Q4 2025 Pulse Check: Private Markets Investment Themes

Direct Credit Investing

Access to the private credit market, emphasizing current yield with an aim toward downside protection

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• Deal activity: 2025 was a record-setting year in which we reviewed over 820 transactions totaling more than $32B, surpassing 2024’s total of $16.4B. 
• Funding gap: Significant tailwinds remain for private credit. As of Q1 2025, there was a $1T funding gap between the amount of buyout dry powder raised and the amount of credit capital available to support it. When we marry that figure with the maturity wall data, we estimate that there is comfortably more than ~$1.5T of market opportunity over the next few years for private credit to pursue. 
• Market environment: Looking ahead, credit's continued deal flow drivers should continue to create robust deal momentum based on demand for incremental facilities, refinancings and upcoming maturities. 2025 demonstrated a modest pickup in change of control volume and we are optimistic 2026 will see further M&A momentum. 
• Capital solutions: We expect there to be continued demand for opportunistic capital solutions in structures such as HoldCo notes and preferred equity that offer investors attractive risk/return characteristics to support acquisitions and recapitalizations.
• Market position: During times of uncertainty, there have historically been flights to quality, with private credit offering both yield and downside protection. Scaled players with robust sourcing will have the advantage of choice, enabling selection discipline. 

Direct Equity Investing

Globally diversified platform targeting the SMID market with unique positioning

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• Deal-making: While market uncertainty and trade tensions disrupted M&A activity earlier in the year, Q3 marked the strongest activity since Q4 2021. 2025 continues to be on pace for another year of growth supported by U.S. Fed and European central bank rate cuts, buyers with capital to deploy (driven by aging dry powder) and dealmakers ready to continue embracing uncertainty. 
• Liquidity: What may not be a surprise is that overall private markets distribution rates are down. While the IPO market may be opening again for large/mega funds, that’s really the only practical exit strategy these funds have. Over the last 20 years, middle-market deals have only exited via IPO 12% of the time. Even as the IPO market thaws, potential returns can remain locked up for the next 18 months – or longer depending on when the GP decides to sell shares – taking on public market risk without the benefit of liquidity access. This is another reason why we focus on the middle market versus the mega/large space.
• Market position: Our direct equity platform continues to be well-positioned. Amidst uncertainty, we continue to focus on middle-market companies within legal, accounting, consulting, tech, infrastructure and healthcare services sectors. These segments have historically generated consistent revenue streams across varying economic cycles. They are defensible, typically fragmented across different states and service niche, local markets with their own jurisdictional, legal and permitting rules. We continue to see strong deal flow, having seen $45B of opportunities, representing over 880+ deals, to date (as of 12/11/25). This represents a record year of deal flow, up 16% over a record 2024.  

Emerging Managers

Early access and introductions to best-in-class emerging and diverse-led managers across primary funds and co-investment transactions

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• Market environment and activity: 2025 concluded with a modest pickup in small cap and emerging manager transaction activity, including a small flurry of closings toward year-end. While overall market sentiment remains cautious as we enter 2026, dealmaking was active over the past year, and we expect similar to slightly higher activity going forward, supported by lower interest rates and the deployment of capital that had been held back earlier in the cycle. 
• Deal flow trends: In 2025, the overall number of new fund opportunities across buyout and growth strategies was relatively flat year-over-year. However, emerging manager opportunities declined by approximately 32% versus 2024. Emerging managers represented 39% of total deal flow in 2025, down from a high of 55% in 2024 and broadly in line with longer-term trends. 
• Implications for new GP formation: These dynamics point to a more measured pace of new GP formation and fund launches, with fewer emerging managers coming to market. We believe this is partly driven by a more challenging and selective fundraising environment. 
• Liquidity dynamics and continuation vehicles: Liquidity remains a key topic, but M&A activity in the second half of 2025 meaningfully offset the slower pace of realizations in the first half of the year. Although a distribution imbalance persists, GPs are increasingly using a broader toolkit to drive realizations, including greater use of continuation vehicles, a trend that is also evident among emerging managers. From a primary investment perspective, we generally prefer that emerging managers first establish a track record of regular-way monetizations before relying on continuation vehicles as a more meaningful tool for liquidity generation.

Primary Fund Investing

High-quality primary fund investments with often hard-to-access general partners

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• Investment quality: This continues to be a market in which high-quality assets trade while a general malaise on the deal flow front remains; however, GPs have noted the there is a noticeable pickup in activity. It feels like the tides are turning and GPs are optimistic that the M&A environment will finally pick back up, particularly as 2020 and 2021 vintage funds hit the 5+ year mark for some assets and are either seeking liquidity or new financing options as maturities come due. Anecdotally, investment announcements from GPs have come in quickly at the turn of the year, indicating an active Q4 and continued momentum. 
• Macro uncertainty: GPs have accepted that macroeconomic noise is here to stay, and they are striving to generate the returns that investors expect; they just might need a bit more elbow grease than expected. 
• Equity: Equity GPs who are fundraising, while expecting a tough 2025, may find less competition than anticipated as managers push fundraising efforts to later in 2025 and into 2026. We have already heard of GPs who are pushing from 2026 to 2027 and 2027 to 2028, a continued sign of more disciplined deployment while managing assets that were invested in frothier times. It continues to be a market of haves and have nots. Groups with strategic and financial sales at attractive marks, particularly above most recent holding value, tend to raise quicker than other groups. 
• Credit: Credit fundraising and deployment remain robust and steady; however, these managers are also waiting for an increased flow in M&A. In the meantime, spreads above SOFR have compressed as competition is stiff for the transactions that are occurring as everyone has closed on capital that is ready to be deployed. 

Impact Investing

Seeking to deliver attractive returns while generating meaningful and measurable impact

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• Deal flow: Direct impact deal flow continues to thrive, with 2024 setting a new record for both number of deals (173) and total opportunity size ($6.6B). The Impact team’s deal flow sourcing engine is working well, with continued growth of inbound deals both from sponsors and businesses as well as advisors directly. 
• Sourcing: We are focused on continuing to expand deal flow sourcing in 2025, with proactive outreach to GPs in the U.S. and globally. 
• Tariff risks: Our impact portfolios are largely insulated from increased tariff risks given their typical focus on regional businesses with minimized cross‑border revenue exposure. Within the environmental theme, software‑service and domestic‑manufacturing‑oriented renewable energy businesses remain attractive, while services businesses are a focus within the social impact theme, given their tariff resilience. 
• U.S. policy: Post‑OBBBA tax credit parameters and “begin construction” deadlines are more defined—and in some cases tighter—prompting investors to recalibrate underwriting and delivery schedules while the opportunity set across energy transition and efficiency remains substantial. Technology‑enabled and regionally focused businesses continue to benefit from durable demand drivers despite policy noise. 
• Energy demand: A significant build‑out remains necessary to meet power needs from AI and data centers and the U.S. administration continues to champion AI‑led growth. Industry participants expect near‑term supply shortfalls and heightened grid‑stability requirements. Interest in geothermal is accelerating given its stable, “always‑on” generation profile, which is suited to critical loads. Importantly, these aren’t just infrastructure plays; there is a meaningful private equity opportunity across services and operating companies that design, build and maintain critical systems (e.g., HV substation engineering for data centers, building‑efficiency upgrades, software and analytics), which help target markets improve reliability and efficiency. 

Infrastructure & Real Assets Investing

Access to primary, secondary and direct investments across infrastructure and natural resources

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• Performance: Infrastructure performance continues to exhibit resilience and stability, with private infrastructure outperforming listed infrastructure and bonds, and nearly matching public equity performance over the past 10 years.  
• Contributions: Dissecting performance over the past three years by sector shows a clear division in contribution. Power generation, driven by the rise in data center demand, has been the top sector followed closely by digital infrastructure which is also benefiting from the rise in data center deployment. As a juxtaposition to a few years ago, renewable energy has been the worst performer over the prior three years.  
• Regional sentiment: Geographically, investor sentiment has begun to shift away from the U.S., with Canada, Europe and - to a lesser extent - Asia, incrementally capturing investor capital. Through Q3 2025, Europe accounted for the most M&A activity by deal count, particularly for mid-market investments. The U.S. continues to dominate by value, with more large-cap transactions in the market. From a European perspective, airports have dominated the headlines in 2025 with most of the privately owned airports in the region up for sale over the past 12-18 months as seller desire to capture the post-Covid recovery via exits has increased.  
• Renewables: One sector to watch is renewable energy. Cracks are beginning to show following a period of overexuberance from 2020-2022. Developers are financially stretched, government support mechanisms are being removed or reduced in value and several Independent Power Producers (“IPPs”) created during the energy transition's Covid boom are due to undertake refinancing exercises, which could lead to a requirement for new equity injections and/or potential business sales. 

Real Estate Investing

Seeking to deliver attractive, risk-adjusted returns across primary fund commitments and transactions within real estate

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• Geopolitical and macroeconomic impacts: Central banks have shifted from aggressive rate tightening to a gradual easing, with rates expected to continue to trend lower through 2026, albeit from elevated levels. Recent geopolitical events, such as tariff negotiations, trade policy shifts, continued inflation and a U.S. government shutdown have amplified economic volatility. However, interest rate cuts, overall solid real estate fundamentals and relatively more predictable global trading environment should provide investors with a level of comfort as the market navigates the evolving landscape.  
• Real estate fundamentals: The large wave of new supply delivered over the past several years continues to weigh on fundamentals in select sectors, notably multifamily in Sun Belt markets and industrial in certain distribution hubs. However, higher borrowing and construction costs have pushed construction starts materially lower since 2024, with new supply expected to decline further across most major sectors in 2026, helping fundamentals gradually rebalance. Overall, as of late 2025, senior housing and data centers have the strongest fundamentals due to positive long-term tailwinds such as an aging population and significant increases in spending on artificial intelligence, respectively.  
• Capital markets: Global real estate capital markets strengthened notably in the second half of 2025 as interest‑rate volatility subsided, credit spreads tightened and expectations for continued monetary easing into 2026 improved financing availability. Despite improved conditions, construction lending remains constrained except for pre‑leased projects with strong sponsors. However, established sponsors with strong lending relationships are receiving competitive pricing and options for new acquisitions.  
• Investment activity: As of Q3 2025, commercial real estate investment volume had risen approximately 21% YTD versus 2024, with the recovery supported by stabilizing property fundamentals and more liquid, better‑priced debt markets. Preliminary data into late 2025 indicated this momentum continued, although aggregate volumes remain below the peaks of the prior cycle. 
• Investment selection: Market and sector selection remain critical drivers of performance, as dispersion between and within property types has widened further. Investors have leaned into a more selective approach, favoring assets in supply‑constrained, high‑growth markets and segments with durable demand tailwinds. 

Secondary Investing

A shorter duration complement to an overall private markets portfolio

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• Remarkable deal flow: HL screened $369B of deal flow in 2025, surpassing the previous record set in 2024 by 35%. Over the past five years, the volume of deals we have reviewed has been ~2x what actually closed in the market, on average. 
• Record volume: With record deal flow came record volume. Per Evercore, total secondary market volume surpassed the $200B mark for the first time, coming in at approximately $226B. This was a 41% increase from the record set last year. Volume accelerated in the second half of the year, growing 22% over 1H 2025. 
• Capital overhang: Growth in secondary market volume continues to outpace available buyside capital. At the end of 2025, the ratio of secondary dry powder to total market volume sits at 1.0x. This means that if there were no additional secondary dollars raised, dry powder would run out in a year. This is considerably lower than the broader buyout market where the capital overhang ratio is typically closer to 3.0x. This is a compelling dynamic for secondary buyers who can be very selective.  
• Strong pricing: Average pricing increased about 100 bps from 2024 to ~90% of NAV. There was a slight dip in pricing in April, after tariff announcements, but pricing quickly rebounded and continued the trend of steady price increases since 2022. Pricing upticks have in part reflected younger and higher-quality funds trading, as well as valuation momentum between the secondary’s record date and closing. HL continues to average double-digit closing discounts, taking advantage of sourcing and information advantages to identify high-quality assets with embedded value and limited competition. 
• Tailwinds: LP interest volume continues to be driven by a slow exit environment with paltry PE distributions. Portfolio rebalancing and commitment pacing are top of mind for investors, and political pressures have further motivated sales by certain types of institutions. GP-led solutions continue to see broad acceptance – 75% of the 50 largest global GPs have now used a CV. We have also taken advantage of market uncertainty during 2025 with structured transactions such as preferred equity solutions. GPs often prioritize working with firms like ours, which have the scale and experience to execute highly customized, mutually beneficial structured transactions. 

Venture Capital & Growth Equity Investing

Seeking to access top-tier venture and growth equity companies through funds, secondaries and direct investments

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• New rounds: Deal activity improved modestly in Q3 2025, with mixed dynamics beneath the headline. New deal volume was largely unchanged, but startup capital funded rose, concentrated in nine rounds that comprised nearly 40% of the VC capital closed. The skew was again attributable to several mega artificial intelligence fundraises that closed in Q3 2025. 
• Artificial intelligence: Investor appetite for AI companies remains robust, accounting for nearly 50% of all U.S. deals in Q3 2025. 2025 surpassed all the AI funds raised in 2024 by Q3. While mega rounds for AI companies slowed from their highs in terms of absolute dollars raised, foundational model companies continued to close very large, oversubscribed rounds during the quarter.    
• GP fundraising: Funds raised by GPs slowed during the third quarter, while activity increased with several established and scaled VC firms kicking off processes at the end of the quarter targeting end of year or early Q1 2026 closes.   
• Exit environment: The traditional exit market remained subdued in Q3 outside of a few notable IPOs such as Figma, Gemini and Figure. Although the M&A market picked up, the overall traditional exit environment remains slow. This dynamic continues to put pressure on GPs to get distributions back to LPs as they look to raise new funds. The need for liquidity has been favorable for sophisticated buyers in the VC secondaries space as GPs continue to look for creative ways to manufacture DPI and LPs look to rebalance their portfolios.