Various tailwinds support private markets

Infrastructure outlook

Perry Noble

Head of Infrastructure

Delivering the next generation of infrastructure required to decarbonise the UK economy whilst adapting to the long-term impacts of climate change requires creating entirely new markets and investment models.

The challenges faced by the UK’s first Labour government for almost 15 years, are familiar and interconnected: low growth, intense competition for global capital, and underinvestment in infrastructure. The erosion of the post-second world war global consensus, and resulting geo-political volatility, make resolving them harder. The proposed solutions, set out in the Autumn Budget, are familiar too: government funds for strategic investment, new bodies to direct and regulate it, and renewed focus on value for public money. Will it work?

Possibly. Those infrastructure sub-sectors prioritised by the government align with strong market tailwinds and there is capacity to scale – renewable energy, data centres and next generation batteries. Compounding technological advancement is driving costs low and demand high, such that the government can focus on its core political role – stakeholder management to unlock new projects in the public interest; and can leave efficient capital allocation to investors. While achieving a net zero power network by 2030 remains ambitious, removing the ban on onshore wind and proposed changes to the National Planning Policy Framework and the Nationally Significant Infrastructure Projects (NSIPs) regime have potential to be genuine solutions.

Delivering the next generation of infrastructure required to decarbonise the economy whilst adapting to the long-term impacts of climate change requires creating entirely new markets and investment models. The Autumn Budget contained positive signals for these new sectors, but the detail and execution will determine whether they can attract the private capital needed for them to thrive. For those investors able to identify these sectors and access proprietary opportunities, there is potential for significant returns.

Infrastructure

Private credit outlook

Patrick Marshall

Head of Private Credit and Chair of the Private Debt Investment Committee, Federated Hermes Limited

As interest rates slowly fall, we expect transaction flows to increase within the direct lending segment of private credit. Meanwhile, 2025 is shaping up to be a great year for real estate debt.

The 2025 outlook for private credit remains very favourable as it continues to attract institutional investors seeking exposure to the attractive risk reward parameters on offer from this asset class.

With interest rates slowly falling, we expect transaction flow to increase within the direct lending segment of private credit. Increases in company valuations, on the back of lower interest rates will increase M&A volumes which should benefit direct lenders. Yields on loans will hold steady as the expected reductions in interest rates will be offset by higher margins on the loans as a result of the implementation of Basel IV regulations which should increase the cost of capital for many banks.

Figure 1: Value of global M&A transactions

Private Credit

This will reduce pricing competition for direct lenders. With continued geopolitical and economic risks on the horizon, in the form of weaknesses in many of the European economies and the threat of potential tariffs by the US on some European companies, the focus by investors will continue to be on low risk direct lending strategies which should be better suited to manage this uncertainty. While defaults will continue to increase in the short term on the back of high interest rate costs, we expect this to stabilise as interest rates start to fall more significantly. Conservative and disciplined lenders should enjoy a strong year in direct lending as transaction volumes increase.

Within the asset-backed lending segment, European senior secured real estate debt is currently favoured. With transaction volumes increasing, particularly in the mid-market, the market is currently offering lenders with attractive investment opportunities.

Furthermore since real estate valuations have experienced significant declines over the past couple of years, new financings are currently being structured off conservatives valuations. With the real estate occupier markets remaining strong, and rents holding up well in all major markets, we expect the debt per square metre ratio to be significantly lower on new loans transactions. This coupled with the fact that the expected continued reduction in interest rates will support asset values and maintain debt affordability, leads us to believe that 2025 is shaping to be a great year for this asset class.

Both direct lending and real estate debt are set to have excellent years – however this remains a year to be disciplined and with a number of risks on the horizon, we expect the more conservative strategies to enjoy greater success.

Figure 2: Value of private credit (AUM) worldwide

Private equity outlook

Brooks Harrington, CFA

CIO, Head of North America

Private equity is now a mature asset class and investors need to pick their spots in order to continue generating investment returns in line with expectations.

The US economy continues to drive global growth forward. Across most metrics the economic backdrop is very healthy whether its employment, productivity, GDP growth, or stock market levels. Inflation is no longer the problem it was 12-24 months ago and the US Federal Reserve has already begun cutting rates. The uncertainty around the election is over with a major stock market rally on Donald Trump’s first day as president-elect. Private equity activity has followed suit with improving metrics across deal flow, credit availability, and exit activity.

Private equity is now a mature asset class and investors need to pick their spots in order to continue generating investment returns in line with expectations. The lower end of the market continues to be an exciting area that is less efficient, less competitive, less intermediated, with significant opportunity for needle moving operational value add to help companies reach scale and reward investors with outsized investment returns.

The ‘democratisation’ of private equity will continue as the wealth and retail market offers the industry the largest opportunity for raising new capital.

Artificial intelligence (AI) dominated the conversation in 2024 and that trend will most likely continue. Whether AI represents full scale technological revolution or productivity enhancement on the margin and under what timeline will continue to be debated. Separating the hype from reality will be important for investors. Regardless, technology and innovation will continue to present some of the most attractive investment opportunities across the US.

Europe will continue to lead on addressing climate change presenting a significant investment opportunity backed up by regulatory tailwinds, government support and institutional appetite. Cross border investment in China remains muted due to geopolitical uncertainty. Other regional countries will benefit as a portion of that capital will flow to India, Japan, and southeast Asia.

We believe that investors who have a global reach, significant deal flow, rigorous underwriting standards and flexible investment frameworks will continue to be rewarded.

Private Equity

Real estate outlook

Chris Taylor

CEO Real Estate, Chairman MEPC

The underlying structural trends affecting the built environment continue to have a profound impact on occupational demand patterns.

As expected, UK real estate pricing has responded to the rapid normalisation of rates, with capital value declines most extreme for offices, while the living, logistics and life science sectors are seeing modest declines. However, the underlying structural trends affecting the built environment continue to have a profound impact on occupational demand patterns; therefore, we can expect to see a continued bifurcation between the very best quality offices with outstanding amenities and accessibility alongside mandatory environmental standards and whole swathes of ‘stranded’ assets requiring demolition or repositioning.

In many ways, the extreme bifurcation in demand we observe within the office sector has already been played out across the retail market, with many high streets ravaged by a combination of on-line sales, competition from out of town retailing and the impact of Covid-19 on work patterns in town centres.

We expect to see further significant capital value erosion across much of the office market as many buildings become obsolete. In contrast, city centre placemaking projects such as King’s Cross in London, Leeds, Birmingham and Manchester, have continued to attract best-in-class corporates, attracted by the schemes’ community engagement, accessible destinations and propensity to attract talent. These benefit from the halo effect of single managed estates. Creating relevant and resilient real estate requires a highly active approach to investing.

Increasingly we will see a trend towards an integrated operating model being adopted by successful long-term investors in real estate. Many institutional investors will seek to internalise their operating models by acquiring specialist development management platforms. This approach crucially affords the opportunity to fully integrate all environmental, societal and other related risks as part of an holistic approach to managing risk.

Investments

Our capabilities provide the key.

Solutions across the spectrum

EOS Stewardship