2025 is set to be shaped by political and monetary policies addressing changing economic landscapes, fiscal challenges and rising global deficits. Geoeconomic fragmentation continues to disrupt trade and supply chains, prompting nations to adapt their trading arrangements for resilience. Private capital emerges as a key driver of growth, channelling investments into transformative sectors such as infrastructure, generative AI, and royalty assets, highlighting a convergence of innovation, technology and real assets. These trends underscore an interconnected global response to the challenges of economic instability, technological disruption and geopolitical realignment.
Elections across 100+ countries in 2024 saw many incumbents lose, driven by public frustration over inflation, rising borrowing costs and strained public finances. In the UK, Labour’s victory reflected similar discontent, and their 2024 Budget marks their first major effort to address these challenges. The UK’s Autumn Budget highlights the complexities of addressing fiscal gaps, as significant tax hikes and borrowing were introduced.
Key measures include the increase in employer National Insurance Contributions (NICs) from 13.8% to 15%, a four-year "FIG" regime replacing the non-domiciled tax system, inheritance tax reforms, higher capital gains tax rates and a flat 32% carried interest tax effective from 2025.
The Office for Budget Responsibility (OBR) projects a modest 2% GDP growth for 2025, while the Bank of England (BOE) is more cautious at 1.5%. Although these policies may support public services, they also introduce challenges for private investment strategies and consumer spending. Globally, similar tax adjustments and borrowing constraints will likely impact investor confidence, with both the pros of fiscal sustainability and the cons of slowed growth posing long-term risks. Balancing these trade-offs will define recovery trajectories for governments and markets alike.
The Bank of England (BoE) maintains a cautious stance on inflation, projecting continued pressures despite headline inflation moving towards the 2% target faster than expected. Monetary easing can stimulate growth but risk reigniting inflation, which is currently 2.6% in the UK. Following its November cut to 4.75%, the market in general expects further rate cuts in 2025. In general, the market expects base rates to fall to around 3.75% by end of 2025.1 Ultimately the BoE’s decision on rates will depend on the state of the economy over the coming months by assessing factors such as how fast prices are rising, how the UK’s economy is growing and employment data.
Meanwhile, the U.S. Federal Reserve maintains steady rates, focusing on labour market strength and wage trends, while the European Central Bank (ECB) is set to cut rates again at its first monetary policy meeting of 2025, prioritising concerns over weak economic growth despite persistent inflationary pressures.
Note: CPIH: The Consumer Prices Index including owner occupiers’ housing costs, CPI: The Consumer Prices Index, OOH: Owner Occupiers’ Housing Costs.
Source: Office for National Statistics.
Source: Interest rates and Bank Rate | Bank of England.
The UK’s economic outlook for the coming year will be shaped by US trade policies, shifting geopolitical trends and the structural challenges of Brexit. Donald Trump’s potential introduction of a tariff on goods imported into the US adds an element of uncertainty. In 2023, the US was the UK’s largest trading partner, accounting for 22% of UK’s exports and 13% of UK imports.2 Despite this, the UK is expected to adopt a predominantly symbolic response to prevent exacerbating domestic inflation, further reducing the immediate economic risks.
Source: ONS, Pink Book 2024 & Geographical pattern of UK trade.
Nonetheless, broader themes like Brexit’s structural challenges such as trade friction, regulatory divergence and labour market disruptions, and geoeconomic fragmentation driven by technological competition, divergent monetary policies, and strategic shifts are intensifying trade uncertainties. Ongoing economic divergence between the US and Europe across fiscal, monetary and regulatory policies could result in global macroeconomic uncertainty.
The private capital industry is poised for significant expansion. This growth is driven by rising allocations across all client segments, particularly in private debt and infrastructure. The demand for long-term, profitable assets to match long-term liabilities is a significant driver of this trend, particularly evergreen structures with predictable and stable cash yields.
Fundraising efforts are expected to be robust, supported by favourable credit conditions and a resurgence in deal activity. Following the payout of returns, general partners (GPs) are anticipated to seek additional capital in the market from investors. Notably, private equity exits stood at $303.3bn through September 30, 2024, surpassing the $281bn total for 2023, indicating increased liquidity for investors.3 The normalisation of post-pandemic conditions and anticipated regulatory changes under the new US administration are also expected to boost fundraising efforts.
Deal activity is expected to see a resurgence in 2025, driven by favourable credit conditions, a backlog of exits and anticipated regulatory changes.
Rising activity in the M&A and IPO markets is expected to facilitate more exits and distributions across the private equity sector. The rate environment is becoming more supportive, leading to increased activity across private equity as firms seek to invest their unallocated capital. In 2024, private equity deal activity increased by 21% compared to 2023, surpassing the pre-pandemic average by 45%.4
Private equity is set for a significant rebound in 2025, bolstered by strong performance in 2024. Global PE deal count increased by 8% year-over-year in the first nine months of 2024, with deal values rising by 20% during the same period.5 With interest rates expected to fall in 2025 across western economies, private equity firms are anticipated to deploy record levels of dry powder strategically in high-growth industries like technology, healthcare and renewable energy.6
The private credit sector is expected to grow rapidly, driven by the need for businesses to seek funding sources beyond traditional banks. Despite recent rate cuts, private credit investments are expected to maintain relatively strong returns, given that benchmark rates are not expected to fall back to the unusually low levels experienced after the global financial crisis.7
Venture capital is set to benefit from surging investments in artificial intelligence (AI), as it spurs innovation in areas like infrastructure, foundational models and applications. Early-stage AI startups are securing significant funding, while established companies with robust growth prospects are thriving in a supportive fundraising environment.8 With AI reshaping industries, venture capital is prioritising transformative technologies and scalable business models, fuelling continued growth and investment.
The infrastructure sector is expected to grow significantly, driven by technological advancements and the global shift toward sustainable energy solutions. The demand for infrastructure investment is expected to rise substantially, which is underpinned by the need for new data centres, power generation and transmission infrastructure to support the rapid adoption of artificial intelligence (AI).
Generative AI (GenAI) is at the forefront of this transformation, demanding unparalleled computational power. Data centres, essential for hosting the servers required for more sophisticated AI training and inference, are experiencing a surge in demand. This surge is exemplified by significant investments, with North America and particularly the United States leading global deal activity, accounting for 69% of the $22bn invested worldwide in the first four months of 2024.9 Notably, Vantage Data Centres completed a $9.2bn equity investment led by DigitalBridge and Silver Lake in June 202410, underscoring the substantial capital being deployed in this sector.
Similarly in Europe, the sector is experiencing unprecedented growth. While France and Italy are emerging as new players, the UK has solidified its position as a leading hub driven by significant investments from global technology leaders, attracting around $7bn in the last five years.11 At the October 2024 International Investment Summit, US-based companies committed £6.3bn to UK data centre technology, bringing total investment in the sector to over £25bn since the current government took office.12 Key projects include CloudHQ’s £1.9bn data centre campus in Oxfordshire, aimed at providing the infrastructure necessary to train and deploy next-generation AI technologies. These developments are part of UK government’s broader £50bn economic growth plan, focusing on AI, life sciences and infrastructure. Furthermore, sector leaders emphasise the need for renewable power and compute diversity to sustain the UK’s growth as a global data centre hub, with the government set to designate data centres as Critical National Infrastructure.13
Private capital is driving the expansion of infrastructure to support GenAI, with an increasing number of private equity firms actively integrating infrastructure into their platforms. In January 2024, US PE firm General Atlantic agreed to acquire Actis, a UK-based infrastructure investor managing approximately $12.5bn in assets.14 Similarly, BlackRock’s $12.5bn acquisition of Global Infrastructure Partners (GIP), an infrastructure manager with more than $100bn of assets under management, positions Blackrock as a leading infrastructure player.15 GIP BlackRock has recently raised a $30bn fund with backing from leading technology firms. This fund's mandate is to invest in data centres and other energy related infrastructure.16 The rising interest in infrastructure also stems from its reliable cash flows, inflation resilience and lucrative fundraising opportunities, offering diversification and strategic growth potentials.
Furthermore, the growing AI data centre demand necessitates additional power generation and transmission infrastructure. Correspondingly, many operators are forming partnerships with power producers and exploring "behind-the-meter" solutions, generating their own off-grid power through solar, wind, natural gas, and even nuclear energy.17 For example, Digital Power Optimization Inc. is developing 100 MW of data centre capacity directly connected to wind farms in Texas18, while Microsoft has entered a 20-year agreement to purchase energy from the restarted Unit 1 facility at Three Mile Island in Pennsylvania.19 This integration of power and data centre development capabilities presents a ripe opportunity for experienced infrastructure investors across digital infrastructure and energy.
Royalty investing is poised for significant growth in 2025, driven by its potential for stable income and low correlation with traditional financial markets. This strategy involves acquiring rights to a portion of revenue or earnings from underlying assets like intellectual property or natural resources, offering exposure to growth without operational responsibilities and costs. The terms of a royalty contract are negotiated between the asset owner and the operating company, granting the operating company the right to use the asset in exchange for royalty payments.
Royalty investments, particularly in sectors like biopharmaceuticals and music, have garnered significant attention from specialised firms and asset managers in recent years. Leading players in royalty investing have been actively shaping the market with notable deals in 2024. Royalty Pharma, the world’s largest buyer of biopharmaceutical royalties, led the charge by securing a $350m funding agreement for U.S. net sales of Niktimvo (axatilimab-csfr) with Syndax in November 202420 and acquiring frexalimab royalties from ImmuNext for $525m in May 2024.21 Similarly, HealthCare Royalty Partners completed several royalties-based structured royalty financing deals with emerging biopharmaceutical companies throughout 2024, including its $115m royalty financing agreement with Heidelberg Pharma to advance its clinical programs.22 Additionally, music royalties sector is experiencing significant growth, driven by the rise of streaming platforms and increasing valuations of music catalogues23 - Round Hill Music, a leading private equity platform focused on music catalogue investments with over $900m in assets under management, expanded further by investing in high-value music catalogues in 2024, ensuring diversified and stable revenue streams from popular artists such as Whitney Houston and Bruno Mars.24 Leading asset managers are also increasingly entering and expanding their portfolios in royalty investments, attracted by the stable cash flows these assets offer. In 2024, Blackstone solidified its position by acquiring the Hipgnosis Songs Fund, a UK-listed music royalty owner for $1.6bn, aiming to optimise the profitability of its vast music catalogue.25 Similarly, KKR capitalized on its previous investments by selling a majority stake in Chord Music Partners, which owns rights to iconic songs, to Universal Music Group and Dundee Partners in a deal valuing the catalogue at $1.85bn.26 These moves highlight the growing appeal of royalties as a strategic and lucrative asset class.
Royalty investments generally offer predictable cash flows and could provide a natural hedge against inflation. Such characteristics could result in attractive risk-adjusted returns and present a compelling option for investors seeking to diversify their investment portfolio. Furthermore, the introduction of evergreen fund structures, which are open-ended without a fixed termination date could enhance flexibility and alignment with the long-term nature of royalty investments.
