Future of Alternatives 2025: Private Equity AUM Will Top $9tn in 2025

Private equity and venture capital funds will fly higher as institutional investors continue to turn away from actively managed public equity funds

There appears to be no stopping private equity & venture capital (PEVC). Preqin’s forecast is for assets under management (AUM) to more than double from $4.41tn at the end of 2020 to $9.11tn in 2025 (Fig. 1), despite a pause in growth in 2020 caused by the coronavirus pandemic. We expect strong performance and net inflows into the asset class to drive a global growth rate of 15.6% over the period. 

We expect investors to continue a gradual rotation out of actively managed public equity funds into passive instruments and private equity. PEVC will extend its position as the dominant asset class within the alternatives space, with private debt the second fastest-growing asset class. We predict that PEVC will swallow an even larger share of the alternatives pie, with its proportion of alternatives AUM rising from 42% in 2019 to 53% in 2025. Low interest rates will continue to support the financing of buyout funds, providing markets can avoid any material financial stress that would limit lending.

Capital Concentration Set to Accelerate 
COVID-19 has not dampened investor appetite for alternatives in the longer term. In Preqin’s Future of Alternatives 2025 survey, 23% of respondents expect to significantly increase allocations to private equity by 2025, with a further 56% planning a slight increase. Just 4% of respondents were planning to decrease allocations. 

We expect this capital to flow into a smaller number of larger funds. This trend was well established going into the COVID-19 crisis: average buyout fund sizes increased from $765mn in 2017 to $1.3bn in 2019, while the annual number of funds closed dropped from 299 to 246. The pandemic has since presented LPs with operational challenges in the form of remote due diligence, so capital concentration is likely to accelerate as LPs stick to managers that they know. This makes for a challenging environment for emerging managers raising capital. 

However, capital concentration does not mean that smaller managers will be left high and dry. A full 79% of investors in our survey expect to increase their number of fund manager relationships over the next five years, though at the aggregate level an increasing proportion of capital will go to the largest managers.

COVID-19 to Accelerate Existing Sector Trends
The pandemic has also helped accelerate a number of industry-specific trends that GPs are likely to remain focused on. E-commerce, online grocery, and EdTech are just some examples of industries that will see an accelerated increase in market share in the post-pandemic environment. Technology-focused strategies will tap into these key themes, with growth and venture capital funds likely to attract significant attention. 

Can Valuations Push Higher Still?
A powerful driver of past performance has been the ever-expanding earnings multiples assigned to deals – and there has never been a boom that hasn’t ended. However, in this environment of easy monetary conditions, and strengthening flows of capital into the market as investors search for returns, who would bet against still higher valuations? For fund managers, valuations cut both ways: 43% of survey respondents feel valuations over the next five years will have a positive impact on their business, against 29% that see them as a negative (Fig. 2). 

Barriers to trade, the geopolitical landscape, regulation, and domestic politics were seen as the most negative forces in the PEVC market over the coming five years, while access to talent, the exit environment, and interest rates were seen as positives.

Going forward, we also expect funds to continue adopting increasingly sophisticated techniques to raise the leverage of funds. Key to this will likely be a wider use of subscription financing, which allows GPs to deploy capital before it is called from investors, effectively leveraging returns. The Federal Reserve’s recent ‘lower for longer’ guidance will only act to support banks in supplying this financing. For now, 10-year Treasury yields remain low at 0.66%, indicating limited pressure on long-term financing.

Asia Set to Light up Global Private Equity
Ongoing developments in capital markets in China are expected to lead to rapid growth in the PEVC industry in Asia-Pacific over the next five years. China’s growth comes as it continues to move away from more opaque financial products in the shadow financial system and toward a more formalized investment industry. However, the extent of cross-border GP-LP flows may be curbed in both directions if international relations between the US and China continue to deteriorate. 

Download a data pack containing all the charts in our asset class forecast articles for Future of Alternatives 2025. For more predictions and projections from Preqin on the future of the alternatives industry, visit our Future of Alternatives 2025 Content Hub.