that enough capital is available to keep markets stable, although the refinancing of commercial real estate remains a work in progress.

Opportunities in the Current Cycle 

Demand for various property types has changed since the pandemic, due to shifting consumer preferences. As a result, opportunities in this cycle for real estate investors are different than those available prior to 2020. Some assets are less competitive in the marketplace now, including non-prime office space and less-functional industrial properties. 

Still, valuations are at or near a bottom on a wide swath of sectors, which could present excellent investment opportunities, in our view. In the multifamily sector, recent reductions in the level of new supply and still elevated mortgage rates could potentially drive healthy demand and better fundamentals.

Meanwhile, shifts in supply chains and a relatively healthy consumer could continue to support the industrial sector. New logistics development under construction has slowed significantly. In addition, the impact of new trade policy may change the flow or price of goods entering and leaving the country. We believe this could create a wide range of investment opportunities, as new supply market centers emerge as the result of onshoring needs.

The Bottom Line

The macro environment for the emerging real estate cycle remains encouraging. Capitalization rates, or “cap rates”, which are used as an estimate for the rate of return on a real estate investment, could shift lower over time. They are likely to stabilize at higher levels than in the last cycle, largely due to interest rates remaining higher than the historic lows of the previous cycle. 

It is important to emphasize that during a real estate cycle’s early phase, market and individual asset selection are critical for investors. The skill of a manager during this nascent part of the cycle can have a major impact on returns. Macro factors influence cap rates directionally, but the strength of the individual asset is critical to the success of the investment. That is why engaging with a strong manager, who is skilled in assessing the relative strength of each market while conducting effective due diligence around each asset, is key to a successful real estate investment strategy.

AI Infrastructure: New Opportunity, but Old Principles Apply 

The Opportunity

Artificial Intelligence (AI) is primed to be one of the most impactful technological revolutions in modern history, with the potential to transform significant parts of the global economy. As the use of AI and related technologies increases across different industries, the build-out of digital infrastructure such as fiber networks, wireless infrastructure and data centers to process, transmit and store data is becoming increasingly important. 

While the demand for digital infrastructure may be fairly obvious, the bottleneck for AI adoption is going to be the access to power. An internet search query using an AI service requires substantially more power than a typical Google search. With 5.3 billion global internet users and the expected widespread adoption of AI, there is going to be a significant increase in power demand. This is in addition to electricity needed for industries, heating for houses, and other uses. Combining all these requirements together, the total global installed capacity for electricity is expected to more than double over the next 20 years, while some of the existing power generation facilities are expected to be retired due to their carbon-intensive nature.⁷ 

Once power is generated, data centers also need to be connected to the grid to deliver the power through transmission assets. Utilities and owners of power generation assets are positioned to benefit from the increase in electricity demands. We also believe midstream infrastructure will be a prime beneficiary, helping provide data centers with cost-efficient, consistent and reliable natural gas as a power source. 

In summary, artificial intelligence has initiated a domino effect on several of the sectors in infrastructure, broadening the opportunity set for the asset class and while helping to create opportunities for investors.

Sticking to the Ground Rules 

It is important to place the AI infrastructure boom in a historical context. Other technologies that are now well-established required additional infrastructure resources when launched, such as mobile phones, fiber optics, and cloud technology. For the most part, AI is and will be no different. 

Continuous improvements in technology behind AI servers and software is positive, as they lead to new and more complex AI use cases, such as robotics. Moreover, the prospect of more cost-effective AI applications is likely to increase adoption rates for AI, making the technology more widely accessible. Overall, technological disruption naturally bodes well in the long term for digital infrastructure demand, consequently creating significant growth opportunities to power this demand across sectors, such as renewable power, energy transition, utilities and midstream. 

Certainly, investors should be excited about what’s ahead. However, it is equally important to note that the traditional ground rules around investing in infrastructure still apply. While AI is still new, it is important to revisit the essential principles when it comes to investing in infrastructure and target investments that: 

• Constitute “the backbone of the economy,” including the digital backbone—in other words, assets that are essential to society and economic activity;
• Have predictable cash flows with creditworthy counterparties; and
• Have limited to no technological risk. 

Particularly, technological risk is a key risk to avoid for infrastructure investors, as technological advancements are not often linear and technology can become obsolete quickly. In contrast, infrastructure assets are long-life assets.

Bottom Line

Infrastructure presents a way to invest in the AI tailwind with less volatility than investors may be subjected to when investing in technology companies. Still, when investing in AI infrastructure, consider looking for well-established investment managers who are benefitting from the AI tailwind as a natural extension of their existing business, and who have the scale and depth in each of the sub-sectors that is relevant for digitalization.

Read More in our Q1 2025 Alts Quarterly.