Despite a rocky start to 2025, allocators remain optimistic about private and alternative investments — particularly when it comes to sectors like hedge funds and private credit, according to new research from Barnes & Thornburg.
“Private investment funds encountered several roadblocks during the opening months of 2025,” the report’s authors wrote. “The anticipated dealmaking renaissance hit snags as the Trump administration’s tariff announcements sowed heightened volatility.” This led to slumping revenues for portfolio companies that are still facing high interest rates and inflationary pressures, contributing to the lack of liquidity available to LPs.
But even as the ongoing economic uncertainty has meaningfully increased concerns for private fund investors, GPs and LPs alike are still optimistic about the current environment. In a survey of 121 U.S.-based LPs, general partners (GPs), and service providers sponsored by the law firm, nearly 75 percent of respondents said that the current economic outlook presents an investment opportunity.
Respondents expected hedge funds, private credit, and cryptocurrency markets to thrive in volatility. Three-fourths of hedge fund professionals were optimistic about the industry’s performance over the next 12 months, while nearly 80 percent of all respondents expected a stronger private credit market than in 2024. Eighty-four percent were optimistic about cryptocurrency investments in the year ahead.
Still, challenges remain. Scott Beal, a partner and co-chair of Barnes & Thornburg’s private funds and asset management practice, said that LPs have been facing the denominator effect for years, with fewer exit opportunities impacting their ability to make additional allocations. But more recently, they’re also trying to figure out how to best deal with changing fund terms being part of the new economic reality.
Investment managers have been extending their funds’ investment and fundraising periods while adding or expanding term extensions, securitization techniques, and investment restrictions to mitigate fundraising challenges. And over 60 percent of respondents expected these fund terms to increase, a significant jump from the year prior.
“GPs may need to extend the investment or fundraising period, and while you have to acknowledge that this is the new economic reality, you want to make sure there’s proper economic oversight,” Beal told Institutional Investor.
While LPs were most concerned with fund financing terms, more than half of GPs (51 percent) saw fundraising as their top worry, up from 40 percent from the year prior. In fact, after U.S. PE fundraising declined for the third year in a row in 2024, the total amount raised by closed-end funds in the first quarter of 2025 fell to $56.7 billion — a year-over-year drop of 25 percent. Fifty-one percent of managers also regarded returns as a pressing issue, up from 31 percent last year.
The survey results showed a couple of disconnects between the allocators and managers. While virtually all LPs (96 percent) said a succession plan is important, fewer than half of general partners (GPs) currently have one in place. Meanwhile, the share of LPs citing transparency as a compliance focus was twice that of GPs.
“Transparency has increased in importance year-over-year,” Beale said, noting that LPs want to make sure they’re getting enough information to monitor the investment and make the necessary reports to their own stakeholders.
While Beale acknowledged that allocators are constrained by the denominator effect and that exits may be slower in this environment, “LPs are not looking to pull back their allocation to private equity.” In fact, it's quite the opposite. “The industry has made strides in recent years in accessing other sources of capital,” he said.
