Deregulation, tariffs, boring AI & credit spreads: An outlook for 2025

In part one, we discussed our fundamental outlook, the economic drivers of private markets, and the relative importance of each for private asset classes.

In part two, we’ll focus on the other half (or more or less than half depending on the asset class) of the equation - the idiosyncratic, bottom-up factors that should be considered when deciding on tactical tilts within private markets.

We have no crystal ball, but we do have a framework, some data, and some ideas on how to play the major trends we see unfolding in the private markets space.

Fundamental and idiosyncratic asset class signals

Before we dive into our themes for 2025, we will share our fundamental signals from part one of our outlook, and pair them with our views of the idiosyncratic signals we are seeing across the various asset classes that comprise private markets¹:

As this makes clear, we see top-down and bottom-up reasons to be bullish about venture capital and private equity in particular. We are more cautious about private credit, though - as will become clear as we dive into our themes for 2025 - this manifests in a call for selectivity rather than avoiding the asset class altogether.

Our themes for 2025

a) Friendlier exit environment

Asset classes most impacted: Private equity, venture capital

TL;DR: The exit environment should improve over the coming 12-months-plus due to likely looser regulation, supported by strong markets and easier financing. Good for existing private investors awaiting distributions and for managers looking to deploy capital (with cheaper leverage) - though valuations may rise.

Idiosyncratic factors

• A more pro-business stance at the Federal Trade Commission (FTC) could drive an uptick in mergers & acquisitions (M&A) and IPO activity

Fundamentals

• Highly constructive. Expected pro-business and pro-growth policies are likely to boost economic fundamentals, with robust capital flows and falling interest rates (in the short term at least)

The FTC blocked multiple mergers involving major names like Nvidia, Sanofi, and Microsoft under the stringent antitrust stance of Lina Khan. However, a change in leadership is likely to encourage companies and fund managers to pursue fresh avenues for business consolidation and expansion (before regulatory constraints potentially tighten again down the road).

An uptick in M&A and IPOs would be impactful for venture capital (VC) investors. We could start to see an updated version of the cloud computing wave of the mid-2010s, when tech giants like Microsoft and Amazon expanded by acquiring companies specializing in developer tools, cybersecurity, and data management - with VC investors reaping the benefit of these exits. Fundamental factors are less important when selecting investments in early-stage VC, but the exit environment is important once invested.

Jacob Miller discusses the potential impact of a more business-friendly FTC in the coming years

There is a cottage industry of operationally focused PE specialists who can also benefit from a large handful of companies being trounced in the public markets. Take-privates were largely unattractive from a valuation perspective for the five or so years leading into 2022, but since that downturn, more and more real businesses with valuable assets have come under pressure, creating interesting opportunities. These seasoned operators can merely focus on operational efficiency (and perhaps adding modern technology to boost margins), but also, in this friendly merger environment, drive value through combining the right companies that have been struggling on their own. Several of our partners are active in this space already, and have had quick realizations of value given the sometimes irrationally negative enterprise values granted to these firms in the public markets.  

On the flipside, increased activity will likely put upward pressure on valuations, which could weigh on returns for capital being put to work now.

In terms of financial conditions:

• The market is - as of January 13 - pricing in one interest rate cut over the coming year to bring the policy rate down to around 4% - though the outlook is uncertain given potentially inflationary impulses from probable tariff and tax cut policies. 

• The sheer levels of dry powder and competition across the private credit space are creating overcrowding and placing downward pressure on spreads (see section d below). This should encourage the many venture-backed companies that have delayed fundraising rounds in recent quarters to return to the well, and private equity funds to take advantage of cheaper capital.

• Markets have set record-highs in recent months, and expected pro-market and expansionary policies from the incoming administration suggest this trend could continue.

b) Supply-chain disruption/onshoring

Asset classes most impacted: Private equity/infrastructure/real estate

TL;DR: Expected tariffs will disrupt supply chains/create a risk that should accelerate supply-chain onshoring. For companies/projects with exposure to international supply chains, rising input costs will be a headwind, but they should create tailwinds for manufacturing-related businesses and investments in the US.

Idiosyncratic factors

• The imposition or increase in import tariffs could push up input costs and thereby inflate consumer prices and disrupt supply chains

Fundamentals

• Capital flows and economic factors are likely to be positive, given a relatively strong economy with potentially expansionary fiscal policy. Interest rate environment likely to be constructive in the short term - but could pivot if inflation ticks up

In certain years, politics is less important for the investment outlook - 2025 is not one of those years. 

Though its share of total imports is falling, China still accounts for nearly 14% of the total, so tariff increases on Chinese goods would have a noticeable impact: most notably on inputs for consumer-facing businesses and certain strategic goods such as rare earths/lithium batteries.

If you add in potential tariffs on Mexican and Canadian imports, that would encompass nearly half of all US goods imports, and broaden the increase in input costs to include:

• Motor vehicles/parts, computer/electrical equipment, and agricultural products (Mexico)

• Mineral fuels and oils, machinery, plastics and other commodities (Canada)

These dynamics create an intriguing situation for capital expenditures (capex) in the economy.

Jacob Miller analyzes the potential impact of tariffs on domestic capital expenditures

The outlook seems negative for public market companies, which typically rely heavily on international trade and overseas sales. The proposed tariffs would likely hurt consumer spending power across a range of household goods and beyond. However, private markets may fare better due to their domestic focus, so we see both tailwinds and headwinds for investors from these mooted policies:

Tailwinds

• US lower-middle market companies with limited overseas supply-chain exposure, in areas such as manufacturing, should benefit from becoming relatively more competitive

• Demand should rise for industrial/manufacturing properties in the US, benefiting real estate investors in areas designated for new facilities, as well as funds investing in the infrastructure to support manufacturing processes, and private equity firms working with US construction companies

• Onshoring should boost demand for technologies driving efficiencies in production, benefiting VC

• The disruptive VC-led end of the defence market - which is already benefiting from a strategic onshoring push - could benefit from a potentially accelerated shift to domestic procurement

Jacob Miller discusses the impact on tech of potential supply chain onshoring

Headwinds

• Returns from funds with a consumer focus may suffer as underlying companies face reduced spending power and margin pressure

• Larger companies with internationally diversified supply chains may face headwinds, to the extent that they cannot pass costs onto their customers. This could particularly impact private equity funds with larger consumer-facing companies in their portfolios, with a knock-on impact on the private credit funds that lend to these firms.

• Greenfield infrastructure and value-add real estate projects (outside manufacturing) may face drag from rising input costs

Jacob Miller highlights the potential headwinds from increased input costs due to tariff increases

c) The big impact of “boring” artificial intelligence 

Asset classes most impacted: Venture capital/private equity/infrastructure

TL;DR: We see more reliable, long-term value creation in the “boring” applications of AI - those targeting critical pain points in legacy verticals, such as healthcare, logistics, legal, construction, and energy. 

Idiosyncratic factors

• AI will have applications across all - and frequently large - industries. While the speed of deployment and level of impact may vary, there is not a single industry in which driving greater efficiency is unwelcome.

Fundamentals

• Constructive, with strong capital availability, expected increases in domestic capex and robust growth.

Generative AI might be monopolizing the headlines, but we see more reliable, long-term value in “boring” AI - the application of advanced machine learning to large, under-digitized industries, such as healthcare, logistics, legal, construction, and energy. These legacy verticals often rely on cumbersome, decades-old processes that drive up costs and hamper efficiency. They also tend to be more private than public and/or rely on venture-backed firms, meaning opportunities for private investors that may be hard to capture publicly, and less expensive than public options for AI exposure.

Jacob Miller discusses the impact of AI on efficiency and affordability

What makes a “boring” industry right for AI transformation?

The below five factors make sectors prime candidates for AI innovation:

1. High complexity, low tech

Administrative processes, asset tracking, or compliance tasks in these sectors remain mostly manual. AI-driven automation can yield immediate returns.

2. Fragmented data and siloed systems

Patient and billing data in healthcare, shipment tracking in logistics, contract databases in legal—none of these talk to each other well. AI excels at merging, analyzing, and drawing insights from disparate data sources.

3. Entrenched inefficiencies

Legacy players have tolerated wasteful workflows for decades, creating a major opportunity for solutions that can cut costs and save time.

4. Heavy regulatory overhead

Sectors like healthcare and energy must navigate complex compliance environments. AI can monitor and automate these processes at scale, reducing legal and operational risks.

5. Massive scale and spending

Each of these industries allocates trillions of dollars annually. Even small efficiency gains can translate into outsized returns for both innovators and investors.

Green shoots of real world impact

Despite their differences, “old economy” sectors like healthcare, logistics, legal, construction, and energy share a lot of these key characteristics. We see these sectors at the forefront of the “boring AI” revolution - ripe for incremental disruption (see chart).

Gaining exposure to boring AI

The boring AI ecosystem offers multiple points of entry—beyond just backing the next generative AI “unicorn.” Other highly effective avenues for building meaningful exposure to AI could be:

1. Venture funds backing domain-focused startups

Managers who fund specialized AI platforms for targeted use cases (e.g., healthcare billing automation, supply-chain analytics)

2. Engineering infrastructure and services

Look at companies or funds building the infrastructure (data pipelines, cloud services, edge computing solutions) essential for deploying AI at scale

3. Private equity firms leveraging AI post-acquisition

PE sponsors that use AI to streamline operations in the businesses they acquire - reducing costs, improving margins, and accelerating value creation. Even a modest 10-25% efficiency gain might be enough to drive strong returns in many spaces.

d) Tightening spreads in private credit

Asset classes most impacted: Private credit

TL;DR: Overcrowding and competition are driving tighter credit spreads, particularly in the middle market, which means we see better opportunities at either end of the private credit size spectrum.

Idiosyncratic factors

• Rapid asset growth is driving intense competition to compress spreads

Fundamentals

• Mixed. Economic strength will be constructive, but strong capital flows are a double-edged sword as they fuel overcrowding, which may compress credit spreads as interest rates fall

While floating rates are an important and highly positive component of private credit, they are not technically the most important driver of fund returns. The key to private credit returns is the spread between the borrowing cost of the credit lender and the borrowing cost for the underlying company. We expect that spread to tighten for a large section of private credit.

PitchBook estimated private credit fund AUM at more than $1.6T by the end of 2023 - up from roughly $500B a decade earlier - with dry powder estimated at $520B. Such rapid growth has been driven by demand for the flexible lending model offered by private credit, but inevitably creates overcrowding in certain segments of the market.

In this case, that dynamic is most affecting the middle market. Spreads have decreased and covenants/protections have weakened, exacerbated by additional competition from the syndicated loan market for upper middle-market borrowers. This elevates delinquency risk in the event of financial strain and could ultimately drag on fund returns.

In contrast, at the smaller end of the market, yields and spreads are more robust. This segment favors lenders, as strong protections, covenants, and collateral support their interests, and wider spreads make them less sensitive to base rate reductions. Meanwhile, at the large institutional end, lending platforms that function like banks can weather periods of potential defaults and tighter spreads through financial ingenuity and easier access to credit. These jumbo loans have lower yields but also lower risks.