Key Takeaways
Our semi-annual ratings update across different private market and hedge fund investment strategies reflect a U.S. economy that is on solid footing. Factors considered during our analysis include modest interest rate relief, potential deregulation, and a pickup in capital market and M&A activity.
What does this mean for the private markets? How should clients navigate various investment strategies?
PRIVATE EQUITY
Breakout capital market activity expected
A pickup in both M&A and IPOs should bring much-desired relief for exit activity. At $149 billion, U.S. venture exit value increased 25% year-over-year in 2024, while exit volume activity seems to have bottomed, setting the stage for a break-out 2025. Late-stage venture strategies have the highest correlation to the IPO market, so we’re upgrading the strategy to a Positive.
A broader opening of the capital markets means the PE secondaries market may not be as much of a go-to source of liquidity. With discounts narrowing and increasing competition, we’re lowering our rating on secondaries to a Neutral from a Positive.
PRIVATE DEBT
Category Expansion
We see asset-based lending growing into its own as a part of private credit. The private ABL market, which includes loans, leases, and secured contractual cash flows, is expected to grow to approximately $8 trillion in 2027 and can be an additive strategy to client portfolios.
REAL ESTATE
A Rare Opportunity
The NCREIF-ODCE Total Return Index posted its
first positive quarter
in two years
in 3Q 20242
We are more constructive on core real estate and believe the current cycle of broad property value depreciation has troughed. In looking at the current cycle – from when quarterly returns peaked at 8.0% in 4Q 2021 – the NCREIF-ODCE Total Return Index posted its first positive quarter in two years with a gain of 0.25% in 3Q 2024, leading us to upgrading real estate to a Neutral from a Negative.
HEDGE FUNDS
Changing Risk-Reward Profile
The risk-reward profile of the credit markets appears more balanced. Spreads hovering near historic tights for several credit asset classes, and fewer special situations opportunities exist. With this backdrop, we’re downgrading credit hedge fund strategies.
Credit spreads are
near historic tight levels
for both investment-grade
and high-yield insurers.
Private Markets & Hedge Fund Strategy Ratings
1H 2025
Explanation of iCapital’s Ratings Framework
iCapital’s basis for assigning ratings is the research team’s view of how the investment strategy will perform over the next three years relative to its respective category. For this purpose, the “category” is the asset class associated with investment strategies for which the research team provides coverage. For example, a rating for Growth Equity is relative to other strategies within the Private Equity category.
Strategy ratings are reevaluated at least semiannually with an emphasis on whether the outlook is materially different to affect how the investment strategy may perform over the next three years relative to its category.
Strategy Ratings:
- Positive: Investment strategies expected to outperform the category over the next three years.
- Neutral: Investment strategies expected to perform in line with the category over the next three years.
- Negative: Investment strategies expected to underperform the category over the next three years.
We use a three-year time horizon as it is roughly the average holding period for a private market asset. For Hedge Funds, we use the same strategy rating method but consider a 12-to-24-month performance outlook because of the higher mix of liquid assets that a typical hedge fund may own.
Related Articles
iCapital 2025 Market Outlook
Alternatives Decoded
1. Pitchbook, Q4 2024 Pitchbook-NVCA Venture Monitor.
2. NCREIF ODCE Index
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