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Positive returns in the first quarter, with Europe leading

The current trade situation with the US is evolving, with a China deal looking to be within striking distance, while a proposed steep tariff on EU imports was announced, only to be subsequently postponed for further negotiations. Moreover, the 90-day deferral for reciprocal tariffs is set to expire in July. The OECD reported that GDP growth within the group slowed sharply to 0.1% QoQ in 1Q25, down from a 0.5% QoQ rise in the previous quarter. The group expects global growth to slow from 3.3% in 2024 to 2.9% in both 2025 and 2026, and has scaled back its forecasts, warning that agreements to ease trade barriers would be ‘instrumental’ in reviving investment and avoiding higher prices. In Japan, the first estimate suggested that GDP contracted 0.2% QoQ in 1Q25, while the second estimate showed GDP was flat QoQ. The final 1Q25 GDP estimate for the eurozone showed an expansion of 0.6% QoQ, driven by strong growth in Ireland. However, 2Q25 is expected to be weaker as the US-led surge in European exports reverses.

In Switzerland, policy interest rates were cut to zero in June and markets think they will turn negative again for the first time since 2022. Despite interest rate cuts, the Swiss franc has strengthened, burnishing its status as a haven in times of uncertainty. The strong currency has helped push Swiss inflation slightly negative and is expected to trend around zero until at least the end of the year. For the Swiss domestic real estate market, low rates and debt costs have the potential to boost capital values, while Swiss investors in international real estate will face higher hedging costs and need to be selective in their strategy.

Pressure on trade, geopolitical uncertainty and modest growth prospects paint a mixed picture for real estate, though discounted and distressed opportunities may emerge for savvy investors. We expect markets in Europe and the residential sector to prove most resilient. Latest figures from MSCI showed a global all property total return of 1.3% QoQ for 1Q25, with a European total return of 1.6% QoQ, ahead of 1.2% QoQ for North America and 1.1% QoQ for Asia Pacific. Global capital values rose by 0.2% QoQ, though they may be held back in 2Q25 due to lower transaction volumes and the impact of uncertainty over tariffs. Annualizing the 1Q25 figure gives a global total return in the region of 5-6%, and total returns for 2025 overall could plausibly be slightly higher or lower than this. The Israel-Iran conflict presents a new risk to the global economy and real estate markets via its potential impact on oil prices and global trade.

Geographic diversification sets infrastructure apart

Unlisted infrastructure performance came under pressure over 2024 as the headwind of higher rates started to bite. The underlying stability of infrastructure asset cash flows underpins higher levels of gearing than elsewhere in alternatives. While many assets continue to benefit from fixed rate facilities secured pre-2022, tighter credit markets since are adding to financing costs for new greenfield development and brownfield refinancings amid the emerging higher for longer scenario.

The Burgiss index (MSCI) reported a 6.1% return over 2024 in dollar terms for closed ended infrastructure funds, below the average annual 9.5% achieved over the preceding 10 years. While lower than some other indices suggest, this 2024 return is still ahead of private equity (5.6%) and real estate (-3.0%) and not far off the 6.9% reported across private credit. This illustrates the defensive characteristics of infrastructure as Trump’s pursuit of a new global trade regime creates pervasive uncertainty, dragging on sentiment and stymieing investment commitments in the short-term.

The geographic diversification of unlisted infrastructure is greater than both private equity and real estate, with a larger share of AuM at 3Q24 in European focused funds (37% vs 16% and 22% respectively, Preqin). This contributed to the lower global asset class returns in 2024 as the dollar strengthened 6.2% against the euro. However, the pendulum is swinging back the other way so far over 2025, with the euro gaining 11.6% on the dollar to mid-June, driven by concerns over the impacts of tariffs and the durability of US exceptionalism. Given infrastructure’s greater exposure to Europe, this could provide a relative tailwind to dollar returns over 2025 if the euro holds these gains against the greenback.

A strong pick up in infrastructure fundraising so far this year continues a trend in a tilting towards Europe focus seen since 2024. 63% more capital has been raised by funds primarily targeting Europe so far this year (USD 45 billion) than those for North America (USD 28 billion) according to Preqin. This goes against the long term where North America focused fundraising tends to dominate. The resurgence in 2025 fundraising after two slow years will give further impetus to the deals market, as managers re-visit their discretion on capital deployment between the regions. The stronger euro relative to the dollar, alongside the tax uncertainties for international investors from section 899 of the One Big Beautiful Act in the US, may reinforce home biases for capital deployment in the short term. Longer term, we expect to see deal activity continue to pick up, especially in Europe where lower rates could drive a stronger resurgence.

Two markets in one

Fresh off a busy annual meeting and conference season, we take stock of midyear investor sentiment.

Participants in today’s private equity market are increasingly drawn into two camps: those that have navigated the market volatility of the past five years successfully, and those that are still in the process of righting the ship. With just two rate cuts now expected for 2H25 and M&A markets lagging, there are few immediate catalysts to boost sales of private companies, badly needed to return capital to investors. This is a modest setback for funds which maintained purchase discipline and were active sellers into 2021’s private equity market. Funds which deployed several vintage years’ worth of capital are facing another reality: stagnating earnings growth, flat valuations and a frozen exit market have created a trillion-dollar backlog of assets held in private equity portfolios.

Here the next divide emerges, between the buyers and the sellers. Sellers holding out for premium valuations are increasingly being pushed into nontraditional liquidity avenues including continuation funds, cross-fund transactions, and NAV-based solutions. Buyers with dry powder are waiting in the wings to pick up decent assets from motivated sellers at a discount.

This has led to two fundraising markets: top performing middle market managers benefiting from these dynamics are seeing one-and-done oversubscribed fundraises like those seen in 2021-2022. For alpha-seeking LPs, relationships are important as ever. Beyond these top performers, a larger than typical share of capital is flowing to the largest asset managers in a flight to safety. The majority of funds (there were probably too many being set up in recent years) are fighting for incremental dollars in a tough fundraising environment as their investors wait for distributions to reinvest.

Fund dynamics aside, private company performance generally remains solid. AI in particular, the domain of venture-capital investment a year or two ago, is playing a larger role in buyout value creation. And the increasingly complex regulatory and trade environment is leaving more room for differentiation for sector specialists and those with deep domain expertise.

New origination opportunities in CRE transitional lending

The Commercial Real Estate (CRE) market remains in a state of transition. From a fundamental perspective, vacancy rates have trended higher for most property types over the past several years. In addition, the higher vacancy rates in sectors such as multifamily and industrial have been partially driven by elevated construction pipelines and new deliveries that have occurred in those market segments. The higher for longer interest rate environment has also had a material impact on the CRE market. In particular, sponsors have had to contend with higher borrowing costs and higher cap rates, which have generally resulted in lower valuations for CRE assets. All of these factors have created an environment where it is more challenging for CRE sponsors to refinance maturing debt. In fact, the CRE loan market has been contending with a maturing wall that is at or near a historical peak over the past two years.

While the volume of maturing loans has created more demand for credit, the market has contended with a reduction in lending capacity from some traditional sources of capital. Most US banks have either maintained or reduced CRE lending activity. Furthermore, banks have been particularly focused on reducing new construction loan origination activity. As a result, maturing loans, particularly existing construction or transitional loans, have found it more difficult to obtain a financing solution from a bank or are unable to qualify for a stabilized loan due to not meeting the eligibility requirements of a bank or traditional lender. This dynamic has created an expanding opportunity set for private credit in CRE lending.

For private credit, the opportunity set in performing lending has improved and will likely remain a compelling segment of the market to deploy capital. In particular, there are outsized opportunities in bridge and construction lending. In these situations, managers are focused on originating first lien loans on performing assets where the sponsor is leading a new construction project or executing a rehabilitation project of an existing building. For maturing loans, private credit bridge loans provide sponsors with the opportunity to extend the maturity of the loan so that the sponsor may finish executing the business plan for the property or season the asset further in order to facilitate a stabilized loan takeout in the future.

In addition to performing CRE lending, there is also a compelling opportunity set for opportunistic CRE lending strategies. As discussed above, the CRE market is in a period of transition and there is a portion of the market that is experiencing some type of stress, which is typically attributable to valuation stress, cash flow stress, or refinancing stress. Opportunistic CRE lending strategies are well positioned to underwrite these more complex situations and provide a customized capital solution for sponsors. These strategies are typically capital structure agnostic and can craft a solution from a first lien loan through the preferred equity segment of the capital structure. The opportunistic CRE lending strategies currently benefit from a favorable sourcing environment given the substantial maturing wall and should be able to generate outsized returns for this vintage of deals.

In summary, the CRE market has been negatively impacted by the rise in interest rates, which has created fundamental headwinds for certain assets. The fundamental challenges, combined with a pullback in lending capacity from certain market participants, have created a more favorable opportunity set for private credit strategies that specialize in CRE lending.