Can private markets bloom in the gloom?

We’ve certainly been living in interesting times of late, so how are private markets firms and their investors managing through the waves of volatility that just keep on coming?

Been there, done that

While few will have welcomed past crises, there are some advantages to having lived through challenging circumstances when facing the unexpected. "There is massive fatigue among LPs and market observers with us saying that liquidity is going to get better and equally, with analysts who keep forecasting five rate cuts in a year," says Cara Griffiths, Managing Director in the GP Strategic Investment Team at Blue Owl. "So, I won't predict any of this. But what I can say is that the response to Liberation Day was remarkable. I don't think anyone expected to be dusting off their Covid playbook quite so soon after the pandemic, but GPs were very quick to activate them. GPs have become much better at managing through uncertainty, they have much more sophisticated lines of communication and the quality of data they have to make investments and exits has improved significantly. I'm confident that GPs will manage through what is going to be a sustained period of volatility."

That's not to say there won't be issues in private markets portfolios. "As we examine our portfolio, we see minimal direct implications from tariffs given our end market exposures," says Blair Jacobson, Co-President of Ares Management. "We are more focused on second and third order impacts. If you are CEO of a company, what is your confidence level? Do you want to spend capex? Do you want to go for growth? We are also thinking about consumer confidence. Consumers are still spending, but they are levered and they are thinking about their jobs. Job and wage figures remain robust for now, but discretionary spend can turn on and off quickly – and that's true for consumers and business."

How are private markets firms managing volatility?

Using sophisticated data and communication
Activating crisis playbooks
Focusing on second/third order impacts

We've certainly been living in interesting times of late, so how are private markets firms and their investors managing through the waves of volatility that just keep on coming?

We're reaching a point where shocks have almost lost their capacity to, well, shock. From Brexit to Covid, conflicts in Ukraine and Gaza, inflation and tariff flip-flopping from the Trump administration, the past decade has had more than its fair share of uncertainty. As the macro picture lurches from crisis to crisis, what's the outlook for private markets? And how are firms managing their way through as they wait for the next shoe to drop?

Monitoring the situation

Private credit managers, in particular, are watching for signs of stress. "Rates are going to stay higher than people expected in 2025 and illiquidity in private equity won't break this year," says Jack Neumark, President and Co-Head of Asset-Backed Credit at Fortress Investment Group.

"The big question is whether there will be a trigger event on top of these that will cause defaults to go up or spreads to widen. It could be the economy slowing or GDP turning negative, there's still inflation, there's geopolitical risk and there's uncertainty about what could happen with trade wars and what the Trump administration might do. You'd only need one of these to cause volatility because volatility is just hovering underneath the surface right now."

And some say the reported default rates may not be showing the full picture. For the trailing 12 months to the end of May 2025, for example, the Fitch Ratings US private credit default rate stood at 4.6%, the same as in December 2024. "If you include liability management exercises, US default rates were reasonably high in the US last year - they were between 5% and 7%," says Anthony Yoseloff, Managing Partner and Chief Investment Officer at Davidson Kempner. "If interest rates do go lower in the US, that's not necessarily positive; it may be because of a recession. There are a lot of headwinds out there."

What do you think is the most likely trigger for market volatility?

Economic slowdown/negative GDP
Persistent inflation
Geopolitical risks

Back to basics

Private markets are therefore braced for more difficult news to come out of the existing portfolio. And when it comes to new deals, many say the industry is returning to fundamentals in light of higher for longer interest rates, difficulty selling existing portfolio companies and the prospect of more volatility to come. "We're going back to private equity 1.0," says John Romeo, Managing Partner at Oliver Wyman. "A few years ago, many funds just paid too much for good assets – that has created the exit logjam. This has made everyone remember that entry price in a deal is very important. They are also thinking harder about how to drive value creation."

"We are in a new cycle," says Daniel Lopez-Cruz, Global Head of Private Equity at Investcorp. “We don't know exactly what that cycle is and there is a large distribution of probabilities here – you can be gloomy, you can be very optimistic, or somewhere in the middle. But we do know that the zero interest rate cycle that supported multiple expansion is now over. The inescapable conclusion is that we all have to work much harder with our companies.”

Payment in kind (PIK) structures are also causing concern in some quarters, on the basis that they can mask financial difficulties and potentially lead to worse outcomes for lenders. "The PIK trend is notable," says Jeff Kivitz, Partner and Chief Investment Officer of Canyon Capital Advisors. "It is possible, especially when portfolios are concentrated in services businesses, that the portfolio doesn't fall off a cliff overnight when these businesses don't perform to plan, but rather in slower motion.

If lenders allow a sponsor to kick the can down the road and ultimately defer the pain, by means of a PIK or other relief, sometimes what that lender will get handed back is a business that looks a lot less like the business they originally lent to."

Yet the current uncertain environment will require not just hard work, but also a keen eye for opportunities coming out of dislocations. "Everyone needs to learn how to live with excessive volatility because this will be here for some time," says Michael Bruun, Global Co-Head of Private Equity at Goldman Sachs Alternatives. "Volatility can be a source of great opportunities on the new investment side." He points to founders looking for institutional capital for the first time, corporate carve-outs as companies focus on their business in uncertain times, and small and overlooked publicly listed companies as some examples.

Continental shift

"We're really positive about what's going on in Europe right now," says Jacobson. "The European Central Bank has been accommodative on its interest rate policy and we were really encouraged by the Draghi report at the end of last year, putting Europe on the front foot and being more competitive. There is a view that European markets right now are very attractive."

And growth equity may have seen some challenging times over recent years following the valuation reset and the closure of the IPO market, but there are some who see the current environment as particularly positive. "In all my 20 years in growth equity, I can't remember the IPO window being shut for so long," says Gabriel Caillaux, Co-President of General Atlantic. "This caused us to rethink some tactical aspects, but there are some positives coming out of this. We are seeing one of the most appealing deal-making environments I've seen in my career – that's a mix of valuations having corrected, our themes being strong, and entrepreneurs continuing to seek out meaningful partnerships with long-term investors."

What is the current sentiment toward the investment environment?

Current environment is challenging but positive for deal-making
Europe is becoming more attractive for investment
Investors are rebalancing allocations from US to Europe

And finally, while volatility is present everywhere, Europe appears to be emerging from recent defence and tariff tussles with the US in a rather stronger position than it was before. "We went into the beginning of the year with a lot of people focused on the US and how the Trump administration would provide significant growth stimulus," says Symon Drake-Brockman, Managing Partner at Pemberton Asset Management. “However, the policy changes and tariffs have stimulated European governments into rethinking policy, so we've had defence spending increase announcements and plans for significant infrastructure spend in Germany and so on. We'll have to wait and see, but the unintended consequence of the US administration's actions has been to make Europe take action and therefore more interesting to investors.”

What are European investors considering regarding their investments?

Onshoring investments back to Europe
Maintaining current US allocations
Evaluating impact of potential tariffs

Investors are also pausing to think about where they are allocated and, while there isn't exactly a flight of capital out of the US, many say there is some rebalancing going on. "When I talk to investors across Europe, many are thinking about onshoring their investments and whether they should bring back some of their allocations to Europe," says Ralph Aerni, Head of Client Solutions EMEA at Hamilton Lane. "They are wondering what kind of businesses to back, what the impact of tariffs will be and so on."

It's a trend Drake-Brockman also recognises. "We've seen some large institutions say they want to put more money into Europe," he says. "Europe is definitely going to be a beneficiary over the next 24 months."

So, as the industry contemplates volatility stretching far into the future, it's clear that there will be some casualties in portfolios and, potentially, among the firms that manage some of these portfolios. Yet volatile times can present some attractive opportunities – and GPs and LPs are currently carefully weighing where these might emerge