For years, private markets had nowhere to go but up. The rally, fuelled by central bank cheap money policies, peaked in the historic record year of 2021. Whether venture capital, private equity or real estate – the transaction volumes were never greater than in that year. Not even the Covid crisis could stop the wild ride. On the contrary: in retrospect, Covid was not a full brake. The industry rather gained momentum, and the backlog of deals was released the following year.

But afterwards, private markets recovered significantly slower from the interest rate turnaround initiated in the summer of 2022. Thus 2025 will be a pivotal year. Private markets must show that they can operate without the cheap money from central banks, and deliver excess returns. Since the shift in interest rates, the industry has been struggling, biding its time and hoping that the key interest rates will fall again over time.

They now have, both in the US and in Europe, but the crucial question is how many rate cuts are yet to come this year. Two? Three? Or even more? The level of interest rates impacts private markets in two ways: indirectly, because higher interest rates make liquid, lower-risk capital markets more attractive to institutional investors. And directly, because the interest rate level also immediately affects the value of companies or real estate, and financing conditions.

The venture capital scene probably felt the impact the most. Of all private asset classes, venture capital, with its start-up investments, relies the most on promises for the future. Consequently, the scene was highly inflated before the interest rate shift. And, just as dramatically, it collapsed when the central banks raised rates, causing the bubble to burst.

In particular, smaller funds are finding it extremely difficult to raise capital from investors. With the return of higher interest rates, institutional investors are earning attractive returns from much more liquid and lower-risk products, and are therefore avoiding venture capital. The money still flowing into the VC industry is largely going to the big players. Therefore, 2025 will be crucial for small venture capital managers to determine whether they can stay in the market or will have to give up.

The interest rate shift has also undermined private equity. Many private equity firms struggled to sell their overvalued portfolio companies, which they purchased with cheap debt, and instead frequently transferred them into so-called continuation funds.. Rather than selling or taking companies public, they sold the companies to themselves. This was once a no-go for institutional investors, but it has now become more acceptable. This year, however, private equity must step out of the shadows, as in the long run its investors will not tolerate firms trying to get by with continuation funds and smaller add-on deals.

Private debt is also dependent on the success of private equity. Many credit funds are still heavily reliant on the deal flow from private equity firms. But especially the large funds have long been working on new products, and are looking for ways to partner with banks. They are taking on synthetically securitised risks from bank loan portfolios. Credit funds are also eyeing the real estate market. Lured by the bloodbath in the German real estate mezzanine market, they are trying to transfer their success model, the unitranche, from the private equity world to real estate.

For infrastructure investors, much will depend on the outcome of the German federal election. Infrastructure projects are often more lucrative for investors abroad, and German bureaucracy remains a deterrent. But perhaps some companies can be creatively rebranded and shifted into infrastructure funds instead of buy-out funds. 2025 will be exciting.