Introduction

Introduction

Global Research, Strategy, and Insights Team

iCapital Flow-of-Funds

Private wealth clients continue to favor private equity and private credit in the second quarter

Clients are increasing allocations to direct lending and infrastructure at a sub-strategy level

Over the last five years, clients increased allocations to private credit, registered funds

Overview

Alternative managers hold $18.1 trillion in global assets under management

Alternatives have grown significantly and are projected to increase further in years ahead

Alternatives are expected to have the highest growth rate compared to traditional assets

Aggregate fundraising levels likely bottomed in 2024 with positive momentum seen in 2025

Dry powder has declined to $4.0 trillion as capital deployment is starting to recover

Dealmaking gained momentum in Q2 and Q3 2025, supported by improving corporate confidence

Alternatives have offered strong, long-term outperformance vs. a traditional 60/40 portfolio

Over the next decade, alternatives are projected to outperform their public counterparts

Several private market strategies offer higher yields than those available in public markets

Alternatives can be a powerful diversifier due to their low correlation to public markets

Alternatives offer higher returns and lower volatility vs. a traditional 60/40 portfolio

Manager selection has been an important driver of return outcomes in alternatives

Select private market strategies are trading at valuations below their historical averages

Private clients to increase alternatives allocation from $4T to $13T by 2032

The opportunity to increase allocations is sizable given low portfolio allocation and advisor use

Private Equity

Private equity is the largest asset class within alternatives and has grown significantly

IPO activity is not what it used to be as companies are staying private for longer

Private companies outnumber publicly traded ones, across most revenue segments

Private markets offer investors an opportunity to tap into a larger pool of innovation

Private equity has outperformed public equities over various time horizons

Private equity has delivered more consistently positive returns with fewer negative years

Private equity performance generally improves when investing during downturn year vintages

Private equity fund managers have multiple ways to create value vs. public markets

PE valuations consistent with pre-pandemic norms, and at or below public market comps

While lower rates may steer GPs toward large buyouts, middle market still offers opportunities

Managers adjusted to higher cost of capital by reducing leverage, though this is starting to change

Realization of further rate cuts may help improve levered company credit ratios

Though exit values declined in Q3, higher volumes suggest more assets moving through the system

Robust 2025 deal activity signals GPs and corporates see policy and trade risks as passing storms

Venture Capital

Venture capital AUM is expected to grow at a ~11% CAGR through 2030

Venture capital offers access to vast opportunities and high-growth sectors like technology

Venture capital is a dominant force in the financing of innovation and growth

Private markets drive most of the value creation, meaning most returns are captured pre-IPO

Despite underperformance since 2023–24, venture has outpaced equities over the longer term

Manager selection is key when investing in VC as top quartile funds significantly outperform

Signs point to strong tailwinds for venture capital, partially driven by AI

Venture valuations are elevated but are more reasonable than they appear

Lower valuation step-ups signal a cooler VC market but better entry points for investors

High-profile IPOs continue to boost exits YTD, though M&A remains primary exit path for startups

AI startups are driving a funding resurgence, with significant valuation premiums

Private Credit

Private credit assets have grown rapidly, in part due to share gains from bank lending

Private credit demand is climbing, as private equity is funding a larger share of the economy

Private credit strategies historically outperformed public fixed income sectors

Direct lending has offered favorable risk-adjusted returns versus public fixed income

Private credit drawdown risk is moderated by buy-and-hold nature, fewer dislocations

Risk premium, complexity and market inefficiencies provides a backdrop for attractive yields

Despite some spread compression in recent years, direct lending remains at a premium to loans

Income has been a steady component of private credit returns over time

Credit losses for private credit have been in line with high yield and bank loan issuers

Coverage ratios in private credit are strengthening, which may limit defaults despite headlines

Lower volatility, high income led to more consistently positive results for private credit

The emergence of asset-based-lending in private credit unlocks a vastly larger opportunity set

Asset-based lending is becoming a meaningful alternative as banks pulled back post-GFC

Commercial Real Estate

CRE is a large, diversified asset class with growing interest from private capital investors

CRE has had a low correlation to and better risk-adjusted returns than public markets

Private real estate had less frequent drawdowns, which helped deliver returns overtime

Growth in net operating income (NOI) has outpaced inflation and served as a core return driver

Transaction volumes are recovering and should help with more realistic pricing in future quarters

A pricing recovery is underway after a sharp post-pandemic price correction

Cap rates reset higher as the Fed raised interest rates, but remain low relative to bond yields

NOI growth has moderated but has roughly stabilized above long-term averages and inflation

Value-add funds can help improve NOI given the growing need to improve aging structures

Supply and demand dynamics remain relatively healthy and should also support NOI

Most CRE sectors have solid fundamentals, except for office where weakness persists

Lower use of leverage and higher debt coverage ratios offset some of these concerns

Banks are still retrenching from commercial real estate lending amidst rising defaults

CRE debt funds with ample dry powder should help partially fill the void

Infrastructure & Other Real Assets

Infrastructure is a globally diverse asset class with assets primarily in North America and Europe

Investors can consider four broad categories of infrastructure with varying characteristics

Private real assets have produced superior risk-adjusted returns with low correlation

Real assets have delivered returns outpacing developed market inflation

Real assets provided higher returns during periods of moderate to high inflation

Global economies are set to spend $3.2 trillion per year on infrastructure through 2040

There is a widening gap between projected infrastructure spending and society’s needs

AI buildout is fueling digitization and data center growth – a prominent theme in infrastructure

The investment need for additional decarbonized power generation is growing

Secondaries

The private equity exit overhang is growing, with a significant backlog of unrealized value

Distributions are recovering but still suggests a challenging environment for realizations

With the growth in private market capital, secondaries are one option to alleviate the overhang

Both LPs and GPs have entered the secondary market, though LP-based volume has increased

As PE capital grew and created a need for secondaries, other asset classes are now following

Secondary discounts have narrowed, but remain attractive on a longer-term view

Growth in primary capital and an expanding use of secondaries creates a strong backdrop

Hedge Funds

Hedge fund AUM has rebounded and is at record levels

Different hedge fund strategies can help position for various market conditions

Similar number of hedge fund launches and liquidations highlight selection importance

Traditional 60/40 portfolio is not offering the “natural” diversification it use to, especially today

Historically, adding hedge funds to traditional portfolios has improved risk/return

Over time, hedge funds offer equity-like results with less downside risk

Hedge funds have generally performed better during periods of elevated rates above 2.5%

Hedge fund opportunities increase in periods of higher equity dispersion, low correlation

Despite the recent compression in index spreads, distressed credit opportunities exist

Volatility can be a driver of returns for hedge funds

Event Driven strategies may benefit from the expected pick-up in capital markets activity

Structured Investments

Structured investment volumes in the private wealth channel have grown over time

Payoff structures for market-linked growth and income notes

Types of protection available in structured investments

Full principal protection demand is a function of equity levels and bond yields

Preference for types and investment terms of structured investments varied over time

Preference for type of protection and type of underlying asset evolved over time

Structured investment returns and pricing are dynamic, fluctuate with market conditions

Rates have moved lower, though credit spreads have widened on the back of market jitters

Volatility remains below 2021-22 levels but has trended higher in recent months

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