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Well, here we go – 2025! 🙂
Last month, I shared a link to a conversation I was fortunate to have with William J. Kelly, CAIA (former CEO of CAIA Association, Congrats on the retirement!!!) and Andrew Akers, CFA from PitchBook.
True to how we do things at Third Wire, we didn’t exactly sugarcoat our thoughts about the current state of private equity and its future. We all agreed that private equity plays a vital role in capital formation, and we believe your clients should have access to these types of opportunities. But where I get bent out of shape is watching mega-fund managers roll out these so-called Evergreen structures that seem designed more for asset gathering than delivering returns. We believe there’s a better way to give your clients responsible access to this type of equity exposure.
But I digress.
The point is, we’re doing it again, and I wouldn’t be from Chicago if I didn’t reference the Blues Brothers here—we’re getting the band back together. I’m excited to continue our conversation and looking forward to meeting Hilary Wiek, CFA, CAIA, Senior Strategist at PitchBook, who will be joining us too!
AND this time, you’re all invited. The the wonderful folks over at PitchBook are hosting.
Save February 5, 2025. Register Here. Bring your questions!
Best,
Dan
Alternative Talking Points
We review the latest monthly reports and industry analyses across the private markets, boiling them down into a few easily digestible points to share with your clients. Contact us if you’d like more depth.
Hedge Funds: December caps off strong 2024 with mixed performance as managers navigate policy shifts and market uncertainty.
➕ The HFRI Fund Weighted Composite Index closed December with a -0.2% decline while the Asset Weighted Composite Index gained +0.8%, bringing the full year 2024 return to approximately +10%.
➕ Macro strategies led December performance with the HFRI Macro Asset Weighted Index gaining +1.6%, though it was the lowest performing main strategy for 2024 at +5.95%. Commodity-focused sub-strategies surged +3.6% for the month.
➕ Fixed income-based Relative Value strategies maintained their steady performance, with the HFRI Relative Value Index gaining +0.2% in December – marking its 14th consecutive monthly gain and 27th gain in the last 30 months.
➕ Equity Hedge strategies, despite declining -0.7% in December, led all main strategies for 2024 with a +12.3% annual return. Technology-focused funds showed particular strength, gaining +2.7% in December and +19.6% for the year.
➕ Performance dispersion tightened in December with top decile funds gaining +5.5% while bottom decile funds fell -7.4%, compared to November’s wider spread of +12.3%/-5.4%. For full year 2024, top decile funds returned +37.3% while bottom decile declined -11.7%.
Sources: HFR
Private Equity: Mixed signals heading into 2025 as large deals drive growth despite persistent exit and valuation challenges.
➕ Global PE deal value increased 24.7% in 2024, though this growth was concentrated in large-cap transactions ($1 billion+) rather than showing broad market strength. Deal volume actually declined 6.5%, suggesting limited opportunities and ongoing valuation mismatches.
➕ Exit markets remained challenging with values hitting a five-year low despite modest volume improvements. Many portfolio companies are now held beyond four years, leading firms to increasingly explore NAV financing and secondary sales for liquidity.
➕ Sector-specific strength emerged in energy, with PE deals increasing sixfold driven by renewables and infrastructure investments. Healthcare PE also showed resilience, reaching $115 billion in global deal values for 2024.
➕ Geographic trends varied significantly – North America and Europe led activity while Asia-Pacific lagged, particularly in China and Japan. This regional disparity reflects varying economic conditions and regulatory environments.
➕ Record levels of dry powder (approximately $2 trillion) are creating deployment pressure as fund lifespans near expiration, potentially impacting deal pricing and investment discipline heading into 2025.
Sources: S&P Global Intelligence, Investment Executive,
Private Credit: Growth continues, but warning signs emerge as competition intensifies and defaults loom.
➕ Private credit market hit $1.7 trillion in AUM, with optimistic projections of $2.8 trillion by 2028. However, this rapid growth is raising eyebrows – particularly as new entrants chase yields with potentially looser underwriting standards.
➕ While deal activity picked up in late 2024, increased competition from returning banks is compressing spreads and forcing private lenders to either accept lower returns or take on riskier deals. This “race to the bottom” dynamic deserves careful monitoring.
➕ Default rates appear manageable on paper, but this may mask underlying risks. Many managers who excelled at origination during the boom years are about to face their first real test in managing distressed credits – and not all will be equally prepared.
➕ The surge in NAV facilities and PIK notes, while providing needed flexibility, could also be seen as a warning sign – potentially masking underlying portfolio stress by kicking problems down the road rather than addressing them directly.
➕ Regulatory scrutiny is increasing for good reason – the rapid growth and increasing exposure by individual investors to private credit creates systemic risks that regulators can’t ignore. Bank partnerships, while innovative, add another layer of complexity to monitor.
Sources: SSGA, AIMA, S&P Global,
Commercial Real Estate: Market conditions continue to create selective opportunities for patient investors amid ongoing sector challenges.
➕ Nearly $2 trillion in commercial real estate loans will mature by 2026, with early 2025 refinancing activity showing stress particularly in the office sector
➕ Industrial and logistics properties continue showing resilience, with rents rising modestly (+1.6% year-over-year) despite some regional oversupply concerns.
➕ Office sector struggles persist with national vacancy rates around 19%. Class A properties in prime locations maintain better performance, while older buildings face significant value declines.
➕ Multifamily properties demonstrate stability with occupancy rates remaining high and rent growth returning to historical averages following recent supply increases.
➕ While overall transaction volumes remain low, recent interest rate cuts are beginning to ease financing pressure, potentially creating opportunities in well-located assets at attractive valuations.
Sources: Capital Economics, MSCI, JPMorgan,
Worth your time
Our monthly recommendation of books, articles, research, and announcements we found interesting, important, or just plain entertaining enough to share. Sometimes we’ll have a lot. Other times, not so much. The objective is to share things that might be useful or interesting for your clients, not filler.
➕ Industry Perspective: A Candid Conversation About the Future of Private Equity – Evolution, Revolution, or Replication?: Third Wire Insights. We think this one is worth replugging this month. We’re kicking off the New Year with some big announcements on the way. Stay tuned!
➕ Better Living Through Chemistry? The Asset Allocator’s Acid Test: Angelo Calvello, PhD. Love it. “When you ask her to explain this sudden, dramatic improvement in performance, she announces that the uptick is attributable to her microdosing of psilocybin mushrooms for the past year.” Brings up a number of serious points to consider about what running a ‘rigorous’ due diligence process means.
➕ 2035: An Allocator Looks Back Over the Last 10 Years: Cliff Asness. This one’s been promoted all over LinkedIn, but we think it’s worth oversharing it.
➕ On Bubble Watch: Howard Marks. Here’s another must read / listen. Howard Marks’ latest memo marks the 25th anniversary of his famous ‘bubble. com’ piece with a look at today’s market through the bubble lens. His observation that “it’s not what you buy, it’s what you pay that counts” seems particularly relevant given current valuations.
➕ Consultant IDs Trends That Will Define Hedge Fund Industry in 2025: AI-CIO. Here’s what catches our eye: while everyone else seems focused on foisting illiquid private equity and private credit products into your clients’ portfolios, institutions are apparently rediscovering their love for hedge funds going into 2025. 🤔
Disclosure:
This newsletter is for informational purposes only and does not constitute investment advice. All investments, including those in equity, debt, and alternative assets, carry certain risks, notably potential liquidity and transparency issues associated with many private investments. These risks should be considered in the context of an individual investor’s objectives and risk tolerance.
The views expressed are those of Third Wire as of the date of publication and are subject to change. The information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed.
Past performance is not indicative of future results. Investors are advised to consult with qualified financial, legal, or tax advisors before making any investment decisions. Third Wire does not accept liability for any loss or damage arising from the use of this newsletter.
By subscribing to this newsletter, you agree and acknowledge that Third Wire is not liable for any decisions made based on the information provided herein.
