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Private infrastructure is expanding and becoming more sophisticated, placing increase demands on the operational models of infrastructure firms and the Chief Operating Officers (COOs) responsible for keeping operations running smoothly.

According to Boston Consulting Group private infrastructure assets under management (AUM) have more than quadrupled during the last decade, reaching a record high of US$1.3 trillion.

Surging AUM growth reflects private infrastructure’s long-term success, and the asset class’s proven track record of delivering attractive yields and risk-adjusted returns that are uncorrelated to market cycles.

The rapid growth of private infrastructure, as with other private markets strategies, however, has come with closer regulatory oversight, more diverse and demanding investor bases, more complex investment strategies as managers have to differentiate offerings to remain relevant in a competitive market, and heavier operational, compliance and reporting loads for back-office teams to process.

As private infrastructure has matured, front office effectiveness has relied more and more on back-office data, operations and risk management. It is the role of the COO to ensure that the required rails are in place to ensure that firms have the rails in place to meet their regulatory and investor obligations and support their dealmaking teams with up-do-date data and high-quality risk and cost management analysis.

Aligning fund structure and strategy

For any infrastructure manager, and indeed managers in other alternative asset classes, the foundation of long-term success starts with fundraising, and ensuring that fund structures are a good fit with strategy.

Fund structure has become even more important as the range of assets infrastructure funds back has broadened out from focusing almost exclusively on so called “core” and “core-plus” deals (involving mature, established infrastructure assets with baked in long-term revenue contracts) into value-add deals, where firms refurbish and enhance existing infrastructure assets, and opportunistic deals, where managers fund new projects that carry construction and development risk.

LPs are fine-tuning their infrastructure allocations accordingly, aiming to invest across all deal types and build infrastructure portfolios with a mix of risk-adjusted returns.

Fund structure is a key enabler for matching up deal types to funding sources and investor bases. Brookfield Asset Management, for example, offers a mix of closed and open-ended on its infrastructure platform, with long-term assets, such as renewable energy projects, dovetailing with open-ended structures, while higher-returning assets with defined exit plans, such as data centers, are a tidy fit for close-ended structures.

Running multiple funds places heavier loads on fund accounting and reporting teams, and in the case of open-ended funds, which offer specific redemption windows, managers have to monitor and forecast cash flow focus to ensure that liquidity demands can be met when redemption windows do open.

The capacity to publish quarterly NAV figures, so that investors can value redemptions, is another capability that managers running open-ended funds have to have in place.

Risk and cost management

The complexity and long-term nature of infrastructure investing also leads to significant overlap between front office and mid and back-office functions. Risk and cost management are embedded into infrastructure deal origination and investment, with dealmakers not only assessing a project’s commercial attractiveness and valuation, but also financing and operational costs and risk.

Infrastructure funds will also be investing in assets across multiple jurisdictions using multiple currencies. It falls to COOs to understand and price in navigate land acquisition laws, tax treaties, and local governance frameworks, as well as evaluate expropriation risk and put the necessary hedging policies in place to shield investments from foreign exchange volatility.

Risk management is particularly relevant as opportunities emerge for private infrastructure managers to partner with governments to fill an infrastructure funding gap that is forecast to widen to $15 trillion by 2040, according to the G20 Global Infrastructure Hub initiative.

Public-private-partnerships (PPPs), where the private and public sector share risk and capital expenditure when building new infrastructure, will be one of the primary routes for crowding in private investment.

When bidding for these PPP deals managers will require robust data and forecasting capability to ensure that their bids reflect the appropriate levels of risk that a private player can tolerate, as well as realistic assessments of the cash flows that new assets will produce when operational. PPP bids in the past have seen private firms overbid in order to win contracts and deals, only to find that they have taken on too much risk.

Infrastructure builds can also be subject to delays and cost overruns, with interface risk another key consideration, with supply chain bottlenecks and grid connections some of the areas where projects can face delay before coming onstream, with a potential impact on cash flows and returns.

It is down to the COO to put robust modelling and forecasting tools in place to manage these risks, as well as implement systems and hardware such as drones and Internet of Things (IoT) devices to keep a tight rein on construction and maintenance costs and ensure that existing assets are operating with maximum efficiency. Blackstone Infrastructure Partners, for example, has developed internal resource that allows the firm to actively manage operational efficiencies at portfolio company level.

Overall, infrastructure assets will typically involve more intensive operational management and oversight than buyout investments, where hold periods are shorter, and portfolio companies are often “asset light”.

Infrastructure COOs have to ensure that their firms are purpose built to comply infrastructure-specific regulation and pricing negotiations, handle complex investment structures (especially when participating in PPPs and joint ventures, forecast long-term cash flows across extended hold periods and accounting for long-term contracts, such as power purchase agreements (PPAs).

Intense on ESG

Infrastructure investing also has direct correlations with ESG objectives, with infrastructure at the heart of delivering ESG benefits to wider society. Clean energy, water provision and sanitation, transports and schools and hospitals are aligned with ESG goals.

The fact that infrastructure operations and developments have a direct impact on the communities they serve also means infrastructure firms to have public affairs teams in place to manage government, regulatory and community relationships.

Infrastructure COOs will be tasked with putting robust ESG and community engagement frameworks in place to ensure compliance with ESG reporting standards and regulations, which will differ from jurisdiction to jurisdiction, and to report on the bespoke ESG and CO2 emissions metrics of LPs, who are obliged to meet environmental and social obligations as part of their investment mandates.

These obligations are shaping the way infrastructure managers investment and structure their operations. Global Infrastructure Partners (GIP), for example, incorporates ESG considerations into its investment process, while KKR’s Global Infrastructure Fund is equipped to provide granular reporting on the ESG performance of its portfolio.

A maturing asset class

In addition to asset-class specific demands, infrastructure COOs are also managing the same changes and transitions faced by managers across all private markets strategies as the alternative assets space as a whole matures and institutionalizes.

As more capital flows into infrastructure LPs are understandably demanding more detailed and frequent reporting from managers and paying closer attention to a manager’s technology stack and operational robustness.

Making the transition from an often domestically focused, dealmaker-led firm with a small back-office and basic reporting and technology tools, into a large, global operation managing hundreds of millions of investor capital does involve a step change in operational expectations.

Undertaking this change entirely in-house is incredibly resource and capital intensive, which is why COOs seeking support from third-party fund administration partners with robust technology platforms, deep industry expertise, economies of scale, automated processes, data analytics and predicative forecasting tools and best in class cybersecurity.

Working with outsourcing partners allows infrastructure managers to invest in front office investment and portfolio management capability rather than sinking large amounts of capital into large inhouse back-office teams. Working with a fund administrator also allows managers to benchmark administration costs and scale their platforms as new funds are raised and additional strategies launched.

COOs central to infrastructure manager progress

The successful infrastructure firm has to manage operational complexity, regulatory compliance, strategic growth and investor trust.

The COO is the key team member when it comes to covering these bases and ensuring that firms have the necessary risk management, ESG, investor reporting, regulatory compliance and forecasting resources built into their operating models.

In a competitive and evolving market, robust operational capability is increasingly becoming an essential foundation for investment and returns success, putting COOs at the center of the long-term performance and commercial sustainability of their franchises.

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Data centers and renewable energy have emerged as two of the fastest growing sub-sectors within the infrastructure asset class.

The digitalization the economy and the transformative impact of generative AI on society and business has seen a surge in demand for data, which is forecast to climb from just two zettabytes in 2010 to 2142 zettabytes by 2035, according to CBRE Investment Management analysis.

The exponential increase in data demand has in turn driven unprecedented levels of investment and growth in the data center market. According to Blackrock the data center market is expanding at a compound annual growth rate of 22 percent and will reach 291 GW by 2030, while data center M&A reached an all-time high of $73 billion in 2024, according to Synergy Research.

Growth in renewable energy market, meanwhile, has been spurred by initiatives to reduce carbon emissions, strengthen energy security, and transition the global energy system off hydrocarbons in order to mitigate the risks of climate change. According to the International Energy Agency (IEA), the ratio of clean power to investment to hydrocarbon investment has increased from 2:1 in 2015 to 10:1 in 2024, with global renewable energy capacity expected to expand by 2.7 times by 2030.

Changing the face of infrastructure

The growth of data centers and renewables reflects the changing way investors and dealmakers are thinking about infrastructure.

Traditionally infrastructure has been defined as an asset class focused on “hard” assets in the built environment, like roads, railways, and utilities, but the combination of rapid advances in digital technology, growing sensitivity to climate change risk and increasing electric vehicle use, is reframing how governments, investors and consumers think about essential services.

These megatrends are broadening out the scope for where and how infrastructure funds invest, with Goldman Sachs Asset Management noting that there is more scope for infrastructure funds to invest in assets with a wider variety of risk profiles, at different points in their development cycle.

The emergence of data centers and renewables in the infrastructure mix are illustrative of how infrastructure has expanded beyond its core and core-plus base, where investors target classic, mature assets with long-term contracted revenues that deliver steady yields, into value-add infrastructure, where assets require investment and enhancements; and opportunistic infrastructure, where investors will take on construction and development risk.

Data centers and renewables can straddle the full infrastructure risk curve, with managers either targeting the steady yields on offer from established renewable energy and data center assets characterized by contracted revenue streams and inelastic demand, all the way through to higher returning value-add and opportunistic plays, where infrastructure investors will either digitalize and decarbonize existing assets, or finance the construction of new data centers, wind and solar farms.

Data centers and renewables do present the key infrastructure investment characteristics (defensive, predictable cashflows and returns with a low correlation to market cycles and other asset classes), but in different shades.

This means that the lines between infrastructure and other asset classes, such as real estate, can often blur and overlap.

Data centers, for example, provide an essential service, and have high barriers to entry and have long-term contracts, which puts them squarely in the infrastructure bucket; but also exhibit real estate characteristics, as they will usually be leased to third-parties and their relative attractiveness will be determined by location, access to utilities, and permitting sign-offs, according to CBRE Investment Management.

For investors and dealmakers, it is important to have an investment framework in place that is flexible and can accommodate any natural overlaps between infrastructure and other asset class, but also precise enough to avoid strategy drift.

Intertwined fortunes

As the data center and renewables asset classes continue to evolve and expand, their progression will become increasingly intertwined.

The single biggest bottleneck to meeting data center demand will be access to power. Data centers are heavily power consumptive. In the US, for example, data centers currently account for 2.5 percent of total US electricity consumption, and close to a fifth of power generation in Northern Virginia, where around half of the US’s data center infrastructure is located, according to CBRE Investment Management. By 2023 data centers could account for 7.5 percent of US electricity consumption.

Linking data center assets up to the power grid, however, is complex process, with timelines for securing permits and adding to grid capacity running from anywhere between 5 and fifteen years.

Grid bottlenecks can pitch data center developers against other, as new renewable energy assets are also faced with long lead times and delays to secure access. CBRE Investment Management notes that in the US alone close to 1,600 gigawatts of electricity generation capacity – mainly from wind, solar and storage – is awaiting the regulatory green light to access the power grid.

But while data centers and renewable may be scrambling against each other for scarce grid access in some cases, there is also growing cooperation between the two assets classes to meet their respective requirements.

Data center users, for example, are working with renewable energy providers to offset emissions from their energy intensive operations. Bringing on additional renewable power capacity will be crucial for data center growth.

According toMcKinsey, hyperscale data center operators are among the biggest backers of 24-7 renewable energy power purchase agreements (PPAs) (where energy users commit every hour of electricity consumption with hydrocarbon free generation) with these PPAs filling the gap left by government-backed subsidies and tax credits that funded the roll-out of renewable energy projects, but have gradually been rolled back as renewable energy has matured and become more competitive with hydrocarbon power generation on price.

Google, for example, plans to purchase clean energy 24 hours a day on every grid it draws power from. In 2024, for example, the technology giant signed up to its largest PPA deal ever, buying up 470MW of offshore win capacity to power its Dutch operations. Microsoft has agreed a similar deal in Sweden, while Amazon is now one of the single biggest corporate buyers of renewable energy in the world, backing over 500 projects with annual generation capacity of 77,000 GwH, according to Data Center Dynamics.

For renewable energy project developers, the strong demand from data centers for clean energy ensures that they have a ready-baked market for their output, with PPA deals securing long-term contracted revenues at a set price for all their energy production.

PPA deals, however, are not only a way for data centers to offset fossil fuel power consumption. Data centers and renewables providers are also developing new models to supply clean energy to data centers directly.

Data Power Optimization (DPO), for example, focuses on aligning the location of data centers with so-called “stranded” renewables assets in remote ocean and desert locations, where there is plenty of wind and sun, but it is difficult to transmit this energy to populous urban areas where its required.

Matching up these locations with data centers solves for the grid access issues a data center may encounter, as well as given the data center direct access to clean energy, while ensuring that the renewable energy provider has a buyer for its production.

Indeed, Data Center Dynamics reports that technology companies are teaming up earlier with renewable energy developers earlier in the development of renewable energy projects to secure long-term energy supply deals for their data centers directly. As demand energy-hungry data centers continues on its upward trajectory, renewables power provision will be a crucial lever for meeting this energy ask. Infrastructure investors targeting one of these asset classes will find that its long-term progress is becoming inextricably linked with the other.

Global demand for infrastructure is skyrocketing and governments around the world are struggling to keep pace.

The world’s population, estimated at around 8 billion, has more than tripled since 1950 and is forecast to increase by more than 20 percent by 2025, according to the United Nations. This has driven up demand for more provision of electricity, transport, water and sanitation and telecommunications.

In addition to the pressure for additional core infrastructure capacity to come onstream to support a growing population, there is also growing demand for investment in new areas, including digital, renewables and decarbonization. Ageing infrastructure also requires capital for urgent upgrades and maintenance, usage of existing assets increases in line with rising populations.

A widening fund gap

It has become increasingly difficult for governments – who have had to rein in spending after pandemic financing stimulus and in the face of rising borrowing costs – to keep up with the accelerating demand, as required investment outstrips available public resources.

According to The G20 Global Infrastructure Hub initiative, current levels of investment in infrastructure will not be enough to meet long-term demand, with $15 trillion investment gap opening by 2040 if investment doesn’t increase materially.

If governments do not make the necessary investment to fix, upgrade and build new infrastructure, the costs to economies and societies will be immense, with impacts on domestic and cross-border trade, economic competitiveness, consumers and the environment.

Governments will remain ultimately responsible for infrastructure development, but will have to work with private sector capital providers to finance the build of new projects and operate and maintain existing assets.

The investment case for private markets

The urgent requirement for governments to up infrastructure investment align with the commercial objectives of private markets fund managers, who can invest in infrastructure on a sound commercial basis at the same time as serving a wider societal objective.

The solid long-term fundamentals that underpin infrastructure demand, and the stable contracted revenue streams tied to infrastructure assets, have drawn more and more capital into private infrastructure funds during the last 15 years.

Infrastructure assets under management (AUM) have expanded at a compound rate of 16 percent since 2010 and now exceed US$1 trillion, according to Preqin figures. By 2026 AUM could exceed US$1.8 trillion.

The levels of infrastructure AUM relative to the forecast 2040 US$15 trillion infrastructure funding gap suggests that their a is still a long runaway of growth ahead for infrastructure funds, and clear incentive for the public sector to funnel this capital into infrastructure projects.

Bringing in the private sector

Bringing in private capital to finance the construction of new infrastructure can be facilitated through the range procurement channels and public-private-partnerships (PPPs), where the private and public sector share the risk and capital expenditure burden of construction new assets. Private sector operators can also back existing infrastructure assets, investing in the ongoing provision and maintenance of services.

Funding core infrastructure operations and build-out with private sector capital, however, is not a silver bullet that will magic away the widening infrastructure funding gap and eliminates financial risk and delay on infrastructure projects

There have been high profile examples of PPP deals. for example, that have been hit by long delays and large cost overruns, such as the California High-Speed Rail project in the US and the Sydney light rail development in Australia. Direct private ownership of infrastructure assets has not always worked either.

Projects run only by the public sector, however, have also been subject to prolonged timelines and mushrooming budgets, and there is a body of research showing that in the round, PPP projects offer better value for money than vanilla government procurement.

In addition, G20 Global Infrastructure Hub analysis shows that the increase in capital flows into private infrastructure funds has translated into more investment. Private investment in infrastructure does not come without its risk, but with the infrastructure gap widening every year, the requirement to accelerate private investment is becoming ever more pressing.

In it for the long-haul

From an investor and private funds manager perspective, while infrastructure does offer protection against downside risks, there will be points in the cycle when wider macro-economic and geopolitical trends impact deployment and fundraising opportunities.

Interest rate dislocation during the last 36 months, for example, has taken a toll on infrastructure fundraising, which has declined for the last three years, falling to a decade low in 2024.

Deployment can also prove challenging, through all points in the cycle. Competition for a limited pool of existing assets, with bankable, established cashflows is intensifying and high valuations on entry can make it tough for managers to meet investor return expectations.

The Global Infrastructure Hub, meanwhile, notes that sourcing suitable greenfield projects is also difficult given the risk that comes with backing these projects. The highest share of uninvested infrastructure dry powder is held by managers who are targeting greenfield projects exclusively.

If governments want to draw more private capital into funding infrastructure, preparing a longer pipeline of bankable investment opportunities will be essential.

Even entirely privately funded infrastructure projects involve close coordination with government agencies to cover of planning permissions and permitting. According to the World Bank project preparation can take between 24 and 30 months and absorb between five and 10 percent of total project investment before ground is even broken.

When crowding in private capital governments also have to ensure that risk is allocated sensibly between the private and public sector. Private investment in infrastructure is not sustainable if managers are seen to be taking excessive profits from building and running public assets without taking on any risk, but at the same time private markets players won’t have the balance sheets or capacity to bear all the risk of large projects entirely in isolation. Rigorous planning, structuring and negotiation is necessary to strike this fine balance.

Governments that expedite pre-project planning and permitting work and take a balanced approach to risk sharing, will have a deeper pool of bankable projects for private funds managers to back, and be in the front of the queue to attract more private investment.

Demand for infrastructure, across all geographies and all categories, is not slowing down. private markets managers have the potential to generate excellent returns when serving that demand. Governments should be ready to help them every step of the way.

During the last decade private infrastructure has grown from an esoteric asset class on the periphery of the private markets ecosystem into a mainstay of alternative asset portfolios.

In 2010 infrastructure assets under management (AUM) only totaled less than US$170 billion, according to Preqin figures, but during the following decade infrastructure AUM have grown at an annual compound rate of 16 percent and now exceed US$1 trillion.

The steady long-term cashflows and relative low volatility that characterize the asset class have made infrastructure one of the fastest growing areas of private market.

The strategy, of course, hasn’t been immune from the wider headwinds that have faced private markets through the recent interest rate rising cycle. Infrastructure fundraising has declined for three years in a row, falling to the lowest levels in a decade in 2024.

Over the long-term horizon, however, infrastructure remains a highly attractive investment strategy for pension and sovereign wealth funds that want to diversify their private markets portfolios and build exposure to assets that offer inflation protection and stable, uncorrelated investment returns.

Even as AUM have skyrocketed, many investors are still under-allocated to infrastructure, with a survey of more than 100 investors in 20 countries by Cornell University’s Program in Infrastructure Policy and advisory firm Hodes Weill Associates found the almost two thirds of public and private pension funds said they were under-allocated to infrastructure, while global institutions, on average, reported being 1.23 percent below targeted allocations.

After a challenging 36 months, prospects for fundraising are looking up, demonstrating long-term investor appetite for exposure to the asset class.

Infrastructure Investor estimates that the ten largest funds in the market will seek to raise more than US$143.63 billion between them alone during the next year, while asset manager Schroders sees fundraising rebounding back in line with historical patterns.

With the private infrastructure industry set for a period of sustained growth, Alter Domus provides a detailed breakdown the attributes that make infrastructure such an attractive investment strategy for long-term institutional investors.

1. Assets with predictable cash-flows

Infrastructure assets, such utilities, transport networks, schools and hospitals, provide essential services funded by non-discretionary spending, with demand sustained across investment cycles.

As providers of essential services, infrastructure assets and operators benefit from long-term financing arrangements fixed contractable revenues, often running for 10 years or more and supported by government guarantees.

The fact that infrastructure provides non-discretionary services makes it easier to pass on high-costs to end users, and many contracts will have inflation-adjustment mechanism provisions, offering a shield against inflation on margins.

Analysis from KKR shows that in cycles of high inflation, infrastructure assets provide superior real returns to equities and real estate.

2. Returns with low correlation to other asset classes

Infrastructure will typically produce returns that have low correlation with other asset such as equities and fixed income. This offers investors attractive diversification benefits, as well as steady revenues and yields through downcycles.

Hamilton Lane analysis shows that the pooled one-year IRR for global infrastructure over the last ten vintage years, has come in at 12.5 percent, and when looking at the highest and lowest 5-year annualized performance periods over the last 20 years, investors in infrastructure avoided the drop off on performance observed in other asset classes.

3. Returns with low correlation to other asset classes

Infrastructure assets will typically have long life spans, making illiquid private markets funds are good structure for holding these assets.

For pension funds, insurers and sovereign wealth funds that have to meet long-term financial liabilities the long hold periods for infrastructure assets (HarbourVest estimates that core infrastructures assets can have asset lives in excess of 100 years) are a good option for matching liabilities with assets to ensure they meet their investment obligations.

4. Solid underlying growth fundamentals

A confluence of global megatrends is driving up demand for infrastructure investment across all areas. There is a long growth runway ahead for infrastructure investors, driven by multiple factors:

The world’s population has more than tripled since the 1950s, according to the United Nations, driving up demand for energy, transport, water and sanitation and telecoms.
The world is more urbanized. More than half of the global population now lives in urban areas – up from a third in 1950, according to the UN. The drives particularly intense demand for ongoing infrastructure investment in concentrated areas
Decarbonization will require existing infrastructure to be retrofitted to reduce energy and emissions, as well as investment in new infrastructure to facilitate the use of renewable energy, as well as battery storage and charging infrastructure to support the switch to electric vehicles.
The digitalization of the economy, cloud computing and the rise of AI are driving huge increase in demand for investment in data center capacity. According to BlackRock, data center capacity will have to expand at a compound annual growth rate of 22 percent to meet projected demand.
There is an urgent requirement to upgrading aging infrastructure. According to the American Society of Civil Engineers failure to upgrade existing assets could cost the US economy up to US$4 trillion GDP between 2016 and 2025.

5. Partnering with government to deliver infrastructure

Government budgets are stretched following the pandemic period, especially as borrowing costs have gone up. It will be difficult for governments to meet infrastructure investment requirements without private capital.

Partnering with governments using structures like public-private-partnerships (PPPs), where the private and public sector share the risk and capital expenditure burden of construction new assets, opens opportunities for the private sector to support the build of new infrastructure projects in return for access to stable revenue streams and the appreciation of underlying asset values.

PPPs are designed to share risk between the state and private sector, making it easier for private infrastructure players to invest than taking on greenfield projects without the support of the state.

6. A pathway to meeting ESG obligations

Almost all institutions will be obligated to meet environmental, social and governance (ESG) goals as part of their investment mandates.

Infrastructure assets are well-positioned to align these ESG goals with financial performance metrics. Investments in clean energy, water sanitation or schools and hospitals all present sound commercial investment opportunities, but also drive visible, positive environmental and social impact.

Risks and challenges

Regulatory risk:
Infrastructure can be impacted by shifts in government and regulatory policy, which can disrupt revenue and funding models, particularly for assets developed in PPP deals.

Political risk:
Some jurisdictions can present political risk and even possible expropriation in some circumstances. Protecting infrastructure assets in unstable regions can erode earnings.

Operational risk:
Infrastructure assets are complex and challenging to build and maintain, which can often lead to delays and cost overruns. Construction consultancy Mace estimates that four in five large infrastructure projects globally experience cost or time overruns, while McKinsey analysis shows that 98 percent of mega projects will exceed budgets by more than 30 percent, with more than three in four of these projects subject to delivery delays of at least 40 percent.

A good fit for institutional investor portfolios

It is important for investor to go into the infrastructure segment with their eyes open to these risks, but equally important to recognize that experienced managers with proven operational expertise will be able to mitigate these risks significantly through due diligence and building up diversified portfolios of infrastructure assets.

For institutional investors the benefits of infrastructure allocations to a portfolio far outweigh the risks. The asset class dovetails tidily with long-term private markets fund structures and presents investors with stable, long-term revenue streams that are insulated against inflation and have low correlation to other investment classes and economic cycles. Infrastructure investment also aligns with ESG objectives

As growing populations drive long-term demand for infrastructure, and with governments unable to meet investment demand without private sector capital, infrastructure will remain a key part of private markets portfolios.

The private markets manager ecosystem is consolidating it an unprecedented rate as firms race to scale in a market where size is becoming more important than ever.

By December last year 135 M&A deals between GPs had progressed, the highest deal volume on record up from the 93 deals recorded in 2023, according to Pitchbook figures.

Meanwhile, the deal value for GP-to-GP transactions more than doubled, rising from US$15.6 billion in 2023 to US$42.6 billion in 2024, Pitchbook figures show. This surge was boosted by asset manager BlackRock’s US$12.5 billion acquisition of Global Infrastructure Partners and its US$12 billion purchase of private credit firm HPS.

The race for scale

The record levels of private markets manager M&A have been driven by a confluence of factors, with managers turning to M&A to broaden the geographic reach, expand product offerings and grow assets under management (AUM).

The value of scale has become particularly important in a fundraising market that has slowed during the last two years as elevated interest rates have led to a slowdown in exits and fundraising activity.

Global private equity fundraising dropped by almost a fifth in 2024, according to PEI figures, falling to a four-year low, with more than 20% of that overall fundraising total absorbed by just ten managers.

With less capital to allocate to new funds, LPs are consolidating GP relationships and writing larger checks to a smaller cohort of firms.

As a result, M&A between GPs climbed as managers move to consolidate into bigger platforms – building AUM via acquisition is much faster than attempting to do so via primary fundraising in challenging market.

Managers are also turning to M&A to accelerate expansion into new strategies like private credit and infrastructure, which unlock different investor bases and a wider palette of deal opportunities in new markets.

Bulking up the back office

Other incentives to build or join a bigger platform include the back-office synergies larger entities are able to unlock.

The regulatory and investor reporting obligations for managers have intensified as the alternative assets market has grown, placing added demands on operational infrastructure.

The rise and sophistication of the liquidity options available to GPs, such as NAV loans and continuation funds, coupled with the push into the retail market through feeder funds and semi-liquid vehicles, has added further complexity and workloads for back-office teams.

It is becoming more and more challenging for smaller managers to absorb the additional costs that come with more reporting and compliance. In contrast, larger platforms can leverage synergies and economies of scale to keep overhead costs in check.

A game changer for fund administrators

The wave of consolidation that is reconfiguring the private markets manager ecosystem will also reshape expectations and requirements around fund administration service provisions.

As managers merge and consolidate, they will review cost bases, operational models and reassess their fund administration requirements.

McKinsey research commissioned by Alter Domus indicates that manager expectations have already shifted, with a strong preference towards working with select groups of fund administration providers that have the geographic reach and service breadth to cover private market manager requirements across multiple strategies and geographies.

The study found that 60% of GPs already prefer bundled solutions – a proportion that is expected to climb to 70% within the next three to five years.

This shift is already driving a step change in how fund administrators are expected to set up and operate.

Fund administration remains a highly fragmented market, by both geography and service line expertise. Historically, the market has compromised of best-of-breed specialist providers that excel in specific areas or geographies.

This service model worked well when servicing small managers with relatively simple operating and fund accounting requirements, but as the industry has expanded it has become more challenging for small fund administrators to offer the breadth and depth of service the managers increasingly demand. Service levels have been known to vary across different service lines within the same provider, with rigid product siloes also making it difficult for some fund administrators to adapt to more complex client needs.

Consolidation a driver of consolidation

The ongoing consolidation of the GP ecosystem is, in turn, accelerating consolidation within the fund administration market.

Managers are eager to move away from myriad relationships with multiple fund administrators in different geographies across various product lines.

In the face of an increasingly complex operating and regulatory landscape, operational efficiency is paramount and will see managers pivot decisively towards forming relationships with fund administration partners that have the global footprint and deep expertise across all asset classes to provide “one-stop-shop” bundled services that cover all the bases.

This is already driving consolidation across the fund administration space and will continue to do so.

Fund administrators will have to demonstrate their capacity to service managers anywhere in the world, as well as the ability to ramp up service provision in line with the demands of managers as they grow their platforms.

Scale at fund administrator level will also be essential for keeping pace with mushrooming data volumes, technology and software advances, regional regulatory variations and the demand for transparent, speedy reporting and data sharing.

Managers are looking to outsource more work to fund administrators – more than 50% of GPs across all alternative asset classes are serious considering outsourcing more services, according to McKinsey. However, they want to do so with a trusted partner who can grow alongside them rather than a piecemeal patchwork of providers.

Fund administration is shifting from a purely executional relationship into a strategic partnership.

Choosing the right strategic partner, with the toolbox and expertise to navigate an increasingly complex operational environment, will be crucial for managers that want operational alpha and the full benefits of outsourcing. Fund administrators of scale will be in the best position to support managers on this journey.

Data reflected in eyeglasses, symbolizing analysis and expertise in fund administration services.

Portfolio optimization is a cornerstone of modern asset management, aiming to balance risk/return, promote portfolio diversification, and improve overall portfolio efficiency.

Fixed income managers actively seek to optimize their portfolio allocations such that the portfolio is expected to generate the maximum return with the least amount of risk. In this context, managers may apply an internal scoring methodology to grade assets as part of their investment decisions. These scoring methods in many cases rely on a weighted approach based on certain factors, many of which may be subjective. In addition, managers may rely significantly on a single guiding metric, such as yield, but still need to further control for other factors, such as credit risk, to be comparable.

Investment decisions are further complicated by various constraints. Constraints may be market driven, such as the availability of investments or market prices. Investor-mandated factors such as average credit quality, percentage limitations and duration may also come into play, as do regulatory factors, such as SEC, NAIC, Federal Reserve, Basel III rules.

These constraints can apply across all areas in fixed income, whether the asset is an investment grade credit, a high-yield bond, a broadly syndicated loan, private debt or structured credit. Constraints could also extend to other ‘cash flow intensive’ investments, such as commercial real estate and infrastructure.

Given the myriad factors that investors must consider, it comes as no surprise that portfolio optimization in fixed income is a sophisticated process with complex methods and techniques.

In this paper we present a framework designed to address these complex portfolio allocation challenges. This framework offers a single universal metric, the Alter Domus Score (‘ADS’), which can arm managers with a solution for efficiently measuring an optimal portfolio allocation that is objective and comparable across any fixed income investment.

The ADS, which is an asset-based measure, is also robust and controls for information relevant to any fixed income investment, ranging from cashflow characteristics and credit worthiness to market price, pre-payment, and illiquidity costs.

We will detail the elements of the ADS, including the underlying framework, and illustrate the relationship between the ADS and changes to certain key asset-based characteristics.

Why Trade Optimization?

Trade optimization addresses a fundamental economic problem: maximizing the efficient and productive use of limited resources, specifically investable capital. Fixed income managers must, therefore, choose from among various investment opportunities to maximize the overall portfolio return given each investment’s attributes, which include cashflows, credit risk, and market price.

In most cases, managers are also faced with a variety of constraints, such as credit quality, maturity, and diversification limits, to name but a few, which adds more complexity to their decision-making process.

Essentially, managers aim to navigate these variables to deliver the best value for their investments.

The ADS presents a framework that relies on a single metric and objectively accounts for economic factors that are key to any fixed income investment. This framework is particularly valuable for managers bound by constraints, helping them to make the best investment allocations when weighing tradeoffs. The ADS serves as a complement and support to existing methods used by investment managers.

The ADS: an objective and universal measure for trade optimization

The ADS is an objective measure that is rooted in fixed income theory.

Essentially, it represents the discounted and risk-adjusted cashflows for any expected stream of cash flows, including fixed income instruments, such as bonds, loans, and asset-backed securities (ABS).

The ADS is easily comparable across all securities since it is a measure based on a single dollar (or any currency) value at risk. This feature allows any prospective universe of fixed income investments to be rank ordered on a pro-forma basis to determine an optimal portfolio allocation that is subject to constraints.

The score means that a fixed income investor can compare a bond to a loan or an ABS security – or even a real estate investment – when selecting the optimal portfolio allocation investment decision.

The score is agnostic as to the type of underlying investment and relies on the individual cashflow characteristics of the asset, factoring in the time value of the expected cash flow and uncertainties due primarily to the credit risk of the borrower and potential prepayments.

Digging into the detail: the formula behind the ADS

The ADS is calculated based on the following formula (see Appendix for detailed description of inputs).

To make effective comparisons across assets, the outstanding principal balance of the asset is first normalized to an indexed value of 1, which results in the market value (MV) to be a percentage of the indexed value. Therefore, we can break down the key inputs into two groups – one group is based on asset-specific attributes and the other reflects cashflow uncertainties.

To present it simply, the numerator represents the present value of the risk-adjusted weighted cashflows over the duration of the asset, the Cashflows Risk-Adjusted Value (C-RAV) while the denominator is the MV[1].

Some key factors to consider are that the risk related inputs can be based on the manager’s judgement or can be used to gather insight as to what the market value implies.

The ADS can also be used to generate trade ideas for making asset substitutions, when, for example, seeking a better relative-value opportunity, and thus can increase the likelihood that a portfolio will be better off or more optimal.

Applying the ADS in different scenarios

It is noteworthy to begin highlighting three possible scenarios of the ADS for any given security.

ADS > 1 (i.e., C-RAV > MV),
ADS < 1 (i.e., C-RAV < MV), and
ADS = 1 (i.e., C-RAV = MV).

Example 1: In cases where the ADS score is greater than 1, the time-value adjusted and risk-adjusted cashflows based on the manager’s expectations is greater than what the market price is reflecting. The asset is therefore ‘undervalued’, as indicated by the asset’s risk/return profile.

These are assets that offer the manager favorable investment characteristics, as the value of the risk-adjusted cash flows is greater than the price to acquire those cash flows.

Example 2: In cases where the ADS is less than 1, the time-value adjusted and risk-adjusted cashflows based on the manager’s expectations is less than what the market price is reflecting. The asset is thus ‘overvalued’, as indicated by the asset’s risk/return profile.

The manager will seek to sell these assets since the proceeds from those sales would exceed the manager’s fundamental assessment of what those cash flows are worth.

Example 3: In cases where the ADS score is equal to 1, the time-value adjusted and risk-adjusted cashflows based on the manager’s expectations is equal to what the market price is reflecting. So, the asset is ‘fairly valued’, as indicated by the asset’s risk/return profile. These assets have market values consistent with the manager’s fundamental assessment, and the manager would therefore be indifferent to holding, buying, or selling these assets.

When working through these scenarios, it becomes clear that a manager can begin to utilize the ADS as a metric for comparing and effectively rank-ordering decisions across different types of fixed income assets.

The ADS can also be used as a tool to inform the manager as to what the risk-based inputs the market is implying. With these inputs on hand, the manager can better assess whether an asset’s market price is rich or cheap.

Manager judgement, of course, is an important element to calculating the ADS.

The ADS could be pre-populated with apparently objective inputs and additional manager overlay could significantly improve the quality of the ADS and its utility as a tool to support portfolio optimization.

Assessment of prepayment rates and credit risk inputs are informed by asset manager expertise and play a big role in calculating the ADS.

Dissecting the AD-Score

The tables below illustrate the relationship between the ADS and changes to certain key inputs holding all else equal. We have intentionally kept the analysis simple so that we could better illustrate the mechanics behind the score.

A more thorough analysis, inclusive of actual cash flow payment dates (we assume annual for our simple analysis), spot risk-free rates (we assume a flat risk-free curve), more dynamic prepayment rates, and other more precise inputs are considered as part of the ADS.

For simplicity we also assume the assets are floating rate senior secured loans, but set at a fixed rate, and have a narrow band of possible recovery rates. The probabilities of default (PDs) are based on the Moody’s idealized default rate table.

The Tables that follow illustrate how the ADS score may shift under different scenarios:

Table 1: Impact of Coupon Rates and Credit Risk Ratings to the ADS

The first part of the analysis (see Table 1) shows the calculated ADS for a group of six stylized loans. The loan coupons range between 5.50%-10.75% (4.50% risk-free rate and risk premiums between 1.00%-6.25%) and have current ratings in the Ba2-Caa1 range. The loans have six-year stated maturities (with 10% constant prepayment rate – CAP) and assumed recovery rates of 45%. Note that for further simplicity we assume the current market values are 100% (or equal to par), and that the stated coupons are such that the current ADS is 1.00 (or ‘fairly valued’ at par).

Table 1 also shows a range of possible ADS scores based on changes to credit risk ratings and coupons. It can also be viewed as changes in the manager’s opinion of credit risk (or PD) associated with the loan. Furthermore, the ADS values can reflect the manager’s opinion on its own fundamental assessment of the loan cashflows (or C-RAV), holding all else constant.

In other words, these ADS values can reflect the manager’s opinion on what the fair value (or price) should be as a percent of par and can be used to compare to what the market price is offering.

Table 1: Impact of Coupon Rates and Credit Risk Ratings to the ADS

Initial noteworthy observations show that investors require compensation via higher coupons that are commensurate with lower rated loans, holding all else equal, such as a larger risk premium for riskier loans.

This can be reflected in the highlighted cells across the loans where the market price clears at par (also reflected with an ADS of 1.00). Notice that for each loan, a change to rating (or PD) impacts the ADS through C-RAV.

For example, if the stylized loan rated B2 were to be upgraded (or downgraded) by +/- 1 subcategory, the ADS value would change from 1.00 to 1.03 (and 0.96) respectively, assuming the market value of the loan remains pegged to 100%.

Table 2: Impact of Prepayment Rates to the ADS

Table 2 displays ADS values after reducing and increasing the CAP rate from 10% to 0% and 20%, respectively.

This scenario, of increasing prepayment rates, effectively reduces the asset’s weighted average life expectation, thereby reducing overall coupon cashflows, while also reducing the exposed amount to default, or in other words, prepayments are not subject to loss.

We first notice that those loans with lower ratings (and higher coupons) appear to be the most sensitive to CAP. A lower CAP rate scenario seems to generate more than enough coupon cashflows to compensate for the longer period of exposure to default, such as relatively higher C-RAV and ADS.

In contrast, the higher CAP rate scenario appears to reduce the coupon cashflows enough to lower the ADS (and C-RAV).

Keep in mind that this is an isolated scenario analysis meant for comparison. The outcome can be sensitive to other variable inputs, such as the default timing profile.

Table 3: Impact of Maturity to the ADS

Table 3 displays ADS values after reducing the stated maturity of the loans from 6 years to 5 and 4 years, respectively.

The stated maturity scenario analysis above shows that it has a similar effect to increasing the CAP rate (see Table 2) thereby drawing a similar conclusion.

Table 4: Impact of Recovery Rate to the ADS

Table 4 displays the sensitivity of ADS values at various recovery rates – from 40% to 50%.

This scenario analysis impacts the ADS through the loss given default (LGD) expectation of the asset. The table results are clear and intuitive in demonstrating that as recovery rates increase (or, as LGD decreases), the ADS naturally increases.

The extent of the increase appears to be in the range of 1-3 points of incremental ADS as recovery rates increase by 10% (from 40% to 50%). The larger ADS impacts are reserved for the lower-rated, or riskier, assets since the benefit of the higher recovery rates is most pronounced when the probability of default is relatively high.

A tool to navigate the complexities of fixed income portfolio allocation

Fixed income portfolio managers seek to optimize their portfolios to achieve the maximum return with the least amount of risk. However, they face numerous challenges, including market-constraints, investor/lender mandates, and potential regulation.

As managers strive to optimize their portfolios, they often utilize a scoring approach for generating trade ideas. In this paper we presented a framework that can support decision-making for these types of complex portfolio allocation challenges and complement frameworks that may already be in place.

The framework provides a universal score, the ADS, that is easily comparable across all cash-generating assets. The ADS is also simple, robust and controls for critical information, whether it is objective or subjective, relevant to any fixed income investment.

For AD clients, including clients of Solvas and Enterprise Credit & Risk Analytics, the ADS is offered as an additional measure to support our clients with their trade optimization, portfolio allocation, and risk analytics.

Please contact [email protected] for further information on how to access the ADS.

Appendix: Calculation of the Alter Domus Score

The first step to compute the Alter Domus Score (ADS) for any fixed income instrument is to normalize the initial face amount to a value of 1 in the relevant currency. The ADS is then calculated as follows:

Where:

[1] The MV can be adjusted in cases where the manager is subject to certain trading criteria. For example, CLOs commonly carry any loan that was purchased below a certain threshold (or ‘deep-discount’) at the purchase price, which results in a haircut to par in the OC tests. The ADS would effectively be capped (potentially at 1) in this instance.

A team of our real estate-focused sales and operational leaders attended IMN’s Winter Forum on Real Estate Opportunity & Private Fund Investing in Laguna Beach, California this past week. Held from January 22-24, 2025, at the Montage Laguna Beach, the conference attracts more than 1,200 attendees and holds an agenda of more than 40 sessions with more than 200 speakers participating, including our own Manager Director Michael Dombai.

While there, we spoke with fellow servicing firms, software providers, and real estate managers of all sizes and niches while also listening in to the expert opinions on the top trends affecting the segment.

What’s clear is that real estate finds itself at an important junction with the new year ahead – whether it’s a new U.S. administration, the still-evolving commercial real estate recovery, or the closely watched interest rate cycle. As a result, there was plenty to discuss with our industry peers over the course of the conference – here are some of the most buzzed-about trends.

1. Fundraising is down

As cited in a speaking session from our valued partner Matt Posthuma at Ropes & Gray, PERE has published that fundraising is down 50% from its peak in 2021, and down around 30% from 2023. Of this shrunken fundraising pool, the largest real estate managers are claiming the lion’s share – a trend we are seeing not only in real estate but across the broader alternative asset landscape.

While fundraising may be tempered, returns and investment values show promising signs of health, as the U.S. real estate sector is forecasted to submit better returns than the public equities market.

2. Interest rates continue to bring uncertainty

When it comes to interest rates, few feel confident enough to make a defining statement on what is to come, particularly with the volatile last five years in mind. However, with a recovered market, vocalized rate cuts by the Federal Reserve, and a likely extension to the U.S. Tax Cuts and Job Act, the broadly held hope is that we will settle into stable period of interest rates.

3. Outsized insurance risk is our new normal

Skyrocketing insurance rates were also heavily discussed – a timely topic given the event’s proximity to the L.A. fires that tragically continue to burn through the metropolitan area. Speakers suggest that while these natural disaster events are often referred to as “once-in-a-lifetime events”, they will transition to our new normal. Insurance rates in high-risk areas are unlikely to return to the past levels we’re accustomed to, and that added cost must be factored into future real estate deals and underwriting processes.

4. All eyes are on the new U.S. administration

As a new U.S. administration entered the White House earlier this week, the industry is on the lookout for changes in regulation, tariffs, geopolitical conflicts and more. The consensus is that impending deregulation could have a favorable effect, but other question marks remain. For example, how could impending tariffs affect the costs of building materials, and how might the possibility of mass deportations affect access to building labor and construction timelines?

Even with the uncertainty of a new administration’s impact on the real estate space, foreign managers and investors have a favorable eye to U.S. real estate exposure due to its strong market recovery in a post-COVID world.

5. Several sectors are producing exciting activity

Activity in the data center niche creates the most excitement. Though they require ample energy to operate, some think we will see a renewed rise in nuclear power plants to power these data centers. Open air shopping centers have also performed well and new opportunities in this niche are attracting healthy deal attention.

Luxury housing conversely has a poor outlook as a sector, even amid high building activity since materials and labor costs to build remain high. At the other end of the spectrum, demand for workforce housing may be at an all-time high, but the real estate investment space isn’t feeling optimistic about the possibility of returns for such projects, which tend to require a private/public partnership.

In all, we had a productive few days rubbing shoulders with some of the brightest minds in the real estate investment space. This new year is certain to hold wins, challenges, and changes, and we’re excited and committed to helping our clients navigate what’s set to be a fascinating 2025.

Ready to talk about your real estate servicing needs for 2025? Reach out to our team here.

Global infrastructure outlook trends in 2025

The data center and decarbonization mega-trends will animate infrastructure fundraising and deal activity in 2025
Significant opportunities will emerge in building out utilities and power provision to support the data center boom
Signs of a soft landing after the rising interest rate cycle bodes well for toll road, airport and port assets
After a tough year for managers, fundraising sentiment should improve as sliding base rates drive up investor appetite for yield

The infrastructure space is well-positioned for a solid year of deal and fundraising activity in 2025 as interest rates subside and macro-economic conditions improve.

As has been the case for other private markets asset classes, 2024 has been a challenging year for infrastructure. Annual fundraising is at risk of falling below 2023 levels, according to Infrastructure Investor, while CBRE has recorded declines in year-on-year infrastructure M&A during 2024.

The next 12 months are likely to remain challenging and unpredictable for infrastructure managers and investors – after all, infrastructure fund dry powder has recently hit a record 24% of total global AUM, according to Preqin, indicating managers’ caution to deploy. But falling interest rates will help to put the asset class in a more stable position.

For deep dives into key trends driving the 2025 global infrastructure outlook, read on.

Infrastructure investment trend #1: Fundraising on a firmer footing

Fundraising activity will derive potentially the greatest benefit from lower rates, as investors emerge from the defensive crouch of the last 24-36 months and resume the search of yield as interest rates come down.

Infrastructure will be ideally placed to serve investors as they gradually look for opportunities to take on more risk, as it offers returns at a premium to the risk-free rate while retaining defensive, inflation-resistant qualities, according to asset manager ClearBridge Investments. For investors who are still wary of downside exposure as economies emerge from a period of high inflation and rising interest rates, but have to sustain yields, infrastructure will be an ideal fit.

The 2025 infrastructure vintage also holds the potential to deliver attractive returns for investors.

ClearBridge Investments analysis shows that over the long-term infrastructure asset returns correlate strongly with infrastructure asset earnings growth. Since 2022, however, a recalibration of risk and valuations across all asset classes has seen infrastructure asset valuations drop even though earnings growth has proven resilient. This delta between earnings and valuations will fall back into the long-term pattern, presenting early movers with an opportunity to invest at potentially highly attractive entry multiples.

Infrastructure investment trends #2: Going green and going digital

Fundraising and deal activity in infrastructure will be driven by the two mega-trends that dominated the asset class during the last 24 months – decarbonization and data centers.

Both subsectors are underpinned by robust underlying fundamentals and have experienced little if any impact from recent capital markets dislocation.

Decarbonization and targets to reduce emissions to net zero by 2050 have become compliance and regulatory essentials for all sectors, with regulators mandating higher energy efficiency standards and disclosure on emissions.

The cost of building out new, green, low emission infrastructure, as well as repurposing existing legacy infrastructure assets will involve substantial resources and investment. According to S&P Global estimates $5 trillion of annual investment in energy transition will be required every year between 2023 and 2050 to meet Paris Agreement emissions reductions goals – triple current levels

Governments will be unable to shoulder this obligation alone, opening up an investment opportunity of vast scale for infrastructure players.

The fundraising market is already pivoting in this direction, with renewable energy fundraising the largest category for sector-specific infrastructure fundraising in 2024, according to Infrastructure Investor. And the deals are following suit – per Preqin’s Infrastructure Global Outlook, renewable energy accounted for 69% of primary deals in 2024 – its highest share since at least 2006.

Decarbonization will not be a one-way street, especially as the costs of energy transition are felt by taxpayers and consumers, pushing decarbonization into the political sphere. Nevertheless, the fact that decarbonization can also address other long-term energy pain points, such as cost of energy and energy security, gives the net zero project the necessary momentum to withstand any political or consumer resistance. The risks posed by climate change are simply too severe for governments to ignore.

In the data center space, meanwhile, similarly robust fundamentals will power sustained investment opportunities.

Demand for data is surging, particularly given the huge amounts of computing power that will be required to support the rapid growth of the AI sector, which private markets platform Partners Group forecasts will grow at a remarkable compound annual growth rate (CAGR) of 42 percent to become a $1.3 trillion market by 2032.

Investors and dealmakers have been racing to gain exposure to this dynamic sector, via both equity and debt investment strategies. The scramble for data centers shows little sign of slowing in 2025.

Infrastructure investment trend #3: Classic categories. New opportunities

But while data centers and decarbonization will grab the headlines (and with good reason) 2025 also promises to be a good year for more established infrastructure categories.

Indeed, as data centers grow so will the core utilities required to service them, most notably power generation. According to McKinsey, the power generation capacity required to support electricity-hungry data centers will have to more than double by 2030. Grid connection capacity will have to be ramped up in similar increments.

Outside of utilities, other sub-segments such as airports, toll roads and ports are also set for a positive 2025, as the inflationary pressures that have weighed on consumer spending start to ease, and travel activity and demand for goods increases.

According to the International Air Transport Association (IATA) global air passenger numbers are forecast to exceed 5 billion in 2025 for the first time, while global container volumes passing through ports are expected to climb by as much as 7 percent in 2025, according to shipping and logistics group Maersk. Toll road traffic is also expected to increase, particularly in centers with growing populations, with usage on most routes now back at or above pre-pandemic levels.

New verticals may be expanding the options and growth opportunities for infrastructure stakeholders, but “old-fashioned” infrastructure assets look set to remain as attractive and valuable for investors as ever.

Key trends in 2025’s real estate outlook

Lower interest rates will ease the pressure on real estate investors in 2025, but the rebound in real estate deal activity will be uneven
The sector continues to grapple with secular shifts in the market following pandemic. Opportunities will arise but risk lingers
Data centers, logistics and the living sector present the most compelling near-term investments, but there is value to be found in other verticals
Real estate players still have to manage a large wall of debt maturities. This will be a challenge, even as interest rates recede

Real estate is in a much stronger position than it was 12 months ago, but while the asset class is set to rally in 2025, the road to recovery will be uneven and complex.

The good news for the sector is that as near-term interest rates have cooled and stabilized, so have real estate valuations, with asset manager abrdn noting that the pricing corrections that weighed on the sector through the rising interest rate cycle appear to have run their course.

As valuations stabilize, returns are set to improve, with abrdn forecasting annualized global all-property total returns of close to 7 percent for the next three and five-year periods.

For deep dives into key trends driving the 2025 real estate outlook, read on.

Navigating real estate’s recovery in 2025

Navigating the real estate recovery, however, will not be straightforward, even as the macro-economic fundamentals improve.

The sector is still in the midst of a period of reconfiguration following pandemic lockdowns, which has driven large, secular shifts in usage patterns.

Remote working and AI, for example, have had a profound impact on office real estate assets, which continue to encounter headwinds even as large corporates lean on employees to return to the office. Retail is another real estate sub-sector that has been challenged following the pandemic, and then the squeeze on consumer spending as inflations and interest rates climbed. In the two-years following the first pandemic lockdowns, retail vacancy rates climbed to new record levels in some jurisdictions as rents saw drops of more than 10 percent.

Other real estate verticals, however, have thrived. Private markets investment platform Partners Group notes that living and logistics assets have benefitted from long-term secular growth drivers and constrained supply, while the data center space has gone from strength to strength.

In the US alone, the colocation data center market has doubled in size during the last four years, defying the rising rate cycle to continue meeting surging demand for data and digital infrastructure to power AI and digitalization.

The rub for real estate investors as they move into 2025 is that real estate remains bifurcated and complicated market. There will be a recovery in pricing and deal activity, but there are still banana skins that investors will have to avoid.

Balance sheet housekeeping is still a key real estate focus

In addition to trying to read the real estate rune sticks, investor bandwidth will also continue to be absorbed by existing portfolios, for which large amounts of refinancing are imminent in the next four years.

According to Trepp data analyzed by asset manager Franklin Templeton around US$1.2 trillion of commercial real estate debt will mature in 2024 and 2025, with a further US$1.7 trillion falling due between 2026 and 2028.

Falling interest rates and lower debt costs will ease refinancing pressure to a degree, as will stabilizing pricing, which will support more favorable loan-to-value ratios.

However, even though interest rates have eased in 2024 and are expected to continue moving in favor of borrowers in 2025, base rates remain materially higher than they have been for years and will test capital structures put in place prior to the rising interest rate cycle.

Even as the wider real estate market shows green shots, there will simultaneously be pockets of distress in the sector in 2025 as borrowers battle to service debt costs while base rates remain elevated relative to the prior cycle.

Amid a 2025 real estate outlook, risk remains – but opportunity beckons

Against a background of looming maturities and market bifurcations, investors are likely to continue leaning into the most robust and fastest growing real estate segments, with the red-hot data center space leading the charge.

There will, however, be a window of opportunity for savvy investors with solid operational track records as well as sector and regional know-how to lean into less popular real estate segments and invest in high quality assets attractive valuations.

Retail real estate, for example, which has been struggling and out-of-fashion for years, appears to be turning a corner as global retail sales recover.

JLL notes that in key jurisdictions such as the US, vacancy rates in high-quality retail locations are approaching record lows, with tenants jumping at opportunities to lease new space as it becomes available. Not all locations will see an uplift, but prime space is well placed to generate attractive returns.

The office segment, which looks challenging overall, also presents opportunity for investors and developers that can identify sites in the right location and price risk effectively. According to JLL, office vacancy rates are forecast to peak in 2025 with availability for high demand locations falling. The narrative around offices may still be broadly negative, but early movers who pick the right assets will see the potential in 2025 vintage deals.

Real estate risk will continue to linger in 2025 – but so will new opportunity.

Close-up of hand with pencil analyzing data, reflecting trends and insights in the private debt outlook.

Private debt trends in 2025

Private debt is in line for a bumper year of deal flow in 2025 as M&A activity rebounds
Interest rate cuts will squeeze returns a little, but the asset class will continue to present compelling risk-adjusted investment opportunities
Private credit defaults are likely to track higher, but within manageable levels for managers equipped to troubleshoot
Competition for deals will intensify as broadly syndicated loan (BSL) markets continue to rally. Debt funds will have to adapt pricing, but will still benefit from sticking to core strengths

Private debt’s so called “golden age” will still have room to run in 2025, even as interest rates come down and broadly syndicated loan (BSL) markets reopen.

The asset class proved one of the best performers through the cycle of rising inflation and interest rates, with its floating rate structures benefitting from rising base rates at the same time as risk-averse BSL markets pulled up the shutters, opening the way for private debt managers to gain market share and take their pick from the best credits on offer.

These favorable dynamics have shifted in 2024, with central banks cutting rates as inflation subsided and BSL markets bouncing back to record double-digit gains in year-on-year issuance.

Private debt managers will face increasing competition from BSL markets in 2025 as a result, with BSL arrangers and investors showing strong appetite to lean back into M&A and leveraged buyout financings after a stepping back through the period of interest rate dislocation.

The last year has already seen BSL markets claim back market share, offering lower pricing to win back credits that were financed with private debt-backed unitranche loans.

Bank of America figures reported by Bloomberg show that at least US$30 billion worth of private debt deals in the US were refinanced in the BSL market in 2024 at lower rates. BSL players will continue to run hard in 2025 and will not only compete on price. Arrangers, noting the speed of execution and certainty offered by private debt providers, have worked hard to get BSL pricing spot on to avoid flex and mitigate syndication risk.

For deep dives into key trends driving the 2025 private debt outlook, read on.

Pricing pressure for private debt investment targets

Increased competition will keep private debt managers on their toes, but the asset class is still well placed for a strong year of activity and opportunity in 2025.

Managers will have to accept that they may have reduce margins to stay within a reasonable range of the pricing banks and BSL markets can offer in the year ahead. Many have already done so.

But while margins may have to come down, and interest rates are lower, private debt managers will still be able to deliver consistent, high single digit returns, as base rates remain well above levels from 24 months ago. On a risk-adjusted basis, private debt will continue to appeal to investors, even if returns are slightly lower than those delivered in 2024.

Lower returns, however, will be more than made up for if a much-anticipated uptick in M&A activity is realized in 2025. Interest rate stability and the urgent requirement for private equity dealmakers to make distributions to LPs promises to deliver a meaningful uptick in deal volume and demand for private debt financing.

Private debt players have also proven their ability to finance large credits through the period of interest rate rises. BSL markets may be open again, but private debt managers now have a track record of clubbing together to deliver financing for massive credits that not too long ago would have been the exclusive preserve of BSL markets.

Recently, for example, a club private credit managers teamed up to provide a £1.7 billion loan to help finance the take private of UK investment platform Hargreaves Lansdown. BSL markets will entice borrowers with lower pricing in 2025, but large credits will no longer default to BSL markets, as private debt managers show that they have the scale and appetite to offer flexibility and certainty of execution on big credits.

Dealing with private debt defaults

A rise in deal financings, however, will not be the only thing taking up private debt manager time in 2025. Portfolio management will remain a key priority, as managers move to protect value and limit losses.

Private debt portfolios have proven resilient through a period of rising rates, and while defaults are expected to increase in 2025 as the impact of rising rates trickles down to borrower balance sheets, overall default levels should, all being well, remain within manageable thresholds.

An uptick in defaults, however, will see a bifurcation in the market between managers with the capability and resources to steward credits through periods of stress and distress, and those that have strong transactional capabilities but haven’t made the investment in restructuring capability. This will become especially apparent in a market where defaults track higher at the same time as new financing deal volumes start to rally. Managers with lean teams will find it increasingly difficult to keep on top of new opportunities and keep troubled credits on track.

A good time to be in private debt

The next year might not be quite as good for private ~~credit~~ debt as 2023 and 2024, but the asset class is still set for a good 2025.

Winning deals will take more work as competition increases, and margins and returns will have to be adjusted accordingly for private debt to remain competitive in a market where other financing channels are beginning to function normally once again.

There will, however, be more deals to go for if M&A activity rebounds as expected, which should balance out the challenges posed by rising competition and tighter margins and returns.

The private debt “golden era” may have run its course, but private debt is an asset class that looks likely to retain is luster for some time yet.

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