Introduction

Page Index

Global Research, Strategy, and Insights Team

iCapital Flow-of-Funds

Private wealth clients favored private equity and private credit in the first quarter of 2025

Private wealth clients are increasing allocations to direct lending and infrastructure strategies

In the last five years, private wealth clients boosted allocations to private credit, registered funds

Overview

Alternatives hold $17.2 trillion in assets under management globally across strategies

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

Alternatives are expected to have the strongest growth rate compared to traditional markets

Alternatives fundraising activity has been challenged amidst an uncertain macro backdrop

Dry powder has declined to $3.9 trillion as committed capital begins to get deployed globally

Deals continue to get done, but at a much slower pace than expected at the start of the year

Alternatives have offered strong 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

Several private market strategies are inexpensive relative to public markets and history

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

Opportunity to increase allocation is sizable given low portfolio allocation and advisor use

Private Equity

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

Companies are delaying their IPO (some indefinitely) as they stay 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 outperformed public equities over various time horizons

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

Private equity improves when investing during downturn year vintages

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

Private equity valuations have stabilized and remain lower than public markets in the U.S.

Middle market buyout may be in favor this year given valuations and capital market activity

Fund managers have adjusted to higher cost of capital by reducing the use of leverage

Realization of further rate cuts may help improve levered company financials

Exits have been off to a lackluster start and will likely be challenged by the macro backdrop

Capital markets optimism has faded on tariff concerns and lack of deregulation focus

Holding periods continue to increase and drive the need for additional sources of liquidity

Growth in secondaries is driven by strong supply/demand dynamics

Venture Capital

Venture capital AUM is expected to grow at a 12.7% CAGR through 2029

Venture capital offers access to a vast opportunity set and high-growth sectors like Tech

Venture capital has become 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 recent underperformance, venture returns have outpaced equities over the long run

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

Signs point to a turning tide in venture capital despite recent macro turmoil & uncertainty

Venture valuations have remained sticky but are more reasonable than they appear

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

Exit activity remains challenged, and acquisitions continue to be primary exit path for startups

AI startups drive VC funding resurgence, and they command significant valuation premiums

Private Credit

Private credit AUM have grown rapidly to record levels

Secular decline in bank lending is being driven by regulation, capital requirements

Growth in private equity buyout strategies drives further demand for private credit

Private credit strategies historically outperformed public fixed income sectors

Direct lending 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

Direct lending spreads recently widened, moving closer to historical excess spread

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

Private credit coverage ratios are improving, which could help keep defaults in check

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, should help provide more realistic pricing in coming quarters

Commercial real estate prices corrected sharply, but the recovery process is underway

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

NOI growth is slowing from high levels but is still roughly 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 significant fund assets in 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

U.S. and Europe have significantly stepped up their infrastructure-related investments

Digitization and growth in data centers is one of the prominent themes in infrastructure

The investment need for additional decarbonized power generation is growing

Hedge Funds

Hedge fund AUM has rebounded and has hovered near 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

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

The recent widening in index spreads creates opportunities in distressed credit

The recent spikes in 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

Annuities

The annuity industry experienced strong growth as rates rose in recent years

Secular demand for annuities is also driven by rising population of age 65 and over

Definitions

Definitions (cont’d)

Attributions

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