ALTERNATIVE MARKETS UPDATE – SUMMARY 2024

​After peaking inflation in the US in 2021 and 2022, inflation decreased in 2023 to below 4% in the summer and steadily hovered between 3% and 4% until summer 2024. At the time, US inflation fell below 3% for the time in years and followed an optimistic trend to as low as 2.4%, before inflation started to pick up again October 2024. Since then, inflation steadily rose to 2.9% in December 2024. While the development overall is promising, the most recent trend is worrying, as interest rates remain at high levels.
To combat inflation, the Federal Reserve increased interest rates aggressively to as high as 5.25% - 5.5% until late 2023. Initially, cuts were expected by spring 2024. Eventually, the Federal Reserve started cutting interest rates aggressively in autumn 2024. By the end of 2024, US interest rates are between 4.25% and 4.5%. Originally, cuts in the same magnitudes were expected for 2025. These expectations were crushed by Powell in the Fed’s December meeting, in which he suggested that there will only be two 25bps rates cuts throughout 2025. With inflation expected to remain between 2% and 3%, the US labour market will mark an important decision maker for the Federal Reserve for their short-term interest rate policy. Additionally, Trump is another unknown, as he is a strong advocate for lowering rates sooner rather than later. However, while he can influence a lot, it is unlikely that his view will have an impact on the monetary policy, especially as it is virtually impossible for him to replace Powell as Chair of the Federal Reserve. Powell also proved in their meeting at the end of January 2025 that he is not swayed that easily, when the Fed decided to hold interest rates at current level. Figure 1 shows the development of inflation and interest rates in the US, the Euro zone, and the UK from 2023 to January 2025.

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RESEARCH PERSPECTIVE VOL. 244 January 2025 Financial Markets Summary 2024 After peaking inflation in the US in 2021 and 2022, inflation decreased in 2023 to below 4% in the summer and steadily hovered between 3% and 4% until summer 2024. At the time, US inflation fell below 3% for the time in years and followed an optimistic trend to as low as 2.4%, before inflation started to pick up again October 2024. Since then, inflation steadily rose to 2.9% in December 2024. While the development overall is promising, the most recent trend is worrying, as interest rates remain at high levels. To combat inflation, the Federal Reserve increased interest rates aggressively to as high as 5.25% - 5.5% until late 2023. Initially, cuts were expected by spring 2024. Eventually, the Federal Reserve started cutting interest rates aggressively in autumn 2024. By the end of 2024, US interest rates are between 4.25% and 4.5%. Originally, cuts in the same magnitudes were expected for 2025. These expectations were crushed by Powell in the Fed’s December meeting, in which he suggested that there will only be two 25bps rates cuts throughout 2025. With inflation expected to remain between 2% and 3%, the US labour market will mark an important decision maker for the Federal Reserve for their short-term interest rate policy. Additionally, Trump is another unknown, as he is a strong advocate for lowering rates sooner rather than later. However, while he can influence a lot, it is unlikely that his view will have an impact on the monetary policy, especially as it is virtually impossible for him to replace Powell as Chair of the Federal Reserve. Powell also proved in their meeting at the end of January 2025 that he is not swayed that easily, when the Fed decided to hold interest rates at current level. Figure 1 shows the development of inflation and interest rates in the US, the Euro zone, and the UK from 2023 to January 2025. Figure 1: Inflation Rate and Interest Rate in the US, Euro Area and the UK, Sources: U.S. Bureau of Labor Statistics, Federal Reserve, European Central Bank, Eurostat, Bank of England, Office for National Statistics & TradingEconomics, January 2025 In Europe, inflation peaked at higher levels than the US, largely due to the direct impact on the war in Eastern Europe and to a lesser degree to the slower reaction by the central bank’s interest rate hikes. At the beginning of 2023, inflation was above 8% in the Euro area and even above 10% in the UK. The UK was hit especially hard during that period, as inflation stayed above 10% for nearly a full year. In addition to the geopolitical problems that apply to Europe, the UK had additional problems, such as political instability and battling the consequences from Brexit. Luckily, inflation started to decline rapidly and fell below 4% in autumn 2023. While the inflation decline also slowed, inflation was hovering between 2% and 3% as opposed to 3% and 4% in the US. In late 2024, inflation also declined to below 2% for the first time since the Covid crisis. However, Europe also saw a recent uptick in inflation. Currently, inflation in the Euro area is at 2.4% and the UK’s is at 2.5%. Nonetheless, Europe has the potential benefit that if the war in Eastern Europe should be stopped soon, inflation is likely to fall further. The Bank of England acted very similar to the Federal Reserve in rising interest rates. The interest rate in the UK reached its 5.25% at the same time as the US’s. In contrast, the European Central Bank hiked rates significantly slower and not in the same magnitude. The deposit facility rate peaked at 4% in autumn 2023. Rates then were left at those levels until summer 2024, when the ECB cut interest rates for the first time among those geographies. Rate cuts then continued in autumn and winter and amounted to 1% in total with the deposit facility rate reaching 3% by the end of 2024. The Bank of England cut interest rates more cautiously with two 25bps cuts in autumn and winter 2024. The UK’s interest rate ended the year at 4.75%, the highest among those geographies.   Bond investors are confronted with significant uncertainty. Although market outlooks for 2025 are the most promising since the Covid crisis, current financial markets are volatile. Powell’s statement in December 2024 added significant uncertainty for bond investors. While the higher-for-longer environment is beneficial and protects the real yields of bonds, the overall stabilization of the market implies rate cuts and thereby losses on outstanding bonds. In late 2024, the US yield curve entered its normal form again after being inverted – and at some points significantly – for nearly two years. Ahead of Trump’s inauguration, financial markets experienced increased uncertainty as to what is to be expected. After Christmas until Trump’s inauguration, markets were dominated by daily news and moved either way. With the expectation of what Trump could do, inflation concerns flared up and sent 10-year+ Treasuries’ yield skyrocketing. While yields quickly corrected to their previous levels, it emphasizes the volatility of markets. In particular Trump’s suggested tariffs could significantly increase inflation, which could result in the necessity for further interest rate hikes. Market participants also expect that Trump can achieve meaningful progress in a resolution in the war in the Ukraine. With this expectation being priced in, a negative progress on that front could also lead to further issues and negatively impact a hopefully slowing inflation. These opposite implications coming from Trump have significant consequences for inflation, which will be crucial to monitor alongside the central banks’ response.   2024 has been a very profitable year for equities, although there were nearly unprecedented dispersions within the equity market. Figure 2 shows the performance of global equities in 2024, while Figure 3 shows the indexed performance of global equities throughout 2024 and January 2025. The US led the performance of equities with a gain of 24% of the S&P 500. Within the US, there were significant differences in performance between sectors with the technology sector contributor the lion shares of the performance. There were also considerable deviations between mega-caps and other company sizes, as the largest companies – most of whom are technology companies – drove the majority of the performance. Figure 2: Performance Overview of Global Equities in 2024 (US: S&P 500, Germany: DAX, UK: FTSE 100, France: CAC 40, Switzerland: SMI, Japan: Nikkei 225, China: Shanghai Composite), Source: Investing, January 2025 Early in 2024, optimism around artificial intelligence was at peak levels and did not decrease. With the majority of large AI companies being based in the US, a lot of capital was raised and invested by these companies, which boosted their share prices on bullish outlooks. This led to a relatively increase in equities until summer, when US shares were up almost 20% at their peak. During the summer, concerns around valuations grew and the lack of interest cuts by the Fed did not contribute positively either. When the Fed eventually started cutting interest rates, equities started to rally, especially as the Fed surprisingly cut rates by 50bps. The next major uptick came after Trump’s election victory in November 2024 with his pro-business agenda. It also ended the uncertainty caused by the election, which affected markets negatively. In December 2024, the turnaround by the Fed triggered a short-lived bear market and led to the sell-off of risk assets. January 2025 has been quite tumultuous thus far. Before Trump’s inaugurations, markets saw significant volatility and performance was mainly driven by market news. After the inaugurations, markets stabilized and continue their gains. This week, DeepSeek – the new Chinese alternative to ChatGPT and its Western comrades – emerged. According to reports, DeepSeek’s AI chatbot overall performs better than any Western AI. More crucially, the model was trained with $5m-$6m compared to multiple billions of Western AI models. It also operates at a fraction of the costs for processing requests. The current assumption of Western AI companies was that the highest-grade IT equipment is necessary to run such models. This notion was shattered. It led to a significant sell-off of any company remotely active in the supply chain of AI. Nvidia lost as much as $600bn in a single day and the market overall nearly $2tn. Markets rebounded the following day, yet it will be interesting to monitor how these groundbreaking developments will affect valuations and the overall stock market in the coming weeks. It is in particular interesting with Trump’s $500bn Stargate project that is focused on providing the required resources for AI progress. Figure 3: Performance Overview of Global Equities in 2024 (US: S&P 500, Germany: DAX, UK: FTSE 100, France: CAC 40, Switzerland: SMI, Japan: Nikkei 225, China: Shanghai Composite), Source: Investing, January 2025 Coming back to 2024, European equities ended the year positively, albeit significantly worse than the US. Unlike the situation in the US, Europe’s economy is weaker and the current political instability in Europe’s powerhouses does not contribute positively either. Only Germany managed to achieve a strong performance in 2024. This can be largely explained by the index composition that relies heavily on international conglomerates that are not dependent on the German economy. More in line with the European average are the UK, France and Switzerland who achieved performance of around 5% with France even being negative. While international conglomerates also apply to Switzerland, the country’s performance is negatively affected by idiosyncratic issues of the largest index contributors. France’s performance was hurt, due to dominance of unfavourable sectors in their index. UK equities struggle to appeal to investors, due to strong devaluation of the British pound. Lastly, Japan and China also ended the year with strong performance of 20% and 15%, respectively. Japanese equities soared in the beginning of 2024 and achieved a performance of more than 20% by March on the back of a strong devaluing Japanese Yen, which is highly beneficial for its international companies. With interest rates still negative, this was unlikely to change quickly. When the Bank of Japan eventually announced that interest rate hikes were coming, panic set in and it led to massive sell-off of Japanese Yen. This led to a nearly 15% fall in Japanese equities in a single day in August 2024. Equities then gradually recovered and ended the year at slightly lower levels than before the unwinding of the carry trade. In China, the situation was significantly different, as the country was (and still is) battling the real estate crisis. Chinese equities experienced significant volatility, even dropping more than 5% at the beginning of the year. After a brief recovery until May 2024, equities started to slide again. This continued into September, when the country announced significant measures to support its housing market, Chinese equities exploded and gained more than 20% in a single month. Equities remained at those levels through most of 2024, before starting to decline again in December 2024. The big question there is how much more the economy will be supported, as they left room for further stimulus packages in their September announcement. Hedge Fund Summary 2024 Hedge funds had a strong year in 2024. This is also led to a new record AuM for the industry. BarclayHedge reports an AuM of $5.6tn compared to HFR and Preqin, which estimate the AuM of the industry between $4.5tn - $5tn (both new records). Figure 4 shows the growth in assets of the industry since the beginning of 2018. Since early 2022, AuM growth of hedge funds has been relatively slow compared to the sharp increase after the Covid crisis. On a more positive note, Preqin reported that hedge fund assets grew in double-digits in the past year, which marks the first time since Covid. This year’s growth is attributed to the strong performance of hedge funds, despite fund flows showing some weaknesses. Fund flows remain an important issue in the industry, as hedge funds experienced a net outflow of approximately $200bn over the past decade. However, the recent four years led to a re-thinking, as only around one eight of these outflows occurred in that period. Most of these developments can be explained by the overall performance of hedge funds. In phases when public markets – especially equities – are in a low-volatility bull markets, hedge funds become relatively unappealing as they typically underperform equity investments. Contrarily, they shine in crises and high volatility periods, when investors are concerned about drawdown. The past few years fall in the latter category, which explains the significantly better fund flows in the past few years. Figure 4: Hedge Fund AuM in Billion USD from January 2020 to September 2024, Source: BarclayHedge, January 2025 With fund flows showing a negative tendency over the past decade, being unique for funds has become more important. By far the most crucial factor for investors to allocate capital to hedge funds is uncorrelated returns. One of the most appealing features of alternative assets is their capabilities in diversification and uncorrelated returns to public markets. This led to promising fund flows in macro, multi-strategy and niche (in particular crypto) strategies in 2024, while equity and fixed income funds struggled. Whether crypto hedge funds will grow as much in the coming year is difficult to say, as most institutional investors who want an allocation to crypto hedge funds likely have done already and the increasing regulation alongside the spot ETFs offers an alternative to gain exposure to the space without the need for crypto hedge funds. The strong performance of those funds in the past year also likely results in institutional investors reaching their cap, which may lead to reductions in the coming year. The fund inflows in macro and multi-strategy hedge funds were frequently covered in 2024. Many of the largest hedge funds have seen huge investor interest and even declined multiple billion oversubscriptions. This also highlights the consolidation trend in the hedge fund industry. While this is a persistent trend over the past decade, it was especially pronounced in 2024. One the one hand are the established mega funds that handily raise billions of dollar, while new managers struggle to attract investor interest. Investors also place more importance on the track records of hedge funds, which exacerbates the issue for emerging managers. Fundraising is also significantly easier for new funds of existing managers as opposed to new funds from new managers. This trend has been evident in yearly new hedge funds launches. 2024 was an extremely weak year in terms of new funds launched. Since 2000, there was no single year, in which fewer funds were launched. In 2024, just slightly more than 100 new funds were launched. This is a steep decline from nearly 300 back in 2023, 400 in 2022, and typically 600 in 2021 and the decade before. On the bright side, liquidations also came down significantly and have never been that low in the past decade.   Performance has been the key contributor for the growth of the asset class in the past years. Despite the negative fund flows, hedge funds still make an appealing case for optimising absolute and risk-adjusted portfolio returns. Unsurprisingly, equity strategies have performed the best among the core hedge fund strategies. Depending on the index, equity hedge funds returned between 8% and 15% on average in 2024. While this is significantly below the US equity return in 2024, it is in line with the industry’s performance in strong equity markets. The next crucial step will be how the strategy can handle the next bear market. Especially if positive, it could lead to another high growth period for hedge funds. Figure 5 shows a comparison of Stone Mountain Capital’s Equity strategies and various benchmarks. Figure 5: Performance of Stone Mountain Capital’s Equity Hedge Funds and Benchmarks in 2024, Source: Stone Mountain Capital Research, Credit Suisse, HFRX, Eurekahedge, Standard & Poor’s, January 2025 Fixed income strategies have continued the trajectory of solid performances since its catastrophic year in 2022 when bond prices collapsed. Since then, fixed income hedge funds have returned stable single-digit returns. Figure 6 shows a breakdown of returns of fixed income hedge funds in 2024. Stone Mountain Capital’s fixed income hedge funds returned just above 6% in 2024, while the returns of other benchmarks varied considerably between 1% and 8.5%. Figure 6: Performance of Stone Mountain Capital’s Fixed Income Hedge Funds and Benchmarks in 2024, Source: Stone Mountain Capital Research, Credit Suisse, HFRX, Eurekahedge, Bank of America, January 2025 The aforementioned beneficial impact of hedge funds on portfolio returns is even more pronounced for multi-strategy and global macro hedge funds, which partially explains the investor interest in this strategy. Global macro hedge funds had a relatively volatile year in 2024 and ended the year with positive single digit returns. Stone Mountain Capital’s Tactical Trading hedge funds ended the year 5% up, while most benchmarks hover between 2% and 6%, as shown in Figure 7. Overall, global macro strategies have become less volatile over the past five years, although there are still significant differences in risk and return profiles among individual global macro funds. Figure 7: Performance of Stone Mountain Capital’s Tactical Trading Hedge Funds and Benchmarks in 2024, Source: Stone Mountain Capital Research, Credit Suisse, HFRX, Eurekahedge & CBOE, January 2025 The significant interest in cryptocurrency hedge funds is unsurprising, as the asset class is becoming more prominent and increasingly more “investable”. Cryptocurrency hedge funds returned around 70% in 2024 with Stone Mountain Capital’s funds reaching an average performance of 78%, as shown in Figure 8. However, this is significantly lower than 120%+ that Bitcoin achieved in 2024, which is now easily investable through ETFs. Despite this caveat, interest in crypto hedge funds remains high, due to the variety of strategies that are employed. An outperformance of Bitcoin compared to a cryptocurrency portfolio is also somewhat rare and unlikely to hold for 2025. More details on the industry are provided in the following chapter. Figure 8: Performance of Stone Mountain Capital’s Cryptocurrency Hedge Funds and Benchmarks in 2024, Source: Stone Mountain Capital Research, HFRX & CoinMarketCap, January 2025 Given that hedge funds strategies achieved good performances across the board, Fund of Hedge Funds (FoHFs) also posted solid returns with benchmark indices returning around 8% to 12%. Stone Mountain Capital’s FoHF underperformed these benchmarks with only 6% performance in 2024, with the caveat that the category consists of only two FoHFs. On aggregate, the average hedge funds returned between 26% and 29% in 2024. While impressive, cryptocurrency hedge funds contributed the majority to this performance. Nonetheless, Equity and Global Macro funds also contributed to this strong result. Figure 9 shows these returns in more detail. Figure 9: Performance of Stone Mountain Capital’s Tactical Trading Hedge Funds and Benchmarks in 2024, Source: Stone Mountain Capital Research, HFRI & Eurekahedge, January 2025 Blockchain & Cryptocurrency Summary 2024 Cryptocurrencies achieved a stellar performance in 2024. This continues the strong upward trend the industry started in 2023, after the cryptocurrency market started to collapse in November 2021, which continued well throughout 2022. During this downward trend, the total market capitalization of cryptocurrencies fell to below $1tn. Currently, the industry’s market capitalization is close to the $4tn threshold, which highlights the steep growth since its last low. Figure 10 shows the development in market capitalization since the beginning of 2021. In 2021, the space was in its last bull run, which ended abruptly at the end of 2021 and continued until the beginning of 2023 with several spectacular collapses along the way. 2023 resulted in a specular bull run, although the increase is relatively little compared to 2024. 2023’s remarkable performance mainly stems from the fact that the market bottomed in December 2022, which led to strong percentage gains from the industry’s rebound. 2024 had two major drivers that led to strong performance of the cryptocurrency market – the approval of spot Bitcoin and spot Ethereum ETFs and Trump’s election alongside a pro-crypto government. Figure 10: Cryptocurrency Market Capitalization in Billion USD Since January 2021, Source: CoinGecko, January 2025 More concretely, it led to Bitcoin soaring from just above $40k to more than $100k by December 2024 and January 2025. Figure 11 shows this strong growth alongside key events that were responsible for a large portion of this growth. In early 2024, the first spot Bitcoin ETFs were approved by the SEC, which elevated the crypto industry and Bitcoin in particular. While the immediate impact on the Bitcoin is not observable, prior to the announcement, Bitcoin already rallied, which led to a flat response. This is a common theme for these key events. The second steep increase followed in February 2024, when Bitcoin ETFs huge inflows after comparatively mediocre inflows in the month of its approval in January. Bitcoin then remained mostly flat until early November 2024. During this period, spot Ethereum ETFs were surprisingly approved in May and Trump’s participation at “Bitcoin 2024” and his plans pro-crypto administration led to anticipatory gains followed by similar declines. When Trump won the election, Bitcoin and cryptocurrencies started to rally, as crypto markets this time did not anticipate a Trump victory. By the end of 2024, Bitcoin also rallied beyond the $100k for the time. After a brief risk-on asset selloff at the beginning of 2025, Bitcoin and cryptocurrencies briefly reversed the trend as soon as Trump was sworn in on 20th January 2025. Figure 11: Bitcoin Price Development from January 2024 to January 2025, Source: CoinMarketCap, January 2025 Since January 2024, Bitcoin gained 137% at the time of writing. A majority of other cryptocurrencies did not manage to keep up with Bitcoin’s performance in that period, as shown by the Bitcoin dominance indicator shown in Figure 12. The indicator measures the total market capitalization of Bitcoin in comparison to the total market capitalization of all cryptocurrencies. Historically, Bitcoin dominance has been a reliable indicator for bull and bear markets in the space. Rising Bitcoin – as the “safe” asset in the space – dominance indicates a further bull run. Crypto bull runs usually go through two phases. In the first stage, Bitcoin outperforms altcoins, while this reverses in the second stage and Bitcoin dominance falls. Historically, this phenomenon is explained by investors first moving into Bitcoin and as greed increases, allocations in altcoins and more speculative coins increase, leading to falling Bitcoin dominance. This is a promising sign for the industry and indicates a prolonged bull run. However, there are two caveats. Firstly, as the asset class becomes more established, these trends flatten and reducing their “predictive” patterns. Secondly, Bitcoin’s increase was driven significantly by fundamental factors. For example, the launch of Bitcoin ETFs makes the asset more investable and leads to direct inflows. Similarly, Trump’s Bitcoin reserve also directly affects Bitcoin and no other cryptocurrency. Figure 12: Bitcoin Dominance and the Performance of the Largest Altcoins (Excluding Stablecoins) from January 2024 to January 2025, Sources: CoinGecko & CoinMarketCap, January 2025 Ethereum, the second-largest cryptocurrency, had an unimpressive year in 2024. The cryptocurrency significantly underperformed Bitcoin and most other cryptocurrencies. At the time of writing, Ethereum is only up 41% compared to its January 2024 levels and nearly 100% lower than Bitcoin’s performance over the same time frame. Solana – the third largest cryptocurrency for a long time – moved alongside Bitcoin for the longest time and only started deviating in December 2024. The coin regained its losses relative to Bitcoin in part thanks to President Trump’s TRUMP coin. Yet, Solana has been overtaken by Ripple (XRP) as the third-largest cryptocurrency since Trump’s election. Since January 2024, Solana gained 134%, while Ripple grew by a staggering 393% in that period. Ripple’s gains were mostly caused by optimism around Trump’s pro-crypto administration, as Ripple is in a legal battle with the SEC for years, which should ease significantly if not being dropped soon. Private Equity & Venture Capital Summary 2024 Following a challenging macroeconomic environment in 2023, conditions for the private equity industry have improved. While still not ideal, the landscape in 2024 has seen notable progress. Inflation has stabilized at manageable levels, and although interest rates remain high, they are on a downward trajectory heading into 2025 and beyond. The macroeconomic outlook for 2025 is generally optimistic, particularly given the significant improvements over previous years. After a period of subdued activity, the private equity market rebounded in 2024, and this positive momentum is expected to continue into 2025. The industry also faced challenges stemming from the overheated market of 2021 and 2022. As a result, private equity activity remained sluggish throughout 2023 and much of 2024, primarily due to low deal volume across the sector. The sharp rise in valuations during 2021 and 2022 enabled most companies to secure funding at highly favourable terms, ultimately contributing to a liquidity squeeze within private equity. With ample capital already raised, many companies had little need for additional funding, limiting opportunities for private equity firms to deploy capital. Moreover, when companies did seek new funding, valuation disagreements often arose, as investors were reluctant to match the elevated prices of the previous bull market. Unless securing additional capital was absolutely essential, deals were rarely completed. This challenging environment resulted in a limited number of transactions and correspondingly few exits. The overall difficult ecosystem for the private equity market since its bull run in 2021 and 2022 has been challenging. The situation is improving but is not resolved yet. With fundraising typically taking some time and capital deployment being difficult, it is no surprise that dry powder in the industry rose in the past years. Recently, US PE dry powder surpassed the $1tn mark, which is close to its record high in 2023. However, in contrast to the total AuM of the US private equity market, dry powder is decreasing. PE AuM has significantly increased in 2020 and 2021, as shown in Figure 13. Since then, the growth in AuM has slowed. As of Q2 2024, the US PE market manages just above $3.5tn. Figure 13: US Private Equity AuM and Dry Powder from 2014 and Q2 2024, Sources: PitchBook, January 2025 The challenging ecosystem is also observable in the performance of private equity and venture capital. While the two asset classes flourished in the bull run following Covid with steady quarterly IRRs above 10% for private equity and IRRs as high as 30% for venture capital, performance is lacking since 2022. Private equity at least managed to achieve positive IRRs in most quarters. Venture capital posted negative returns throughout most quarters, as shown in Figure 14. Figure 14: Quarterly IRRs of US Private Equity and US Venture Capital from Q1 2020 to Q2 2024, Sources: PitchBook & Cambridge Associates, January 2025 Deal activity remains one of the core issues of private equity and venture capital in the current state, as outlined previously. However, as the ecosystem is improving, so is deal activity. Since the end of 2023, the market has become more active and in private equity, it even reached peak pre-Covid levels. This is a strong signal for the industry, as the notion around deal activity in private equity is still quite negative, despite being very strong when excluding the Covid bull run. The most notable development in the past year – especially in the US – was the rising number of transaction exceeding $1bn, which is a key driver of aggregate deal activity. Although overall deal activity is up, exits are still a concern, as those have been low. This is especially problematic for funds that are nearing their final terms and must distribute capital back to investors. As the market has been subdued in the last couple of years, pressure mounts to exit positions, which hurts the performance of the industry. However, 2025 is shaping to be a promising year for exits. It is partially caused by necessity but profits from a better market environment, which is still far away from ideal, but remarkably improved compared to the last few years. The recent boom in AI is an expected highlight and helped mitigate some of the weaknesses in deal activity. The outlook for 2025 under Trump is certainly beneficial alongside an already planned IPO from a high-profile candidate Klarna. These can frequently function as triggers for an IPO wave. For Europe, in particular the strong Fintech industry could a contributor to a surge in IPOs. Exit opportunities in Europe remained limited too. Since 2019, VC-backed IPOs never exceeded the €20bn threshold with exceptions in 2022 with €32bn and the blockbuster year of 2021 with IPO exits amounting to €155bn. Puig’s IPO – a Spanish luxury brand – significantly helped the otherwise poor numbers in 2024. While 2025 will not be an ideal year, many negative factors are likely to improve. This includes falling interest rates, a potential resolution of the war leading to economic optimism and a strong stock market. However, Europe is unlikely to be the reason for an IPO surge. The US will drive the IPO market, which is very likely to boost exits in Europe as well.   Despite the current challenges in performance and the lack in exit opportunities, fundraising in private equity remains solid. In the US, private equity raised nearly $300bn compared to close to $400bn in the past three years. While this is a significant decline, it is still significantly more than in any year prior to Covid apart from 2019, as shown in Figure 15. Compared to its peak, private equity fundraising only declined by slightly more than 25%. For venture capitalists, the market has been harsher. During the post-Covid bull run fundraising tripled to pre-pandemic levels. Unsurprisingly, the industry could not manage to retain these levels of capital inflows. In 2022, VC raised nearly $150bn in the US alone. This declined to around $90bn in 2023 and fell further in 2024 to around $70bn. Figure 15: US Private Equity and Venture Capital Fundraising from 2014 and 2024, Sources: PitchBook, January 2025 Investments in private equity and venture capital are particularly appealing currently, as the market overall is a relatively healthy state with a promising outlook. While there are certainly challenges ahead, the negative view on the asset class usually translates positively into performance. In the space, the best years have proven to be towards the end of a crisis. Valuations – excluding AI – are also relatively low compared to public equity markets that make it appealing to enter the market now.   In case the exit market should not occur as optimistically as expected, there are other opportunities as well. In the past years, when funds came under pressure due to liquidity shortages, they needed alternative ways to exit positions. This led to a significant increase in Secondary transactions. The trend rose to prominence during the post-pandemic bull run, when investors desperately were looking for ways to invest in companies that were not raising capital. When the market conditions reversed, the Secondaries market was used in the opposite way. This led to a steady increase in deal values even in the most recent crash in deal activity. As shown in Figure 16, before the pandemic, the total value of Secondaries amounted to less than $5bn, which soared to $35bn - $40bn during the bull run in 2021 and 2022. In 2024, the total value of Secondary deals rose to $47bn. Figure 16: Global Private Equity-Backed Secondary Exits from 2018 to 2024, Sources: PitchBook, January 2025 Private Debt Summary 2024 Private debt experienced a strong year in 2024. The asset class had profited from the macroeconomic environment in recent years. Especially declining inflation has been helpful to the industry, as the asset class can deliver steady returns. High inflation decreases the appeal, as most of the profit is consumed by inflation. With inflation nearing the 2% target across Western economies and current interest rates as high as they have not been a long time, these risk-adjusted returns become very appealing. Unlike in previous year, the industry is also not threatened by impending recession, which would likely result in increasing default rates and reducing performance. As shown in Figure 17, the industry is providing steady IRRs. The median IRR of global private debt funds overall rose from 7% back in 2014 to above 10% in the past years, even during the Covid pandemic. With a similar risk profile than the public high yield market, the industry is especially appealing, as the industry performed significantly better in the past decade. The deviation between the top quartile IRR funds and the median IRR is relatively low with the highest differences occurring in the past few years. Nearly a decade ago, this difference was around 2% compared to nearly 5% in the past years. However, bottom quartile IRR funds have struggled much more to maintain a performance relatively close to the median. The distribution of strategies within private debt plays a significant role in this dispersion among funds. A large majority of funds is pursuing a direct lending strategy, which is the “safest” strategy in private debt. This also leads to the smoothed returns of the industry. Riskier strategies in poor ecosystems can significantly alter the performance of the bottom quartile funds, as opposed to poorly performing direct lending funds. The macroeconomic conditions and generally low activity in private markets hurt the opportunity of riskier strategies, e.g., mezzanine, venture debt, and special situations, to generate strong performances. Figure 17: Indexed Performance of Global Private Debt in Comparison to Morningstar’s Global High Yield Index & IRRs of Global Private Debt, Source: Pitchbook & Morningstar, January 2025 A strong preference for direct lending is also observable in the fundraising data of the private debt industry. In total, 77% of capital that is raised flows into direct lending funds and another 12% into special situations, which leaves the remaining strategies with only 11% of capital raised. The space is still seeing strong inflows, as shown in Figure 18. The year 2024 is likely the second-best year on record and still has the potential to surpass 2021 with slightly below $160bn capital raised in 2024. Despite an overall strong year of fundraising, the first quarter showed some weakness, which prevents the industry from setting a new record. Investors were concerned about the market development of syndicated loans in the US as well as the fees surrounding direct lending funds. The latter proved to have a significant impact, as average fees for direct lending funds decreased by 0.26% to 1.42% in management fees during 2024. The median fee for direct lending funds remains 1.5% and 2% for other sub-strategies due to the higher risk involved. Figure 18: Fundraising and Funds Closed in Global Private Debt from 2015 to 2024 (Actual: Q1-Q3 2024, Estimated: Q4 2024), Source: Preqin Pro, December 2024 Figure 19 also shows a concerning consolidation trend that is evident in all alternative asset classes over the past years. Compared to the industry’s peak in 2022, the number of funds raising capital has fallen from 300 to 100. This is the lowest number in the past decade, even at times, when the industry raised less than a third of capital. While the trend of declining funds is only in its third year, the difference between emerging managers and established managers has grown significantly. The median new fund manages to raise $78m in comparison to the median fund of an established manager that raises $1.5bn.   Although on the surface, it seems as it was a smooth year for private debt, the industry had to deal with several issues. These mostly address deal activity. The industry profited strongly from the developments of Covid and the subsequent banking crisis, as banks retreated from several areas, in which private debt could step in. As the industry was not as large as private equity for example, the total available capital also was not that high. This allowed the industry to avoid slowed deal activity and liquidity bottlenecks (especially for exits). The private equity industry is also becoming more important to private debt, as private equity transactions are leaning increasingly on private debt for their financing, especially after banks and other institutional investors reduced loans. As shown in Figure 19, institutional leveraged loans came back strong in 2024, which a key market, where private debt swept in when institutional investors decreased the capital. Figure 19: Newly Issued Capital for PE-Backed Transaction in Billions from Q1 2022 to Q4 2024 Separated by Institutional Leveraged Loans and Direct Lending, Sources: PitchBook & LCD, January 2025 Despite these challenges, the industry managed to avert this potential crisis. Private debt managed to lower the spreads on their transaction, as they could not compete with the competitive pricing of leveraged loans. Private debt also specialized in the lower-rated credit market and the lower middle market. These measures allowed the industry to remain competitive and retain their importance for private equity-backed transactions in 2024. The industry is also well-positioned for 2025, as market participants are optimistic about the strengthened M&A market in 2025. Deal activity also slowed in Q4 2024, due to the uncertainty caused by the US elections. A Trump administration with his business-friendly agenda, the prospect of deregulation, and the increase pressure on private equity to distribute capital is likely to revitalize LBO and M&A activity, in which private debt can play an important role. Real Estate Summary 2024 The real estate industry has been in a difficult state since Covid. While the overall market suffered, consequences varied widely across different sectors. The most prominent example during the initial period was that residential properties surged in attractiveness, while office and leisure properties suffered. After the initial period was over, rampant inflation took over, which made investments in real estate unappealing, as returns no longer generated positive real profits – a major selling point from an investment perspective. In 2024, inflation came back to manageable, albeit still high levels historically. From that perspective, properties regained investor interest. However, slowing inflation came at the steep price of highly elevated interest rates. This represents a significant headwind to the real estate market, as financing becomes more expensive and reduces profitability. This is an issue that will likely persist in the coming years, as previous assumptions of aggressive cutting cycles were smashed by the Fed’s December statement. Uncertainty about re-emerging inflation in 2025 that might result in interest rates hike again also dampened the optimism for 2025. While the latter constitutes a risk, the case for gradually slowing interest rates remains the base case and the market is in a better shape than throughout most of its past five years. 2024 also showed more investor interest in emerging property types. Traditional real estate markets, such as office and retail, do not only suffer from the general real estate headwinds, but are also affected by technological and demographic trends. Technology has allowed people to do more from the comfort of their home, which is becoming more and more standard. Specifically for office and retail, this means that people work from home instead of the office or order goods home instead of visiting stores and buying them there. Despite these headwinds, investors of traditional sectors are enthusiastic about attractive opportunities in acquiring properties at low prices. Historically, these sectors provided strong returns when acquired during crises.   Within real estate, data centres were the uncontested winner in 2024. The AI boom has led to an incredible need for data processing, requiring massive amounts of energy and data centres to improve AI models. Despite high financing costs to build new properties, data centres are highly sought after and due to its importance in the AI arm’s race, relatively price unsensitive. As mentioned previously, DeepSeek may change the forecasts for the necessity of such amounts of data, due to its efficiency. On the other hand, a slowdown in this market is unlikely, especially considering the US’s $500bn Stargate project that will include data centres. Figure 20 shows the steep increase in energy required to power these data centres, despite steadily increasing efficiency. Data centres are also the only sub-sector in real estate that is growing significantly in 2025 compared to the industry’s peak between 2021 and 2024. Only the North America’s residential sector alongside real estate in Asia are also growing, while all other sectors in Europe and North America are declining. In some instances, significantly, with declines of up to 70% in US office real estate market. Figure 20: Global Colocation Facilities in GW from 2020 to 2024 and Expectations for 2025, Sources: JLL Research & CBRE, January 2025 STONE MOUNTAIN CAPITAL Stone Mountain Capital is an advisory boutique established in 2012 and headquartered in London with offices Pfaeffikon in Switzerland, Dubai and Umm Al Quwain in United Arab Emirates and Tallinn in Estonia. We are advising 30+ best in class single hedge fund and multi-strategy managers across equity, credit, and tactical trading (global macro, CTAs and volatility). In private assets, we advise 10+ sponsors and general partners across private equity, venture capital, private credit, real estate, capital relief trades (CRT) by structuring funding vehicles, rating advisory and private placements. As of 2nd February 2024, Stone Mountain Capital has total alternative Assets under Advisory (AuA) of US$ 62.4 billion. 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