ALTERNATIVE MARKETS SUMMARY – H1 SUMMARY 2025

​So far, 2025 has been shaped by sharp swings in financial markets, driven by geopolitical shocks, shifting monetary policy expectations, and evolving macroeconomic conditions. The year began with strong risk appetite, fuelled by optimism over disinflation and AI-led corporate growth, but momentum faltered in April when the US announced sweeping “Liberation Day” tariffs, reigniting fears of a global trade war. Equity markets corrected sharply before stabilising in early summer, supported by resilient corporate earnings and easing volatility. Inflation has proven stickier than expected in most major economies, prompting central banks, especially the Fed and the BoE, to delay or temper rate-cut expectations. The US dollar weakened in the first half of the year, boosting gold prices to multi-year highs as investors sought safe-haven assets. Overall, 2025 has presented a complex mix of resilience and risk, leaving investors to navigate an unusually uncertain macroeconomic and geopolitical backdrop.
Inflation trends in 2025 have underscored the challenge facing central banks in the United States, the Euro Area, and the United Kingdom, with price pressures proving more persistent than policymakers had anticipated. In the US, headline CPI has eased from its 2022 and 2023 peaks but remains above the Federal Reserve’s 2% target. While core inflation has been slower to decline, driven by stubborn services and shelter costs. The Euro Area has seen a similar pattern, with headline inflation moderating on the back of lower energy prices but core readings staying elevated due to wage growth and resilient domestic demand. The UK has faced the stickiest inflation among the three, with both headline and core measures remaining well above target despite easing commodity costs—reflecting underlying pressures in the labour market and housing sector. As shown in Figure 1, inflation has come down substantially since 2023, the Euro Area is the only geography of the three that has maintained an inflation rate at or below 2% for multiple months. In contrast, the UK’s inflation rate has begun to soar again and remains well above 3% in recent months.
Interest rate policy has reflected these dynamics, with the Fed and the BoE both delaying widely expected rate cuts as inflation progress slowed in the first half of the year. The Fed has maintained rates at close to their multi-year highs, emphasising the need for sustained evidence of disinflation before easing. The BoE has lowered its interest rates more steadily in 2025 than the US, but the country has to balance cuts with currently rising inflation. In contrast, the European Central Bank has begun to signal a cautious easing path, supported by weaker growth data and a more pronounced decline in headline inflation across the bloc. Elsewhere, Japan’s policy shift away from ultra-loose conditions has stood in sharp contrast, underscoring the divergence in global monetary stances and adding a further layer of complexity to capital flows and currency markets in 2025.

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RESEARCH PERSPECTIVE VOL. 257 August 2025 Financial Markets Summary 2025 So far, 2025 has been shaped by sharp swings in financial markets, driven by geopolitical shocks, shifting monetary policy expectations, and evolving macroeconomic conditions. The year began with strong risk appetite, fuelled by optimism over disinflation and AI-led corporate growth, but momentum faltered in April when the US announced sweeping “Liberation Day” tariffs, reigniting fears of a global trade war. Equity markets corrected sharply before stabilising in early summer, supported by resilient corporate earnings and easing volatility. Inflation has proven stickier than expected in most major economies, prompting central banks, especially the Fed and the BoE, to delay or temper rate-cut expectations. The US dollar weakened in the first half of the year, boosting gold prices to multi-year highs as investors sought safe-haven assets. Overall, 2025 has presented a complex mix of resilience and risk, leaving investors to navigate an unusually uncertain macroeconomic and geopolitical backdrop. Inflation trends in 2025 have underscored the challenge facing central banks in the United States, the Euro Area, and the United Kingdom, with price pressures proving more persistent than policymakers had anticipated. In the US, headline CPI has eased from its 2022 and 2023 peaks but remains above the Federal Reserve’s 2% target. While core inflation has been slower to decline, driven by stubborn services and shelter costs. The Euro Area has seen a similar pattern, with headline inflation moderating on the back of lower energy prices but core readings staying elevated due to wage growth and resilient domestic demand. The UK has faced the stickiest inflation among the three, with both headline and core measures remaining well above target despite easing commodity costs—reflecting underlying pressures in the labour market and housing sector. As shown in Figure 1, inflation has come down substantially since 2023, the Euro Area is the only geography of the three that has maintained an inflation rate at or below 2% for multiple months. In contrast, the UK’s inflation rate has begun to soar again and remains well above 3% in recent months. Interest rate policy has reflected these dynamics, with the Fed and the BoE both delaying widely expected rate cuts as inflation progress slowed in the first half of the year. The Fed has maintained rates at close to their multi-year highs, emphasising the need for sustained evidence of disinflation before easing. The BoE has lowered its interest rates more steadily in 2025 than the US, but the country has to balance cuts with currently rising inflation. In contrast, the European Central Bank has begun to signal a cautious easing path, supported by weaker growth data and a more pronounced decline in headline inflation across the bloc. Elsewhere, Japan’s policy shift away from ultra-loose conditions has stood in sharp contrast, underscoring the divergence in global monetary stances and adding a further layer of complexity to capital flows and currency markets in 2025. Figure 1: Inflation & Interest Rates in the US, Euro Area & the UK, Source: TradingEconomics, August 2025 Equity market volatility in 2025 has remained structurally higher than in the years preceding Trump’s return to the White House, as reflected in the VIX Index shown in Figure 2. While short-term fluctuations have been pronounced – most notably the sharp spike in April following the announcement of sweeping “Liberation Day” tariffs – the broader trend shows the VIX holding well above its pre-Trump average of around 16, with the post-inauguration period averaging closer to 21. This elevated baseline reflects persistent policy uncertainty, particularly on trade, combined with geopolitical risks and shifting expectations for monetary policy. Although periods of calmer trading have emerged, notably in early summer, the backdrop of unpredictable policy moves has left markets more prone to sudden bursts of volatility than in the pre-2025 era. Despite the more volatile environment, US equities have delivered solid returns in 2025, with the S&P 500 up nearly 10% year to date as shown in Figure 2. Gains have been driven by continued enthusiasm for AI-related growth prospects, robust corporate earnings, and resilient consumer spending, particularly in the first quarter. While April’s tariff shock triggered a swift correction, the index recovered steadily through the summer as investor sentiment improved and volatility eased from its spring highs. Sector performance has been uneven, with technology and communication services leading the gains, while more rate-sensitive areas such as real estate and utilities have lagged. Overall, the US equity market has shown a notable capacity to weather political and policy turbulence, albeit within a higher-volatility regime. Figure 2: S&P 500 and Volatility Since January 2023, Source: Investing, August 2025 Following the S&P 500’s near-10% YTD gain, European equities have also delivered generally positive returns in 2025, though with notable divergence between markets. Germany’s DAX has surged 22% YTD, benefiting from strong industrial exports, a rebound in global manufacturing demand, and investor rotation into cyclical sectors. The UK’s FTSE 100 is up 12%, supported by resilient energy and financial sectors, as well as currency weakness boosting overseas earnings. France’s CAC 40 has risen a more modest 5%, with gains tempered by underperformance in luxury goods and consumer sectors amid softer Chinese demand. Switzerland’s SMI has added just 2%, weighed down by defensive sector exposure and a strong franc limiting export competitiveness. The inability of reaching an agreement on tariffs also contributed negatively. In Asia, performance has been mixed. Japan’s equity market is flat year to date, with early-year weakness due to currency volatility and investor caution following the BoJ’s policy shift away from ultra-loose conditions. In contrast, China’s CSI 300 has gained 8% YTD, driven by targeted government stimulus measures, improving investor sentiment, and tentative signs of stabilisation in the property sector. Figure 3 provides more details. Figure 3: YTD of Leading Indices in the US, Germany, France, UK, Switzerland, Japan & China, Investing, August 2025 The US dollar has experienced a clear weakening trend in 2025, with the EUR/USD exchange rate moving decisively higher in 2025 as shown in Figure 4. This depreciation has been underpinned by the Trump administration’s explicit policy focus on boosting the competitiveness of US companies through a weaker currency, a stance reflected in public statements and trade negotiations. The strategy has added a political dimension to currency markets, influencing investor positioning and driving demand for alternative currencies. Foreign exchange market volatility has been more contained than in equities, but the policy-driven moves in the USD have still generated periods of sharp price action. The combination of elevated US interest rates and expectations that the Federal Reserve will eventually pivot to rate cuts has left markets anticipating further downside for the dollar. Figure 4: Appreciation of the EUR vs. USD Since 2025, Source: Investing, August 2025 Gold has been one of the standout performers in 2025, with prices climbing steadily since January to reach several all-time highs with gain of 25% in 2025 so far. Figure 5 shows the steady gains of gold throughout 2025. The metal has benefited from a weaker US dollar, heightened geopolitical tensions, and persistent uncertainty over trade policy, which have reinforced its appeal as a safe-haven asset. Investor demand has also been supported by concerns over the durability of disinflation, with gold seen as a hedge against both inflationary pressures and potential currency depreciation. Central bank purchases, particularly from emerging markets, have added further momentum to the rally, helping sustain upward pressure on prices through much of the year. Figure 5: Gold Price per Ounce Since January 2025, Source: Investing, August 2025 The remainder of 2025 will hinge on the trajectory of global trade tensions, the pace of disinflation, and the timing of central bank rate cuts. Markets will be watching for signs of policy shifts from the Fed and BoE, as well as any escalation or resolution in tariff disputes. A weaker US dollar, elevated volatility, and strong safe-haven demand could continue to shape asset allocation, leaving investors positioned for both opportunity and risk in an uncertain macroeconomic landscape. Hedge Fund Summary 2025 The hedge fund industry has navigated 2025 so far with resilience, benefiting from both favourable market conditions and steady investor demand. Assets under management have continued to climb, supported by strong market performance and positive capital flows, with the industry recording net inflows in both the first and second quarters. Against a backdrop of elevated policy uncertainty, particularly around US trade actions and shifting interest rate expectations, hedge funds have demonstrated their value as diversification tools for institutional portfolios. Performance has varied across strategies, with equity and fixed income hedge funds delivering solid gains, global macro managers producing more mixed results, and crypto-focused funds tending to post negative returns. The industry’s stability has been underpinned by its ability to adapt to a volatile macroeconomic environment while selectively capitalising on opportunities across asset classes. While some strategies have struggled to generate consistent alpha, overall performance dispersion has offered scope for skilled managers to differentiate themselves. This combination of sustained inflows, strategy-specific opportunities, and an uncertain but active market environment sets the stage for a dynamic second half of the year. The hedge fund industry has reached new milestones in 2025, with HFR reporting a record $4.74 trillion in assets under management as of the second quarter. BarclayHedge places total industry AUM at approximately $5.5 trillion as of the first quarter, as shown in Figure 6. Within this total, equity-focused strategies remain the largest segment, managing around $1.4 trillion, followed by over $1 trillion in fixed income strategies. Balanced and multi-strategy approaches each account for roughly $700 billion, reflecting investors’ continued appetite for diversified exposures capable of navigating complex market conditions. Niche strategies have shown the steepest growth and account for nearly $800bn, highlighting the demand for further diversification within the space. This composition underlines the industry’s breadth and its ability to deploy capital across a wide spectrum of opportunities. Figure 6: Hedge Fund AuM by Strategy from Q1 2020 to Q1 2025, Source: BarclayHedge, August 2025 After several years of uneven fundraising, the hedge fund industry has seen a clear turnaround in 2025, recording net inflows in both the first and second quarters. Capital additions totalled $12.6 billion in Q1 and accelerated to $24.8 billion in Q2, marking one of the strongest half-year periods for fundraising in over a decade. This reversal comes after a stretch in which many managers faced persistent outflows amid competition from other alternative asset classes. The renewed momentum underscores a shift in investor sentiment, with hedge funds regaining favour as tools for diversification and opportunistic returns in volatile markets. Equity hedge funds have delivered solid gains so far in 2025, supported by favourable market conditions and strong corporate earnings. Our SMC Equity Strategy is up nearly 5%, performing broadly in line with the wider peer group, as shown in Figure 7. Benchmark indices for equity hedge funds have returned between 4.5% and 6.5% YTD, reflecting both the resilience of equity markets and the ability of managers to capitalise on sector and stock-level dispersion. While performance has varied by style, with growth and technology-oriented exposures generally outperforming more value-focused approaches, overall results point to a constructive environment for equity strategies despite intermittent volatility. Figure 7: Performance of Stone Mountain Capital’s Equity Hedge Funds and Benchmarks as of June 2025, Source: Stone Mountain Capital Research, With Intelligence, HFRX, BarclayHedge, Standard & Poor’s, August 2025 Fixed income hedge funds have posted steady gains in 2025, aided by elevated interest rate levels and selective opportunities in credit markets. Our SMC Credit Strategy Index is up over 4.7% YTD, outperforming the broader peer group, as shown in Figure 8. Benchmark indices for fixed income hedge funds have returned between 3% and 4.2%, as managers navigated a complex environment of shifting yield curves and persistent inflation pressures. Strategies with a focus on relative value and credit selection have generally fared best, while more directional approaches have faced greater challenges in timing market moves. Overall, the asset class has continued to provide consistent returns and valuable diversification benefits within hedge fund portfolios. Figure 8: Performance of Stone Mountain Capital’s Fixed Income Hedge Funds and Benchmarks as of June 2025, Source: Stone Mountain Capital Research, With Intelligence, HFRX, BarclayHedge, Bank of America, August 2025 Global macro hedge funds have seen highly mixed results in 2025, reflecting the challenge of navigating divergent policy moves, volatile currency markets, and shifting macroeconomic data. Our SMC Tactical Trading Index is down more than 7% YTD, underscoring the difficulty some managers have faced in positioning around rapid changes in market sentiment. Benchmark indices for the strategy show a wide dispersion in outcomes, ranging from losses of around 5% to gains of up to 6%, as shown in Figure 9. While certain managers profited from trades in interest rates, commodities, or specific currency pairs, others were caught on the wrong side of abrupt market reversals. This dispersion highlights the strategy’s high dependence on macroeconomic inflection points and the skill of individual managers in capturing them. Figure 9: Performance of Stone Mountain Capital’s Tactical Trading Hedge Funds and Benchmarks as of June 2025, Source: Stone Mountain Capital Research, With Intelligence, HFRX, BarclayHedge, August 2025 Cryptocurrency hedge funds have faced a challenging environment in 2025, with our SMC Cryptocurrency Strategy Index being down 7.5%, while benchmark indices were down around 12% YTD, as shown in Figure 10. The broader digital asset market has been weighed down by regulatory uncertainty, shifts in risk appetite, and sharp corrections in altcoins. Bitcoin has been the notable exception, posting gains of nearly 15%, supported by institutional inflows and the continued growth of spot ETF products. Despite this, many crypto-focused managers struggled to capture the upside in Bitcoin or offset losses in other digital assets, leading to negative overall returns for the strategy. The results underscore the sector’s high volatility and the difficulty of generating consistent alpha in a market still dominated by sentiment-driven swings. Figure 10: Performance of Stone Mountain Capital’s Cryptocurrency Hedge Funds and Benchmarks as of June 2025, Source: Stone Mountain Capital Research, HFR, CoinMarketCap, August 2025 Fund of hedge funds have delivered modest but steady gains in 2025, benefiting from broad-based positive performance across several underlying strategies. SMC’s FoHF Strategy Indices returned between 0.5% to 1.3%, as shown in Figure 11. Despite good results in Equity and Fixed Income Strategies, the performance was drawn down by Tactical Trading and Cryptocurrency strategies. Benchmark indices for the category have returned between 2% and 2.5% YTD, reflecting a diversified allocation approach that has helped smooth out volatility. While this structure has limited exposure to the stronger gains seen in some single-strategy funds, it has also mitigated the impact of weaker performances, particularly in global macro and cryptocurrency strategies. The results highlight the role of fund of hedge funds as a stable, lower-volatility component within alternative investment portfolios. Figure 11: Performance of Stone Mountain Capital’s Fund of Hedge Funds and Benchmarks as of June 2025, Source: Stone Mountain Capital Research, With Intelligence, HFRI, August 2025 The outlook for the remainder of 2025 will be shaped by a combination of macroeconomic developments, policy decisions, and market volatility. Central bank actions, particularly the timing and pace of potential interest rate cuts, will be closely watched, as will any shifts in trade policy or geopolitical tensions that could influence cross-asset performance. For hedge funds, the environment is likely to remain opportunity-rich but uneven, with equity and fixed income strategies positioned to benefit from selective market trends, while global macro managers may face continued challenges in timing large directional moves. Overall, dispersion across strategies is expected to persist, favouring managers with the agility to adapt quickly and the discipline to manage risk in an unpredictable landscape. Blockchain Summary 2025 The cryptocurrency market in 2025 has been defined by resilience in Bitcoin alongside more uneven performance across the rest of the sector. Institutional demand, particularly via record inflows into exchange-traded funds, has reinforced Bitcoin’s position as the anchor of the market and the key driver of sentiment. Ethereum and major altcoins had a difficult start to the year but have only recently recouped earlier losses, reflecting a combination of regulatory milestones and shifting investor confidence. On the regulatory front, notable progress in the US, especially around stablecoins, has provided greater clarity and encouraged further institutional engagement. Broader macroeconomic conditions, including interest rate uncertainty and geopolitical tensions, have also shaped crypto’s trajectory, underscoring its growing sensitivity to the global investment environment. Macroeconomic conditions have played a significant role in shaping cryptocurrency markets in 2025, as shifting interest rate expectations and currency dynamics influenced risk appetite. The Federal Reserve’s decision to hold rates at elevated levels for longer than initially expected weighed on investor sentiment earlier in the year, limiting upside for risk assets including digital currencies. At the same time, the weakening of the US dollar during the first half of the year supported Bitcoin’s rally, reinforcing its status as both a hedge and a speculative vehicle when traditional markets looked more uncertain. Meanwhile, ongoing geopolitical tensions have increased investor demand for alternative assets, with crypto often positioned as part of the broader hedge against volatility. Together, these macro dynamics have kept cryptocurrencies closely tied to the global investment climate, reflecting their growing integration into mainstream financial markets. Regulation of cryptocurrencies in the US advanced significantly in 2025, marking a clear shift from fragmented oversight to a more coherent policy framework. The most consequential step was the passage of the GENIUS Act, which established strict reserve and disclosure requirements for dollar-backed stablecoins, providing long-awaited clarity for issuers and institutional users alike. Alongside it, Congress also approved the CLARITY Act, clarifying the division of authority between the SEC and CFTC, and the Anti-CBDC Surveillance State Act, which explicitly barred the creation of a US central bank digital currency except for explicit authorization by Congress. The SEC further outlined plans for integrating digital assets into capital markets, proposing tailored disclosure rules and guidance on when tokens qualify as securities. Complementing these moves, the administration launched a Strategic Bitcoin Reserve and allowing cryptocurrencies in 401(k)s, underscoring crypto’s growing role in national financial strategy, while simultaneously disbanding a specialised crypto enforcement unit to fold oversight into mainstream supervisory structures. Together, these measures reflect a decisive pivot toward institutionalisation, embedding digital assets more firmly within the US financial system. Europe has moved ahead of most regions by fully implementing the MiCA framework at the end of 2024, creating a unified rulebook for stablecoins, crypto assets, and service providers. In 2025, major exchanges such as Coinbase and Crypto.com have obtained EU licences, signalling growing institutionalisation of the sector. Additional regulations like DORA (cyber resilience) and DAC8 (tax reporting) further extend oversight, while ESMA has cautioned firms against overstating consumer protections. Together, these measures position Europe as a regulatory leader, though differences in national enforcement raise concerns about consistency across member states. The total cryptocurrency market capitalisation reached new all-time highs in November and December 2024, fuelled by record ETF inflows and strong momentum across both Bitcoin and altcoins. This rally was followed by a sharp contraction in spring 2025, as renewed trade tensions and shifting interest rate expectations weighed on risk assets more broadly. Since then, sentiment has recovered, with renewed institutional demand and regulatory clarity helping to drive the rebound. By late July and into August 2025, the global crypto market cap once again surged past the $4 trillion mark as shown in Figure 12, underscoring the sector’s resilience despite intermittent volatility. Figure 12: Total Cryptocurrency Market Capitalization Since January 2023, Source: CoinMarketCap, August 2025 ETF flows have been a decisive driver of cryptocurrency markets in 2025, reflecting the growing role of institutional capital. In the early part of the year, inflows were strong, but sentiment shifted from February through mid-April, with the sector experiencing sustained weekly outflows. Momentum turned sharply from late April, when renewed optimism and regulatory progress fuelled a powerful rebound: in four separate weeks, net inflows exceeded $3 billion, and every week since has recorded positive net subscriptions, as shown in Figure 13. While Bitcoin ETFs accounted for the majority of flows through most of 2025, July marked a turning point, with Ethereum ETFs attracting record demand and temporarily dominating overall inflows. This shift highlighted both the depth of investor appetite and the broadening of institutional interest beyond Bitcoin alone. Figure 13: Weekly Net Flows of Cryptocurrency ETF Since January 2025, Source: CoinShares, August 2025 Cryptocurrencies began 2025 on a strong footing, with Bitcoin and Solana rallying into February. Bitcoin advanced steadily, Solana outperformed with a surge of nearly 40% at its peak. The rally came to an abrupt halt in early spring, when renewed trade tensions and monetary uncertainty triggered a sharp correction across the sector. Bitcoin proved the most resilient, falling to a -20% YTD, while Ethereum dropped nearly to -60% and Solana to more than -40%, highlighting the greater vulnerability of altcoins to shifts in sentiment. Since mid-April, however, all three have been on a renewed upward trajectory, supported by record ETF inflows and improving regulatory clarity. By late August, Bitcoin is up about 30% YTD, Ethereum has surged nearly 40% after an exceptional July and August, and Solana has only just managed to return to positive territory, reflecting its more volatile path compared with its larger peers. Figure 14 shows a more detailed breakdown of the performance of cryptocurrency assets throughout 2025. Figure 14: YTD Performance of Bitcoin, Ethereum, and Solana Since January 2025, Source: CoinMarketCap, August 2025 Decentralised finance has staged a remarkable comeback over the past 18 months, with total value locked (TVL) showing one of the strongest rebounds since the 2021 cycle. From a base of around $50 billion in January 2024, TVL climbed steadily through the year, accelerating sharply in December to surpass $120 billion, as shown in Figure 15. The momentum continued into 2025, and by late summer TVL had surged to roughly $160 billion, just shy of the all-time peak of $170 billion reached in 2021. This resurgence underscores the resilience of DeFi protocols, with liquid staking platforms in particular playing a central role in attracting capital and anchoring activity. Figure 15: DeFi Total Value Locked in Billion USD Since January 2024, Source: Defi Llama, August 2025 On-chain activity has mirrored this strength, with both transaction volumes and user engagement improving alongside rising asset prices. Daily active addresses on Ethereum reached a two-year high of 841,000 in August 2025, their highest level since late 2021, reflecting renewed retail and institutional participation. Decentralised exchanges (DEXs) have also benefited, with cumulative trading volume for 2025 reaching $1.5 trillion by the end of July, up more than 50% compared with the same period in 2024. While activity remains concentrated on Ethereum and its leading Layer-2s, networks such as Solana and Base have captured a growing share, contributing to a more diversified landscape. Together, these developments highlight how DeFi has re-emerged as a core pillar of the crypto ecosystem, supporting both liquidity provision and innovation in financial products. Beyond price action, 2025 has been marked by significant innovation across the crypto ecosystem. Tokenisation of real-world assets (RWAs) has continued to gain traction, with the market surpassing $1.8 billion in tokenised US Treasury products by July 2025, more than double the level at the start of the year. AI-crypto convergence has also accelerated, with venture and institutional capital flowing into projects that leverage blockchain infrastructure for AI model training and data markets. Meanwhile, the stablecoin market has expanded to over $180 billion in circulation, with USDT and USDC maintaining dominance but newer entrants – supported by the US GENIUS Act – beginning to carve out share. Together, these developments highlight how crypto in 2025 is not only about asset prices, but also about building infrastructure that increasingly intersects with traditional finance and emerging technologies. The outlook for the crypto industry in the remainder of 2025 is constructive, supported by sustained institutional inflows and clearer regulatory frameworks in both the US and Europe. Bitcoin is likely to remain the anchor asset, with ETF flows continuing to underpin demand and solidify its role as a macro hedge. Ethereum and select altcoins could benefit from renewed investor appetite, particularly as regulatory clarity extends to ETFs and market structure. DeFi activity is expected to stay elevated, with TVL levels near historical highs providing a strong base for sectoral growth. Overall, while volatility will remain a feature, the combination of regulation, institutionalisation, and innovation leaves the industry well positioned for continued expansion. Private Equity & Venture Capital Summary 2025 Private markets have entered 2025 against a backdrop of geopolitical uncertainty, persistent tariff tensions, and expectations of eventual interest rate cuts. Despite these headwinds, private equity (PE) assets under management reached new record highs, supported by continued fundraising momentum and the expansion of continuation vehicles. Deal activity, however, has slowed from prior years as financing conditions remain tight, with megadeals and take-privates becoming less frequent. Venture capital (VC), by contrast, has faced a more challenging environment: fundraising has softened, valuations remain under pressure, and exits continue to lag despite isolated successes in AI and defence technology. The exit environment for both PE and VC remains constrained, though PE has benefited from more diversified channels such as secondary sales, while VC remains more reliant on IPOs and secondary markets. Overall, performance in PE has been steadier, while VC returns are increasingly polarised, with top-tier firms capturing the majority of value creation. Looking ahead, PE is expected to maintain its resilience through selective dealmaking and sector focus, while VC will depend more heavily on a recovery in the exit markets to regain momentum. Private equity has seen an extraordinary expansion in assets under management over the past decade, though momentum has moderated in recent years. As shown in Figure 16, from 2016 to 2021, the industry experienced a period of rapid growth as low interest rates, ample credit availability, and strong investor appetite fuelled record fundraising and deal activity. By contrast, since 2022 growth has slowed markedly as tighter monetary conditions, geopolitical tensions, and a more difficult fundraising environment began to weigh on the pace of capital accumulation. According to available data, global private equity AuM reached $5.75 trillion by the end of 2024, a record high but reflecting a more gradual trajectory compared to the steep expansion of the previous cycle. This levelling off underscores how the industry is transitioning from an era of explosive capital inflows toward one defined by more selective deployment and a greater emphasis on performance and distributions. Venture capital assets under management have also expanded over the past decade, but with a more volatile pattern than private equity. Growth was especially strong during the 2020–2021 boom years, driven by record fundraising and soaring valuations in technology sectors. Since then, momentum has cooled considerably as fundraising slowed and exit activity stalled, leaving many funds with extended holding periods. By mid-2025, VC AuM remains elevated compared to pre-pandemic levels, but growth has largely plateaued, reflecting the sector’s heightened sensitivity to market cycles and investor caution. Figure 16: Private Equity AuM from 2010 to 2024, Source: Pitchbook, August 2025 Private equity fundraising has proven more resilient than venture capital but is showing clear signs of cooling under the weight of higher interest rates and tighter credit conditions. From 2021 through 2024, annual fundraising consistently held near $600 billion, reflecting the industry’s depth of institutional demand and the scale of available dry powder. However, momentum weakened in 2025, with totals slipping below $450 billion in Q2 on YoY basis, as shown in Figure 17. This underscores the more cautious stance of LPs amid a challenging exit environment. Venture capital fundraising, by contrast, has been far more cyclical. After briefly surpassing half of private equity’s fundraising during the late-2021 to early-2022 technology boom, inflows collapsed in 2023 and 2024, falling to around $100 billion annually as valuations reset and IPO markets froze. Encouragingly, 2025 has brought signs of a tentative rebound, with fundraising on a YoY basis surpassing $200 billion, suggesting that investor appetite is beginning to return, particularly in sectors such as AI and defence technology. Figure 17: 12-Month Rolling Private Equity & Venture Capital Fundraising from Q4 2021 to Q2 2025, Sources: Pitchbook, KPMG, CB Insights, August 2025 A defining feature of 2025’s fundraising landscape has been the sharp concentration of capital in artificial intelligence (AI) and defence technology. AI-focused funds have raised the largest share of venture capital dollars so far this year, with several multi-billion-dollar vehicles closing in the first half of 2025. Defence and dual-use technology has also gained significant traction, reflecting both government priorities and heightened geopolitical tensions, with Q2 marking record fundraising activity for the sector. In private equity, sector allocations remain more diversified, but defence-related infrastructure and aerospace assets are drawing increasing attention, often supported by government-linked initiatives. Together, these trends illustrate how AI and defence have become anchor themes for capital formation, even as broader private markets face subdued activity. Private equity dealmaking has cooled markedly from its peak. Between Q1 2021 and Q2 2022, activity held steady at around $600 billion, supported by strong credit markets and abundant dry powder. From mid-2022 onwards, however, volumes contracted sharply, sliding to about $400 billion, with only a temporary rebound between Q2 2024 and Q1 2025 when deal values briefly recovered to roughly $500 billion, as shown in Figure 18. The most recent quarter marked a renewed slowdown, with deal activity falling back below $400 billion, its lowest point in the observed period, underscoring the drag from tighter financing conditions and more cautious valuations. Venture capital deal activity has shown a similar retrenchment but from a different base. At the end of 2021, quarterly dealmaking was approaching $200 billion, reflecting the final stages of the pandemic-era boom. Since then, activity has steadily declined, falling to well below $100 billion across most of 2023 and 2024. The only clear exception was Q1 2025, when volumes briefly surged, but the latest quarter once again slipped beneath the $100 billion mark. Still, the data indicate a slightly upward trend, suggesting tentative stabilisation even as the market remains well below historical highs. Figure 18: Private Equity & Venture Capital Deal Activity from Q1 2021 to Q2 2025, Sources: Pitchbook, KPMG, CB Insights, August 2025 Valuations across private markets remain under pressure, shaped by higher borrowing costs, slower growth expectations, and muted exit activity. In private equity, the global median EV/revenue multiple fell to 1.5x (TTM to Q2 2025), down from around 2.0x at the 2021 peak, underscoring how sponsors and lenders have scaled back their assumptions on growth and profitability. Deal sizes have become smaller on average, with fewer megadeals closing as firms concentrate on mid-market transactions that demand less leverage and are easier to finance in today’s environment. In venture capital, the correction has been even more pronounced. Median pre-money valuations for late-stage companies remain down more than 40% from 2021 highs, with Q2 2025 ranking among the weakest quarters for late-stage pricing since the pandemic. By contrast, early-stage valuations have risen year-over-year, reaching decade highs in most stages, reflecting capital concentration into fewer but stronger companies with a focus on AI and defence technology. This divergence illustrates a bifurcated market: while late-stage growth capital remains cautious, investors are willing to pay premiums for sectors perceived as structurally resilient and strategically important. The exit environment in 2025 has remained subdued, weighing heavily on the broader private market cycle. Both private equity and venture capital firms have faced challenges in realising investments, as IPO windows remain narrow and strategic buyers cautious. This lack of liquidity has fed back into fundraising, where investors have slowed commitments until distributions improve, and into deal activity, as sponsors hesitate to pursue new acquisitions without clear exit pathways. The weak exit markets have also exerted downward pressure on valuations, with buyers demanding steeper discounts to compensate for extended holding periods and uncertain exit timelines. While select sectors such as AI and defence continue to attract outsized attention, the overall market remains constrained by the bottleneck in realisations, leaving capital deployment below historic averages. Private equity returns have moderated in 2025, reflecting slower exit activity and more conservative valuations. While top-tier managers have managed to preserve double-digit internal rates of return through careful portfolio management and sector rotation, overall industry returns have trended lower compared to the exceptional vintages of 2020–2021. Distributions to investors remain muted, limiting the pace of new commitments. Venture capital performance has been more volatile. The sharp reset in late-stage valuations has weighed heavily on funds with significant exposure to growth rounds, leading to negative interim returns for several recent vintages. By contrast, early-stage funds, particularly those with exposure to AI and defence technology, have continued to post stronger relative results, supported by investor enthusiasm and robust fundraising in those verticals. Overall, both private equity and venture capital have delivered weaker interim returns in 2025, underscoring how heavily the asset class depends on healthy exit markets to sustain performance. The outlook for the second half of 2025 is shaped by both cyclical headwinds and structural shifts within private markets. On the cyclical side, a muted exit environment is expected to persist, limiting liquidity for LPs and putting pressure on fundraising momentum. As long as public equity markets remain volatile and IPO activity subdued, private equity and venture capital managers will need to rely more on secondary transactions and strategic sales to unlock value. At the same time, deal activity is likely to remain restrained, with higher financing costs continuing to weigh on leveraged buyouts. However, sectors with strong structural tailwinds – particularly artificial intelligence, defence technology, and parts of the energy transition – are expected to attract sustained investor demand. These areas are not only driving fundraising at a time of broader caution but also underpinning selective valuations, creating a widening gap between favoured sectors and the rest of the market. A further risk is that record levels of dry powder could remain sidelined if deployment opportunities fail to materialise, raising the likelihood of capital being returned to LPs or recycled into continuation vehicles. Conversely, if financing conditions ease, managers could accelerate dealmaking, narrowing the current gap between capital raised and deployed. Overall, the remainder of 2025 is likely to be defined by continued selectivity and bifurcation. Investors will focus on managers with proven ability to generate exits and identify opportunities in structurally advantaged sectors, while the broader industry continues to navigate an environment of tighter capital markets, cautious valuations, and uneven performance. Private Debt Summary 2025 Private debt has cemented its role as one of the fastest-growing corners of private markets in 2025, attracting significant institutional attention. Fundraising has proven resilient, with steady flows into direct lending strategies reflecting investors’ demand for yield and diversification. Deal activity has softened somewhat, but managers continue to find opportunities in refinancing, mid-market transactions, and sectoral niches such as technology, healthcare, and infrastructure. Returns remain supported by elevated base rates and the illiquidity premium, though competition has compressed spreads and raised the bar for disciplined underwriting. Looking ahead, the asset class is well positioned to sustain its momentum, balancing attractive income with cautious navigation of macroeconomic and geopolitical uncertainties. Private debt has transformed from a niche asset class into one of the fastest-growing segments of private markets. In 2010, global AuM stood at just $0.25 trillion, but by 2017 it had already surpassed $0.5 trillion. Growth accelerated markedly after 2020, supported by both institutional investors searching for yield in a low-rate environment and banks retreating from middle-market lending. The industry crossed the $1 trillion threshold in 2021 and continued to expand rapidly, reaching approximately $1.7 trillion at the end of 2024. Figure 19 provides more details on the explosive growth in recent years. This expansion reflects not only rising investor allocations but also structural shifts in credit markets. As banks tightened lending standards under Basel III and rising rates made syndicated loans less attractive, private lenders stepped into the gap – particularly in direct lending, which now makes up the largest share of the asset class. According to J.P. Morgan, private credit assets account for around 9% of total corporate borrowing, growing at a 14.5% annualized pace over the past decade, compared with just 3% for traditional commercial and industrial loans. Looking ahead, momentum shows little sign of slowing. Analysts expect private debt AuM to surpass $2 trillion by 2026–27, supported by inflows into senior direct lending, opportunistic credit, and asset-backed strategies. While questions remain about sustainability amid tighter monetary conditions, the long-term trend points toward private credit cementing its role as a core allocation within institutional portfolios. Figure 19: Private Debt AuM from 2010 to 2024, Source: Preqin, August 2025 Private debt fundraising has been remarkably steady on a half-year cadence since 2020, typically landing in the $100–$150 bn range with occasional breakouts above that band; H2 2024 was one of those outliers, nearing $200 bn as shown in Figure 20. The first half of 2025 is the strongest H1 since 2022, but beneath the headline, momentum was uneven: H1 totalled $146.9 bn with most of the closings concentrated in Q1, while Q2 2025 ranked among the weakest second quarters in recent years. Preqin characterises Q2 as the lowest quarterly fundraising since 2020, citing policy volatility as a key headwind. Figure 20: Private Debt Fundraising from H1 2020 to H1 2025, Source: Private Debt Investor, August 2025 By strategy, direct lending remains the anchor, but 2025 shows a more “normalised” mix versus last year’s direct-lending dominance: distressed, subordinated/mezzanine, and secondaries took a bigger fundraising share in H1. Regionally, North America continued to lead 2025 fundraising, with multi-regional mandates gaining share, while Europe stayed muted but is flagged for a prospective recovery as portfolios rebalance. On LP sentiment, allocations nudged higher overall (average allocation 5.7% in H1 2025 vs 5.1% a year earlier), with sovereign wealth funds showing the sharpest step-up (to ~6.9%). Despite this, approximately 75% of institutions report being under-allocated to private debt, suggesting latent demand, albeit paced by slower distributions. Private credit dealmaking picked up from the slump of early 2024, with H2 2024 showing a clearer rebound and that momentum carrying into 2025, albeit unevenly. New-money LBOs remain selective, but refinancing and repricing volumes have stayed busy as borrowers term out maturities and opportunistically lower coupons. Notably, the private credit and broadly syndicated loan (BSL) markets have been “in balance,” with deals moving in both directions between them. Partnerships between direct lenders and banks have expanded the pipeline, such as Citi–Apollo’s $25 billion program. As rate-cut expectations firm, arrangers anticipate more primary issuance and somewhat tighter terms for lenders compared with 2024’s buyer-friendly environment. Private credit continues to encroach on larger transactions: in Q2, the take-private of Dun & Bradstreet featured $5.5 billion of direct-lender financing – the largest direct-lender-led LBO to date – underscoring the market’s ability to underwrite at scale. Looking forward, a looming 2026–27 “maturity wall” in high-yield and leveraged loans keeps the refinancing bid well supported, positioning private credit to remain an active provider of capital even if new-money M&A stays uneven. Private credit continues to deliver attractive returns, underpinned by elevated income levels. For instance, the Cliffwater Direct Lending Index recorded income yields in the 9–11% range in early 2025, demonstrating that direct lending still commands substantial premiums compared to syndicated loan and high-yield markets, which are facing tighter spread environments. Market trends confirm how competition has compressed pricing: average spreads for direct lending have narrowed to approximately 550 basis points over base rates (SOFR), down from wider levels seen in prior years. On performance, returns across private debt strategies have been resilient through H1 2025. Direct lending funds are delivering high single-digit to low double-digit IRRs, supported by floating-rate coupons and relatively low defaults. Distressed and special situations remain more mixed: while some managers benefited from selective dislocation in real estate and stressed sectors, the large wave of defaults that would have powered outsized returns has not yet materialised. Mezzanine and subordinated debt strategies provided mid-single-digit returns, reflecting higher coupons but lower deployment. Private credit activity in 2025 has increasingly concentrated around a few key themes. Technology and software lending remain strong, driven by recurring-revenue models and defensibility in downturns. At the same time, healthcare and life sciences continue to attract sizeable allocations, reflecting secular demand and resilience to macro cycles. Infrastructure-related lending, particularly in energy transition and digital infrastructure, has expanded, supported by long-term policy frameworks and stable cash flows. Finally, niche segments such as defence-linked industries and specialty finance platforms have gained traction, reflecting shifting geopolitical priorities and investor appetite for differentiated exposures. Private debt is expected to remain resilient through the second half of 2025, supported by elevated base rates and continued investor demand for yield. Fundraising momentum points to strong LP appetite, while managers are likely to focus on disciplined underwriting as competition compresses spreads. Deal activity may stabilise after a subdued Q2, with opportunities in refinancing, add-on acquisitions, and distressed situations. Overall, the asset class should continue to deliver attractive risk-adjusted returns, though investors will need to balance yield premiums against mounting competition and potential macroeconomic headwinds. Real Estate Summary 2025 Global real estate funds in 2025 have entered a phase of cautious recovery after several challenging years shaped by higher interest rates and subdued transaction activity. Fundraising has stabilised, with investors showing a preference for debt-oriented and opportunistic strategies that can capitalise on market dislocation. While overall deal volumes remain below pre-pandemic levels, select sectors such as logistics, residential, and data infrastructure continue to attract strong demand, contrasting sharply with the ongoing struggles in the office market. Valuations have adjusted further, with cap rates rising and investors increasingly focused on prime, income-generating assets. Despite the still-muted exit environment, fund performance has been underpinned by resilient cash flows and defensive sector allocations, leaving the industry well positioned to deploy capital into emerging opportunities in the second half of the year. Global real estate deal activity showed renewed momentum in the first half of 2025, even as geopolitical uncertainty and shifting trade policies weighed on sentiment. Direct transaction volumes reached US$179 billion in Q2 2025, a 14% increase year-over-year, though the pace of growth moderated compared with Q1. This lifted H1 2025 volumes 21% above H1 2024, underscoring investor resilience and the sustained attractiveness of real estate as an asset class despite volatile macro conditions. Figure 21 illustrates quarterly YoY changes in direct investment by region, highlighting both the global rebound starting in late 2023 and the moderation in growth momentum through mid-2025. These dynamics point to an investment environment that is stabilising, though heavily reliant on capital concentration in fewer, larger deals and sectoral hotspots such as living and logistics. Regional trends were mixed, with the Americas showing the strongest momentum, while EMEA remained more cautious and Asia-Pacific rebounded on the back of renewed cross-border activity. Figure 21: Quarterly YoY Changes in Direct Investment by Region from Q2 2020 to Q2 2025, Source: JLL Research, August 2025 Fundraising in real estate has experienced sharp swings over the past five years, with Figure 22 showing volumes peaking in 2021 above $280bn before trending steadily downward, reaching just over $160bn in 2024. The first half of 2025, at roughly $110bn, marks an improvement compared to the same period in 2024, though still below the highs of the early 2020s. If H2 2025 attracts a similar amount of capital, real estate fundraising could come close to the very successful years in 2021/22. This aligns with deal activity patterns, where transaction volumes have stabilised but remain uneven across regions, reflecting selective deployment and investor caution. LP sentiment has been mixed: large institutional investors remain engaged in the asset class, but many are increasingly demanding more transparency on risk, particularly in light of continued stress in the office sector and ongoing macroeconomic uncertainty. Regionally, North America continues to dominate fundraising flows, while Europe shows resilience despite weaker economic growth, and Asia-Pacific captures rising interest as capital seeks diversification. Sector allocations have shifted notably. Data centres have surged to account for more than a third of H1 2025 commitments, highlighting investor conviction in digital infrastructure. By contrast, industrial has fallen back to just 20% from mid-30s share in 2022, and office fundraising collapsed to 0% in 2025, underlining structural headwinds. Residential allocations have returned to levels last seen in 2020–21, while student housing has re-emerged as an investable niche, picking up to 5% in H1 2025. These changes underscore how capital is being redeployed toward sectors with long-term growth drivers and away from those facing persistent demand uncertainty. Figure 22: Real Estate Fundraising by Sector from 2020 to H1 2025 (and 2025 Expected), Source: PERE, August 2025 The residential market in 2025 is showing early signs of stabilisation after a period of sharp correction. Rent growth has begun to recover, though markets with heavy new supply continue to experience higher vacancy pressures. Developers have slowed project starts due to tighter financing conditions, which should help rebalance demand and supply into 2026. Institutional investors remain active in the sector, with residential once again attracting a large share of global fundraising capital. Industrial real estate remains structurally strong, but performance has moderated compared with its pandemic-era boom. Demand is driven by logistics providers and e-commerce, yet older facilities face move-outs as tenants consolidate into higher-quality spaces. Trade uncertainty and tariff frictions are dampening speculative development, while rent growth has slowed from its multi-year highs. Investors remain selective, focusing on prime distribution hubs with long-term tenant covenants. Data centres are the clear outperformer in 2025, with demand consistently outstripping supply across both core and emerging markets. Pre-leasing rates remain above 75%, reflecting unprecedented demand from hyperscalers and AI-related workloads. Supply bottlenecks, particularly in power delivery and permitting, have created structural scarcity that is driving rents materially higher. Capital continues to flow strongly into the sector, making it one of the most favoured allocations within real estate fundraising. The office sector remains deeply bifurcated, with modern, prime assets in central locations capturing the majority of leasing activity. Vacancy in lower-grade stock continues to rise, reflecting tenant preference for higher-quality, sustainable workplaces. New supply is limited, with 2025 completions at their lowest in more than a decade, providing some stabilisation for core assets. However, structural headwinds remain, and investors are increasingly cautious about office allocations in fundraising. Retail real estate is showing resilience, supported by solid consumer spending and a lack of new supply. Grocery-anchored and essential retail centres continue to attract investor interest, while experiential formats benefit from a recovery in foot traffic. Obsolete suburban malls and weaker secondary assets are still under pressure, often driven by tenant bankruptcies. Overall, the sector has shifted back into favour with select investors as stable income profiles prove attractive in a volatile macroeconomic environment. The global real estate market enters the second half of 2025 with stabilisation in some sectors and ongoing bifurcation in others. Residential is expected to strengthen gradually as supply moderates and rental growth resumes, while industrial should maintain structural demand despite softer trade dynamics. Data centres will remain the standout performer, with capacity constraints and surging AI demand driving rents and investment flows higher. Office faces continued structural challenges, but prime assets may see improved pricing support as new supply remains limited. Retail is set to sustain its steady recovery, with resilient consumer spending and low new development underpinning income stability. 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