Alternative managers to benefit from market shifts in 2025

Moody’s has painted an optimistic picture for alternative asset managers in 2025, with lower interest rates and deregulation likely to prove supportive. 

In its latest asset management outlook for the new year, the ratings agency said alternative asset managers are expected to see a notable uptick in realisations after a prolonged period of reduced deal-making.

“Alternative managers will benefit from lower interest rates, deregulation, and an improving exit environment. In the year ahead, we expect realisations to rise after nearly three years of reduced activity, and we expect fundraising conditions to improve,” it stated.

This was attributed to financial market outperformance during 2023–24, increasing public market values, and deal making that is likely to pick up with greater certainty about the direction of interest rates, as well as reduced regulation.

Additionally, with greater certainty following the US elections, it suggested the IPO market is now expected to open up, benefiting both the broader economy and private equity investors aiming to return capital to limited partners.

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It identified private credit as a particularly bright spot in this space, pointing out that it has been growing rapidly and has produced strong returns.

“Alternative asset managers continue to attract funds for credit strategies such as private credit, which is growing rapidly and has produced strong returns. An expanding economy lowers default risk for portfolio companies,” it added.

It also suggested this could be an area of “potentially sizeable growth” where alternative managers could expand their footprint at a large scale, given the shift in assets moving out of traditional banking markets.

“Another round of post-financial crisis banking regulation is scheduled to take effect in 2025, and could require banks to hold more capital as a result. This creates another opportunity for alternative asset managers to expand their market share in private credit, which as of 2023 stood at $1.7 trillion in AUM. The banking industry, by comparison, has $23 trillion of assets,” it said.

“We expect private credit could tap into as much as $3 trillion in assets moving off bank balance sheets in the next five years, including residential mortgages, higher-risk commercial real estate, project finance, and asset-backed finance like auto loans, aircraft leasing and student loans.”

More broadly, Moody’s identified continuing global economic growth will benefit financial market conditions. It observed strong equity market performance in North America, Europe, the UK and Asia Pacific lifted asset managers’ earnings in 2024, and positioned them to benefit further in the new year. 

“The positive momentum in equity markets will help expand asset managers' AUM, strengthening both their top and bottom lines via higher fee rates on equity products and higher margins as a result of economies of scale,” it said.

However, despite the positive macroeconomic environment, Moody’s cautioned that the asset management industry will still have to contend with the long-term investor shift away from actively managed funds to lower-fee exchange-traded funds (ETFs). 

“Although traditional active mutual funds continue to see outflows, organic growth which has been building in other areas should get a boost from rising markets and increased investor confidence. 

“As investors re-risk, flows into equity funds will likely continue to be of the index fund and ETF variety, which tend to generate lower fees than active equity mutual funds.

“Higher operating costs and shrinking fee revenue will continue to chip away at industry margins. Industry dynamics will continue to favor larger and specialised asset managers, while midsized and smaller scale managers will continue to lose market share.”