Private markets are looking to be a booming part of the wealth management sector in 2025, while private equities seem to be making a comeback. What is the best best? PBI asks the experts.
Andrew Dalrymple, investment manager, Aubrey Capital Management
2024 has been a very strong year for US equity markets, with the S&P 500 up 28.5% to the end of November (in GBP). Aubrey’s Global Conviction Fund has taken advantage of this environment and gained 49.2% YTD against 20.7% for its index (MSCI AC World Index).
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The Global Conviction Fund’s midcap stocks have generated significant value this year, a trend we expect to continue as performance broadens out. This is where we believe we add most value to investors, with our flexible, market cap agnostic approach allowing us to pivot to wherever we see the most opportunity. While many others are fearful of what the coming months holds for the US, we remain confident that further upside remains with effective stock selection in the right areas.
The strength of the US has started to throw up questions amongst investors as we head into 2025. The past few weeks have seen news feeds and social channels clogged with people pointing to the S&P 500 valuations and predicting doom and gloom for US investors. The chart below is used to support this negative view with the index P/E of 22.7x now almost at peak levels over 10 years and a 23% premium to the average, however, the Mag-7 now account for ~30.5% of the S&P 500 so focusing on the S&P 500 from a market cap weighted perspective has become less reflective of where overall US valuations stand.
A more interesting insight is to add onto the chart another line showing the P/E of the S&P 500 Equal Weighted Index, which lays bare the bifurcation we have seen between the largest stocks in the index and the rest showing that since 2022 the two indices have substantially diverged from a valuation perspective, and that the equal weighted remains closer in line with its 10-year average with a 7.5% premium.
With the US economy remaining robust and the prospect of further interest rate cuts into 2025, we view this premium as justified for the growth opportunities on offer.
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By GlobalDataRishi Kohli, CIO – Hedge Fund Strategies, InCred Alternative Investments
Category III AIFs (Alternative Investment Funds) have shown the highest year-on-year and three-year compounded annual growth rates in total AUM at approximately 79% and 43% respectively. Even the number of new Funds in this category has been the highest by far over the past year compared to Category I and II with a 43% increase.
While long-only strategies dominate the Cat-III AIFs with 61% of the share, the interest in long-short strategies in Cat-III has been slowly increasing and gaining ground over the past few years with more players entering the segment and more types of strategies being launched in the long-short segment.
The big news for the Indian equity derivatives market was SEBI clamping down on weekly index options and asking both NSE and BSE to have only 1 index each on which weekly options were allowed leading to NSE choosing Nifty and BSE choosing Sensex. This meant that weekly options for BankNifty, FinNifty, Bankex and MidcapNifty were discontinued from November 2024.
The other indices were relatively less liquid, but the BankNifty weekly options had the highest liquidity among all the indices and hence discontinuation of the same came as a shock to most market participants and pure option traders and managers will have to modify/tweak their strategies and style to diversify their BankNifty weekly options exposure to Nifty/Sensex weeklies and other indices and stocks monthly options. So, this was an unexpected market regime change forced by the regulator!
The big news for long-short strategies in 2024 was SEBI’s announcement of a New Asset Class (NAC) which would basically allow Mutual Funds to launch long-short strategies using derivatives with gross exposures being within the MF regulations of 100% and focused on investors with minimum ticket sizes of INR 10 lakhs for whom SEBI believes this NAC can fill the gap between MF and PMS. Derivatives exposure will be capped at 25% of the AUM for non-hedging and rebalancing purposes.
While SEBI’s intention for announcing the NAC is to curb the unregulated and unregistered investment schemes by providing a regulated and transparent alternative, there is a lot to be desired in the same.
Firstly, most MF managers are not experts in long-short and derivative strategies hence some rules around AUM managed previously by fund managers of NAC needs to be toned down. Further, AIF Cat-III allows long-short strategies and there are many fund managers in this space who have many years of experience and hence are more suited to manage NAC compared to MF fund managers so either such AIFs should be given a NAC-MF license else regular MFs should be allowed to potentially tie-up with such AIFs for NAC. Else the risks could increase rather than decrease due to people not well versed with long-short strategies managing the same, thereby defeating the entire intention of introducing NAC.
The Indian equity markets as denoted by Nifty index were ranged till the beginning of May within a 4-5% band post which went upwards till end of September but with high volatility, first at the result announcement of General Elections in early June and then mini-bouts in early August and early September. Then from end-Sep to end-Nov it had the first 10% correction for the year, a double-digit decline seen after a long time!
Saurabh Jhalaria, CIO – Alternative Credit Strategies, InCred Alternative Investments
The private credit space in India has seen new entrants as well as subsequent fund launches from existing players, across Venture Debt, Performing Credit and Special Situations Credit. One of the key themes identified in 2024 is the rise of interest in ‘CleanTech’ as a space, encompassing renewable energy, Electric Vehicles, Alternate Fuels & Recycling.
As private equity capital slowed down in the year, private credit provided the much-needed growth capital for emerging corporates in India. Private Credit has been particularly useful, both at an operating company level as well as at holding company level for various use cases.
We believe the space is under-penetrated vis a vis the global scenario and is poised to grow at a much faster pace in 2025, with greater acceptance among promoters, who are looking at private credit as a significant source of growth capital without diluting equity. New themes in the form of manufacturing and industrials are poised to fuel growth of the segment, with the existing themes staying strong.
On the other hand, we see emergence of dislocated credit due to the liquidity needs of the existing lenders and cash flow mismatches of the corporates. On the back of this, special opportunities credit will also be a space to watch out for.
Nishith Maheshwari, Head, Digital Business Loans, InCred Finance
Innovative credit models such as cash flow lending have helped provide access to credit to the new age digital economy, including D2C brands, online sellers, SAAS companies, etc. The increase in government allocation for CGTMSE and CGFMU schemes have further helped fuel the growth in MSME credit, helping provide MSMEs with timely capital for expanding working capital requirements.
Going ahead, there would be an increasing demand for capital by cleantech/EV companies. This would in turn require lenders to innovate on their credit policies, to better cater to the increasing capital demand from these sectors. As the Ecom ecosystem and D2C brands grow, the demand for these brands/products on the global marketplaces and online platforms also grow in tandem. This directly translates into a massive opportunity to provide working capital to this segment.
The recent bureau reporting modification requires credit reporting to be done on a fortnightly basis. Set to come into force at the beginning of the new year, the new modification would essentially change how bureau data is consumed and would help push more discipline in borrowers to ensure timely repayments leading to maintenance of healthy credit scores.
Luca Castoldi, Senior Portfolio Manager – REYL Intesa Sanpaolo Singapore
2024 has unquestionably been an extremely eventful year for Asian Equities, being at the crux of the evolving economic and political landscapes across the region.
Starting up North with China, the announced stimulus measures in September 2024 was top-of-mind for global investors as they looked to reassess whether the economy was approaching an inflection point. Prior to the announced measures, a flurry of lacklustre economic indicators was coming out of China amidst her ongoing property downturn, and many global banks and investors alike, were increasingly cynical on her investment prospects.
A prime example was that Chinese equities (CSI 300) had lost about -48% in value from its 2021 peak (peak-to-trough) due to the aforementioned reasons, COVID, and US-China trade tensions. To arrest this decline, the Chinese government stepped in to try to prop the economy up through a wide-ranging suite of measures inclusive of monetary policies and support for both the property and stock markets. In addition, they also signalled for more fiscal support on the way, to the market’s initial delight.
However, in early October 2024, the Ministry of Finance’s long-awaited measures disappointed the markets with the lack of firm details on the consumption side. Since then, Chinese equities have lost a fair bit of momentum from the initial “stimulus bazooka” even if it was viewed as an incrementally positive first step in the right direction. Over the medium-term, investors will continue paying close attention to any improvement signs across the structural issues in China – Employment, the property market, and primarily policy follow-through, to gain further and lasting confidence.
In East Asia, global investors also witnessed the sharp unwinding of the Yen carry trade in early August 2024 due to a confluence of factors. For one, the Bank of Japan (BoJ) set the scene by delivering a hawkish surprise in their July meeting by raising its short-term policy rate to 0.25% – the highest it’s been in 15 years, while announcing a plan to further tighten monetary policy by tapering down their asset buying activities.
However, the upward momentum on the yen did not pause there, as a series of weak United States (US) macroeconomic data ensued BoJ’s hawkish announcement. The mix of these factors caused market expectations for interest rate differentials across the US and Japan to compress – thereby sending the global markets into a flux as traders rushed to unwind their yen carry trades. Since then, the BoJ has left their key interest rate on hold as they continuously monitor economic developments within Japan, while staying cognizant of global triggers and developments abroad, especially in the US.
In India, global investors were fixated over Modi 3.0 to gain confidence in further policy continuity as India held their elections in June 2024. Alas, Prime Minister Narendra Modi was confirmed to serve a third term in office – but the way he got there, was not quite like what the markets expected. Modi’s party, the Bharatiya Janata Party (BJP), was 32 seats short of the 272 seats needed to have an outright majority in the 543-member parliament.
This was in stark contrast from the 303 seats BJP won in 2019. Together with its National Democratic Alliance (NDA) allies, the BJP-led coalition thankfully managed to get 293 seats to secure a majority in the lower house parliament. Both the election results as well as the immediate market reactions, jointly signalled weakened confidence in Modi’s 3rd term as BJP had a newfound need to rely on their allies for a parliamentary majority. These concerns were ultimately underpinned by economic uncertainties surrounding key policies like whether the government could continually focus on industrialisation and fiscal prudence. Since then, the newly instated Modi 3.0 government has made good strides to allay such investors’ concerns. A pertinent example was the announced FY2025 Budget which presented not only broad policy continuity, but also addressed key issues the nation had been facing (e.g., employment initiatives).
On the topic of political regime shifts, ASEAN also had its fair share of political events, notably in Thailand and Indonesia. Starting with Thailand, Paetongtarn Shinawatra was selected to be Thailand’s new Prime Minister in August 2024 after the Constitutional Court ousted Srettha Thavisin, the previous appointment holder. Despite lacking administrative experience, Paetongtarn has since signalled dedication to revitalise the Thai economy against her downbeat growth outlook.
In Indonesia, Prabowo Subianto was also sworn in as the 8th Prime Minister of Indonesia in October 2024, replacing the outgoing Joko Widodo. Global onlookers have also expressed a similar desire for policy continuity in the world’s 4th most populous country, which Prabowo recently assuaged by choosing a relatively stable Red and White cabinet.
Looking forward into 2025, Asian equities are poised to navigate a more complex macro mix especially with the recently concluded US elections. Some of these complexities include but are not limited to: Potentially disrupted central bank easing cycles which stifles economic growth; and increasing protectionism measures impeding global trade. With many Asian countries going into 2025 with new political regimes as well, investors simply cannot afford to overlook the heavy clouds of geopolitical and economic uncertainties.
Michael Von Bevern, Co-Managing Director, Suntera Fund Services
Risk-adjusted returns for private credit will remain a compelling alternative to private equity for institutional investors.
Private credit, especially direct lending, has the potential to offer greater risk-adjusted returns for institutional investors in 2025 compared to other asset classes. With base rates staying elevated longer than many investors expected in 2024, and as central bankers in developed markets prepare to initiate easing cycles, private debt has emerged as a compelling alternative to private equity for institutional investors, offering attractive risk-adjusted returns.
We could see private credit outperform private equity when it comes to absolute return allocation. Some LPs could even see the best risk-adjusted returns they have ever had in 2025. We should anticipate this higher-for-longer rate environment to persist.
Private credit borrowers will benefit from lower interest rates and lower defaults.
In Q3 2024, private credit defaults were significantly lower than in Q2 2024, signalling improving borrower stability. While lower interest rates can further reduce defaults, their impact often takes time to filter through the system. Over time, lower interest rates provide substantial relief to borrowers, improving affordability and reducing default risk. Although lower rates may lead to reduced income for lenders, the trade-off comes with decreased risk. We anticipate even lower private credit default rates in 2025. We also expect the fed to cut interest rates again, which we predict would be 100 more basis points.
There will be no significant regulatory changes that will impact private credit fund managers in the near-term.
In recent years, there has been increased regulatory scrutiny of lenders who lend money to private credit funds typically in the form of NAV-based or subscription-based loans. Because of this, there has been a notable shift of traditional lenders scaling back their involvement in private credit lending leaving a gap for non-bank lenders to step in, who too will face increased scrutiny from regulators. However, private credit fund managers themselves will not necessarily face significant regulatory changes in 2025.
Despite these changes, the continued growth of private credit is attracting greater interest from institutional investors. As private credit funds expand and institutional LP participation increases, regulatory discipline and reporting requirements are expected to intensify. For Private fund managers, maintaining a focus on transparency and risk management oversight will be required to keep pace with the sector’s growth.
There will be heightened emphasis on private credit loan administration technology leveraging AI and machine learning.
In 2025, AI and machine learning will present new opportunities to streamline manual processes in private credit. Within the private investment community, GPs have seen a 52% increase in AI adoption, while LPs plan to grow their AI allocations by 75% in 2025.
However, private credit loans are inherently nuanced with terms tailored to each deal. Credit agreements often vary significantly between lenders, incorporating covenants specific to individual transactions, which makes training AI to accurately interpret and extract critical information from these agreements a complex challenge. This variability creates a gray area in how loan terms are interpreted and applied in the market, limiting AI’s ability to operate independently in these contexts.
Despite these hurdles, technology is steadily advancing in the private credit space.
There will be more competition for private credit deals for both lenders and service providers.
There will be increasing competition among private credit lenders in 2025, as evidenced by the flexibility of debt documents. Even during recent periods of heightened competition in lending markets where tighter covenants and stronger lender protections might typically emerge, there was only a slight shift away from borrower-friendly terms. To retain market share, we can expect private credit lenders to uphold these borrower-favorable terms and agree to provisions that are negotiated in the syndicated loan market.
The Private credit market is poised for growth in 2025 and, despite interest rate cuts and ongoing volatility, it remains a compelling option for institutional investors, offering returns that rival private equity. However, very few people are still focused on the private credit market. As it evolves, one of the key challenges will be finding solutions to keep pace with change.
Deepak Ramaraju, senior fund manager, Shriram AMC
As per OECD growth projection for 2025, global GDP growth is expected to improve to 3.3% from 3.2% in 2024 and should remain stable even in 2026 with India reporting one of the best growth rates at 6.9%. Resilient domestic demand in India, Indonesia along with the recent stimulus measures announced in China augur well for strong growth in Asia. While global inflation should ease further in the coming year, risk remains in the form of any escalation in geo political tension.
Both gold and silver have gained ~30% over the last one-year period. Global uncertainties including the US election led to rally in gold as it is considered as safe haven.
However, post Trump winning the election in US, gold has corrected in the last one-month period. After this rally, gold is expected to remain rangebound in 2025. Silver, on the other hand, may witness momentum on the back of its usage in various industrial applications including electronics, solar panels for renewable energy, advanced healthcare and electric vehicles. Various supply-side challenges also led to higher prices of silver – a situation unlikely to improve soon. We may expect the silver prices to remain buoyant. A reversal in the DXY index may be positive for commodities. Hence a rally in metals may be expected if the DXY reverses.
Indian equities were buoyant amidst a challenging and eventful year with higher volatility. The markets were volatile with multiple global events, a slowdown in the Indian economy, tighter liquidity conditions and delayed government spending. However, a recent cut in CRR is expected to ease the liquidity conditions followed by a pickup in government spending. These two factors are expected to improve overall consumption and pickup in industrial output. The weather conditions have improved and one can expect a better agricultural output and a pickup in rural consumption. All these improvements are pointing towards a relatively better forward earning growth in the medium term.
RBI has reduced the real GDP growth forecast for FY25 to 6.6% from the previous estimate of 7.2% though 1HFY26 growth could recover to 7.1%. Currently, the most pressing issues for the domestic economy are higher interest rates, slower urban consumption owing to inflation and delayed government spending. Not to forget the geo-political challenges, FII pullback and weakening domestic currency. All these factors will be key drivers for the market. The policies adopted by the new US government will be crucial as they will have an impact on the global economy.
One can expect the inflation to bottom out, a couple of rate cuts are on the cards, and the government is expected to continue to invest in infrastructure, boost manufacturing and focus on sustainable energy. The new direct tax code, if approved by the parliament, can improve consumption and boost savings. The domestic flows and the retail participation in the markets can increase. Overall, all these measures can lead to a resurgence in growth and we may expect the earnings to show improvement leading the markets to remain buoyant unless a global event or geo-political factor disrupt the growth or impact the inflation significantly.
Capital expenditure by the government till October 2024 stood at Rs 4,66,545 crores, only 42% spent of budgeted Rs 11,11,111 crores for FY25. This compares with ~55% spending in the year ago period. With government stepping up investments in the 2H, sectors such as infrastructure, defense and railways may witness recovery.
Moreover, FMCG, Oil and Gas, Energy were some of the worst performing sectors in the 3-month period. FMCG, badly hit by urban consumption slowdown, could witness recovery as valuation looks attractive. Besides, with government spending revival and possible interest rate cut in 1HCY25, urban consumption should recover. IT, which has already recovered from its lows after rate cuts, may do well in 2025 as discretionary spending picks up, provided Trump does not impose any surprise tariffs. Banks may also witness recovery post interest rate cuts resulting in possible pick up in credit growth. Moreover, the recent CRR cut by 50 bps (in two tranches) should boost liquidity and credit growth in the banking sector.
