Introduction
Private markets continued to expand and diversify in 2024 with areas like private equity secondaries and private credit garnering many investors’ attention. We believe that 2025 will mark a new dawn for the private market landscape, with the best opportunities in less crowded areas of the market.
In 2024, we saw several new trends appear. Many asset allocators exhibited a type of “flight to safety” behavior with a significant concentration of capital flowing to only the largest funds. There has been a notable acceleration in asset manager consolidation as firms try to build more scale and diversity into their investment offerings. Wealth-targeted private market funds look poised to become a growing part of the landscape as product innovation continues.
Longer-term, we think these forces are likely to result in a more bifurcated landscape. Larger volumes of capital seeking bigger deals are creating greater competition for mega-sized dealmaking. In contrast, we continue to see more liquidity-starved areas of the market presenting better valuations and less competition, making them attractive alternatives.
While some of the challenges facing private markets over the past few years are still present, there appears to be a bottoming out and reasons for renewed optimism across each category of private markets. However, this new dawn will likely require digging a little deeper into each asset class to find the best opportunities.
2025 Private Markets Outlook Full Report
Our 2025 Private Markets Outlook highlights the different views across Franklin Templeton’s $250+ billion alternatives investment platform. Inside, we review the top themes across the private markets landscape and what we see as the best opportunities for each asset class in the year ahead.
Private equity: A need to refocus on true value creation
In 2024, private equity showed some encouraging signs as deal activity was on pace to exceed $850 billion in value for the full year, making it the third highest level on record and a strong turnaround from the sharp decline seen in 2022.1 On the exit front, exit values are estimated to reach $375-400 billion at the end of 2024, in the US returning to the more normalized state we saw before the frenzied years of 2020 and 2021.2
The story around exits is slightly different in Europe. Exit value in 2024 is expected to be basically flat relative to 2023 at around € 279bn. Unlike the US, the median exit value has declined as there have been fewer “megaexits”. The breadth of the market reduces the risk of “missing out” on the biggest deals of the year.
Despite the encouraging rebound in exit values, it’s important to note that total PE assets are markedly higher now compared to the pre-2020 period. Exit values when viewed as a percent of total AUM in the category indicates exit activity is still far below the historical rate investors have previously experienced. In fact, due to a delay in exits, US PE holdings have grown by about 2,400 over the last five years and currently exceed 11,500 companies.3 At the current exit rate of about 1,200-1,400 per year, this represents an eight-year inventory, indicating a need for a substantial acceleration in activity to make up for lost time.4
For the last decade, the PE buyout industry predominately relied on financial engineering to drive portfolio company value growth, with a lesser focus on top- and bottom-line operational improvements. Between 2010 and 2021, leverage and market multiple expansion drove nearly 70% of investment returns for buyout deals.5 Today, the picture is markedly different: readjusting multiples and more expensive leverage suggests value creation through revenue and margin expansion is increasingly important. As financial engineering becomes a less viable driver of returns, we believe private equity investors will need to exercise more patience and identify managers with the demonstrated skill to generate true fundamental value from their portfolio investments.
Source: Franklin Templeton, as of 9/30/2024.
Investment implications
The private equity and venture capital playbooks of the past decade, where one could financially engineer a return, are becoming less effective. In today’s environment, we believe investors will be rewarded for partnering with managers who have true value-creation expertise and are concentrated on a narrower set of best-in-class investments with a clear plan for exit.
Secondaries: Deepening and diversifying
Secondaries are becoming a structurally important part of private capital markets, with secondary market transaction volume predicted to surpass $140 billion in 2024—the highest level on record.6 Pricing has recovered from the lows of 2022 but still offers attractive discounts compared to historical levels, a dynamic which we expect to spur even more activity. Of note, GP-led transactions represented roughly 40% of volume in the first half of 2024.7 We are seeing signs that this part of the secondary market is continuing to mature, as evidenced by robust transaction volume and complexity as well as better alignment of interests.
The GP-led market has grown ~26% per year, or 10x from 2013-2023 as sponsors continue to utilize continuation vehicle transactions to re-invest in their highest-quality companies. Within this market segment, single-asset continuation vehicles (SACVs) have grown even faster at 55% per year, even though limited dry powder has been a headwind for dealmaking. As a result, the SACV market is significantly undercapitalized: we estimate that the supply and demand capital imbalance in the SACV market is five to one in favor of buyers.
We believe this rapidly expanding yet underfunded market presents a unique opportunity to individually select standout companies and build carefully curated secondary portfolios with the potential to deliver strong absolute and risk-adjusted returns versus primary private equity investments.
Source: Source: Preqin, Evercore and Lexington Partners. 2024 estimates as of May 2024.
Investment implications
The global secondary market still represents a relatively small slice of the broader private equity market, despite tremendous growth in recent years and remains undercapitalized against increasing demand for liquidity solutions. As more LPs and GPs come to market, we expect the opportunity set for secondaries to expand and diversify further with more middle-market PE deals and non-traditional transaction types like single-asset continuation vehicles.
Private debt: Avoid the crowds
Despite all the industry attention around the rapid growth of private credit in recent years, the asset class represents only 13% of private market assets and about 3% of the average institutional asset allocation.8 As a result, the runway for a larger share in investors’ portfolios looks promising. PitchBook expects private credit to reach $2.3 trillion by 2028—or even $3.5 trillion in the optimistic case that the current structural tailwinds of elevated rates, bank retrenchment, and a stable macro environment persist.9
From a different perspective, the overall size of private credit assets is just a sliver of the entire fixed income market, leaving room to grow and diversify into other areas of the global lending universe. A recent report by McKinsey & Company indicates that the potential market size for private credit in the US could exceed $30 trillion, assuming non-bank lenders move more aggressively into other types of borrowing, such as commercial real estate, consumer finance, and securitized products.10
Despite the potential to take more share in new lines of lending, 2024 delivered increased crowding and deal competition in certain areas of private credit. In what appears to be a form of “flight to safety” behavior, direct lending gained the vast majority of flows in the first half of 2024, posting the highest share in 15+ years.11 Taking a closer look at direct lending flows, we see significant concentration into mega-sized funds.
With large pools of money from mega-sized lenders competing in the sponsor-focused, large end of the direct lending market, we believe this area of private credit is becoming increasingly crowded. However, going down market to the core middle market space may prove to be more fruitful due to less competition for deals. Furthermore, we believe different categories and geographies of private credit may also present more compelling opportunities in 2025.
Source: Franklin Templeton. Private Capital’s Path to $20 Trillion. AUM and forecasts as of 4/19/2024.
Investment implications
As the upper end of the US direct lending space has become increasingly crowded and many asset owners have built out their core exposure, investors may want to look to different private credit categories and geographies to both diversify and improve the return potential in their private debt allocations. CRE debt—particularly for multifamily properties—presents an especially compelling opportunity thanks to favorable pricing and supply-demand dynamics. Similarly, Europe’s smaller, less competitive private debt market appears to be expanding with opportunities across a wide spectrum of countries and industries.
Commercial real estate: Foundationally sound but slowly starting a new cycle
A deep freeze set into the commercial property market starting in 2022, when the Fed implemented a hiking cycle which culminated in the highest benchmark rate in more than two decades. While this recent period has created some challenges for CRE, notably an adjustment in values, we believe it’s important to look at the downturn from a historical perspective. US CRE investments have produced positive returns in 41 out of the last 46 years, averaging approximately 9.0% annually.12
At inflection points such as this, a thematic approach becomes vital in choosing sectors that can benefit from long-term secular tailwinds. We have identified five key themes that we believe can help build resilient long-term real estate portfolios. These themes are powerful long-term catalysts for real estate demand and can offer investors a multitude of opportunities across different risk and return horizons. Importantly, we believe these themes harness some of the fundamental drivers of economic activity and will remain immutable as demand drivers for decades to come.
Secular Drivers of CRE Growth Remain Strong
Major CRE Investment Themes
Based on the views of Clarion Partners. Subject to change.
Investment implications
Commercial real estate—a historically dependable asset class—has been in a rare moment of weakness. However, there are long-term secular drivers that will continue to make CRE an attractive part of an alternatives allocation. Underneath the surface, the asset class is undergoing a structural shift in its composition with a more prominent role and growing opportunity set in alternative sectors, including health care facilities, storage properties, and different forms of rental housing.
2025 Private Markets Outlook
Our 2025 Private Markets Outlook highlights the different views across Franklin Templeton’s $250+ billion alternatives investment platform. Inside, we review the top themes across the private markets landscape and what we see as the best opportunities for each asset class in the year ahead.
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Important Information
- Source: Franklin Templeton, Q3 2024 US PE Breakdown Report, as of 9/30/2024.
- Source: Franklin Templeton, Q3 2024 US PE Breakdown Report, as of 9/30/2024.
- Source: Franklin Templeton, Q3 2024 US PE Breakdown Report, as of 9/30/2024.
- Source: Franklin Templeton, Q3 2024 US PE Breakdown Report, as of 9/30/2024.
- Source: SPI by StepStone. Sample includes 2,512 buyout deals that were entered on or after 1/1/2010 and exited on or before 12/31/2021.
- Source: Jefferies 1H2024 Global Secondary Market Review. Data as of July 2024.
- Source: Jefferies 1H2024 Global Secondary Market Review. Data as of July 2024.
- Source: CEM benchmarking, as of 12/31/2023.
- Source: Franklin Templeton. Private Capital’s Path to $20 Trillion. Forecasts as of 4/19/2024.
- Source: Preqin, Securities Industry and Financial Markets Association, McKinsey & Company.
- Source: Franklin Templeton. Global Private Debt Report. Data as of 6/30/2024.
- Source: NCREIF, Bloomberg, Clarion Partners Investment Research, as of 9/30/2024.
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. This material is made available by the following Franklin Templeton entities in those countries where it is allowed to carry out relevant business.
All investments involve risks, including possible loss of principal. There is no guarantee that a strategy will meet its objective. Performance may also be affected by currency fluctuations. Reduced liquidity may have a negative impact on the price of the assets. Currency fluctuations may affect the value of overseas investments. Where a strategy invests in emerging markets, the risks can be greater than in developed markets. Where a strategy invests in derivative instruments, this entails specific risks that may increase the risk profile of the strategy. Where a strategy invests in a specific sector or geographical area, the returns may be more volatile than a more diversified strategy.