Why fund managers are bullish about investment opportunities ahead – and still need to focus on value creation

[blog headshot] Ray Zhou, Affinity


In 2024, private capital continued to experience the effects of macroeconomic headwinds: low distribution rates, a shrinking pool of active investors, and a sluggish exit market. Many general partners (GPs) took a more cautious approach to deploying capital, focusing on opportunities with solid traction and a path to profitability.

However, the industry also saw large pockets of growth, especially in sectors like artificial intelligence (AI) and healthcare. Assessing the landscape, 2024 was largely a year of normalization for private capital. While global VC investment declined to $59.3bn in Q3 2024, a 20% decrease year on year, the quarterly average in the first three quarters of 2024 was almost the same as the first three quarters in 2019, before the pandemic hit, according to Preqin data.

Now, with less macroeconomic uncertainty thanks to declining interest rates and the US election behind us, many investors are optimistic about a more active year in 2025.


GPs are more bullish on deal-making opportunities

In our recent survey of nearly 300 private capital professionals in Private Capital Predictions for 2025, 72% expect higher deal volume in 2025 compared with 2024, and they’re redoubling their efforts on deal sourcing in anticipation. This optimism appears rooted in two primary factors: a more promising economic outlook and growing pressure on GPs to deploy capital.

There are some tailwinds for private markets. For a start, inflation has moderated, and elevated valuations have begun to adjust. We saw the Fed cut rates in September and November, and private markets continue to sit on high levels of dry powder, $880bn for growth equity and venture capital investors as of November 2024.

‘We’ve never been as excited about the opportunity in front of us,’ said Alexander Ross, General Partner at UK-based venture capital firm Illuminate Financial, on an Affinity webinar about benchmarking success. ‘There aren’t just lots of tailwinds from the macro side, but also opportunities if you build the relationships and dig under the hood.’

That said, many funds are experiencing slower capital deployment and declining fund graduation rates. As investment periods close, there’s increasing pressure on funds to deploy their capital. Fund managers will be hoping for more favorable private market conditions in 2025. ‘The very best funds recognize that good deals will always be able to get done,’ Adam Shuaib, Partner at UK-based fund Episode 1 Ventures, said on our webinar. ‘If you want to win those deals you need to stay ahead of the pack.


AI is a key driver of deal activity

While healthcare and fintech companies featured prominently in private capital activity in 2024, it was AI that stole the headlines. In Q3 2024, AI companies accounted for a fifth of all venture funding, according to Preqin. But it was the mega deals from numerous AI companies throughout the year, including xAI’s $6bn raise in May and OpenAI’s $6.6bn raise in October, that caught people’s attention.

It’s clear that AI is transforming the industry – not just in terms of investments made, but in how private capital firms operate, driving their efficiency and productivity. Firms are figuring out where AI adds the most value in their investment processes and where it’s just noise. Compared with last year, there has been a substantial decrease in investors using AI to make investment decisions, from 40% to just 13%, Affinity data shows.

What remains unclear is the extent to which AI is a bubble. A key question in 2025 will likely be the scope of AI’s capabilities, including how close we are to realizing them and which industries will see the most impact. Since the vast majority of AI revenue remains captured by a small handful of companies (and few application businesses have achieved significant scale), the risk of an impending and painful reset is there – not unlike the one we saw across tech as a whole in 2022.

Shuaib at Episode 1 urges caution: ‘If you look at the Gartner Hype Cycle, you have this period of inflated expectations and then this trough of disillusionment. I think in 2025, the AI bubble is going to burst to some degree. I think people will realize that companies branding themselves as AI are not AI at all, and there’s just a lot of AI-washing going on – we’ve seen plenty of it.’


Value creation is front and center

A consistent theme in private capital – especially VC – over the past several years has been the dismal state of fundraising. Fund count is projected to end 2024 at the lowest level in almost 10 years, according to Preqin data. Limited partners (LPs) are exercising more caution with emerging managers and concentrating their capital with fewer, larger players.

Competition is intense. Joe Schorge, Founder and Managing Partner at UK-based Isomer Capital, a private investment firm focused on European venture capital, said: ‘LPs are spoilt for choice. They might invest in your fund, but there are 100 other funds that they also could invest in. Having seen both sides of fundraising as a GP and LP, what I want to hear is why you’re the best, why your thesis is powerful, why you have some competitive advantages to what you’re doing.’

GPs need to concentrate on what differentiates their fund and firm to drive success in an already challenged arena. Our data reflects this tougher fundraising environment, with 7% more investors indicating they see the same or fewer opportunities for fundraising in 2025. This doesn’t bode well, given the suboptimal fundraising conditions in 2024.

Aside from market factors, there’s one key fundraising challenge that’s top of mind for 50% of the investors we surveyed: proving the value of their existing funds. LPs have limited incentives to surrender more capital when their existing investments haven’t paid off.

The heat is on for GPs – and not just those looking to fundraise soon – to return capital to investors. The ones who don’t deliver value now risk sacrificing their track record when it’s inevitably time to raise again. Therefore, GPs are focused on driving value creation by growing revenue in their portfolio companies.


Gearing up for growth

Private capital faces familiar and emerging challenges – from economic pressures to growing competition for LP commitments and the race to create value. However, there are signs that 2025 holds a more promising year for activity and growth, especially for firms with the right strategies. For private capital investors, 2025 will be a year to differentiate and drive value.


About
Ray Zhou, Co-Founder of Affinity, believes every opportunity begins with a relationship—and knows that business networks become unwieldy and harder to leverage as they grow larger. In response, he co-founded Affinity, whose CRM automatically captures and organizes communication data, combining it with other datasets to provide the relationship intelligence needed in industries where relationship-building is foundational to deal-making.

A native of the Bay Area, Ray met Affinity’s Co-Founder, Shubham Goel, at Stanford, where they studied computer science. Affinity is now used by over 3,000 relationship-driven organizations worldwide, including more than 50% of the top venture capital firms. For more information, visit affinity.co.


This article originally appeared in Preqin 2025 Global Report: Venture Capital. The opinions and facts included in the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin and Affinity accept no liability for any decisions taken in relation to the above.