Private Capital in Focus: 2025 Trends to Watch

Private capital — spanning debt, equity and real assets — has rapidly expanded over the past decade and enters 2025 with USD 2 trillion of dry powder. These markets also go into the year faced with challenges, unknowns, as well as some grounds for optimism.

The focus for many investors in private markets is the broader economic environment, as they deal with the ongoing impact of the spike in central-bank rates that began in early 2022 and tackle issues such as trade tariffs.

The high-rate regime has provided private-credit investors with favorable returns, but at the same time, there’s a pressing need to address the heightened risks of default in a prolonged period of elevated rates. Tighter monetary policy has also introduced an additional layer of complexity in the exit market, as the rising cost of capital has placed downward pressure on multiples. Following periods of slow exit activities in 2023 and 2024, the new year raises more questions about not only distribution rates, which are at historically low levels, but bigger questions about asset allocations that are impacted by private funds’ extended holding periods.

In the realm of trade and tariffs, electric-vehicle (EV) manufacturing is at the center of a rapidly shifting trade environment that could reshape supply chains and private-capital flows. For investors in energy transition, identifying financial opportunities in 2025 will require further transparency into supply chains across regions.

In this blog post, we detail four key trends to help investors in private markets tackle the opportunities and risks in the year ahead.

Distributions stuck in a holding pattern

After a period of exuberance in 2021, distributions from private-capital funds have slowed significantly across most asset classes. With the possible exception of private credit, we have not seen holding-level distribution rates as low as current rates since the global financial crisis (GFC). In addition to the broad slowdown, we find significant variation in the degree of slowing by deal vintage (or equivalently, deal age) using MSCI's deal-level private-capital data.

While cash flows for most historical vintages follow a remarkably similar path, more recent vintages are clearly drifting away from the pack — their distributions have stalled and early exits have evaporated. This is most noticeable for venture capital and perhaps least marked for private credit, where such a slowdown would be entirely unexpected.[2]

Recent distribution rates have fallen far below historical averages across some key asset classes. For buyout, mature holdings have seen their distribution rates roughly halve. For younger holdings, however, distribution rates have fallen even further relative to recent norms. For venture capital, the effect persists even out to five-year-old holdings before reverting to about half of what is historically typical.

In 2025, private-capital investors will continue watching — and waiting — for distributions. There may be both cyclical and structural headwinds at play as exit opportunities remain limited and the private-capital landscape continues to evolve. Are long holding periods reflective of a new normal?

Shrinking gap in valuation multiples may offer encouragement on buyout exits

Driven by the rapid increase in interest rates, investors have been forced to reassess asset valuations, and thus allocation strategies due to the denominator effect. Although listed markets quickly reflected these adjustments, private markets are still repricing their assets.

In buyouts, over the long term, general partners will typically value their investments conservatively, resulting in higher valuations for exited investments, but when the market swings rapidly this relationship can reverse. For the third year in a row, exits have occurred at lower valuation multiples (total enterprise value/EBITDA) compared to those still held by funds, a gap not seen in buyout investments since 2009 and the GFC.

The pricing gap has narrowed to a mere 0.3x in 2024 through the third quarter, however. Such a shrinking could offer some support to optimism that the pace of exits will increase in 2025 from the low level of the past couple of years.

Private credit tests uncharted waters

Private-credit funds posted strong returns in 2024 as the strategy experienced its first real interest-rate cycle, but the winds may be shifting heading into 2025. Index rates (like the secured overnight financing rate) are still up 450 basis points since the start of 2022, creating crosscurrents for private credit. Higher interest rates continue to buoy returns from performing floating-rate loans, but some borrowers have begun to founder under now-burdensome debt-service costs.

How general partners (GPs) navigate this new interest-rate environment will be a key consideration for private-credit investors looking to the year ahead.

GPs have already begun to change tack when it comes to subordinated lending — spreads on mezzanine corporate loans have been drifting downward over the past two years and are now almost indistinguishable from senior loans. This suggests that mezzanine lenders are tightening underwriting to avoid a wave of defaults down the line. Loan valuations indicate that mezzanine lenders may have righted the ship, positioning themselves for a period of prolonged elevated interest rates. Rates of distress in mezzanine loans have retreated since 2023 and are (broadly) converging on distress rates seen in senior loans, which have themselves spent several quarters in choppy waters.

With an eye on 2025, private-credit investors find themselves in uncharted territory. Much will depend on the future path of interest rates. A series of rate cuts could bail out senior lenders, who may have taken on more risk than their investors realized.

Alternatively, if interest rates persist around 5%, loan values could sink further. Asset owners concerned about their private-credit portfolios would be well served to begin monitoring loans sooner rather than later.