Asset Management Outlook 2025: Exploring Alternative Paths

Infrastructure: The asset class reconfiguration

Infrastructure has performed well amid recent high inflation, in-line with historical experience. However, moderating inflation and heightened geopolitical issues present headwinds to future cash flow upside for assets whose revenue growth comes primarily from inflation sensitivity. This may put pressure on upside growth potential, particularly in core strategies. Limited relief from the interest rate environment may also pressure core returns. We believe fundamental asset growth will become more critical to attractive upside generation.

Asset owners with the ability to pull operational levers to drive fundamentals are likely to be best positioned in 2025. We believe value-add strategies are well positioned in this regard as their business model derives more of its return from operational value creation initiatives in cash flow-generating assets. The key risk is execution skill, but this can be mitigated via careful manager selection.  

Much like in private equity, we believe the middle market offers an attractive balance of potential value creation from systematic operational initiatives and a flexible exit strategy, amplified by recent fundraising trends. The industry is evolving, with large funds accounting for a bigger share of fundraising, which we believe will lead to greater competition to deploy capital at the upper end of the market. However, this presents attractive exit opportunities for mid-cap funds that can grow their investments during their holding periods. Competition for new assets in the large-cap market could also widen the existing valuation spread between middle market and large-cap assets, amplifying multiple expansion tailwinds for mid-market assets from entry to exit.

Given the market dynamics linked to asset size, access points for infrastructure may bifurcate. Large core assets could increasingly become within the scope of evergreen structures, which provide more flexibility for long hold times without the need to exit the investment. Returns would come largely from yield, reducing the reliance on transactions to generate cash flows. Opportunistic assets may continue to be held primarily in drawdown funds, a structure that can provide discipline to sell the asset and realize proceeds. Value-add strategies can lend themselves to either structure, given their mix of yield and capital appreciation return drivers and greater exit and realization flexibility.

More broadly, while structural change is always subject to some degree of uncertainty, we expect thematic opportunities to remain in focus in 2025 as infrastructure evolves. The shift towards more sustainable energy consumption is driving investments across renewable energy storage and electrified transport. AI’s accelerating adoption is another structural force; data center investment is poised to more than double by 2030, driven by AI. Trade fragmentation represents another structural change for the asset class, as companies reconfigure supply chains for resiliency and evolving geopolitical realities. This is impacting transport and logistics requirements to support changing locations of manufacturing and storage facilities, and trade routes to deliver goods to customers. Aging populations may also contribute to growing demand for private infrastructure funding, as public budget priorities in societies with aging populations shift to support retirees’ income and healthcare needs and leave less public money available for public works spending.

Hedge funds: A different dimension to diversification

Markets proved volatile in 2024 with a tumultuous period in August in particular seeing sharp risk-off moves. Hedge funds navigated this period well and ended the third quarter in positive territory, highlighting their important role in diversifying a portfolio and reducing both equity and fixed income market beta. Today’s post-quantitative easing environment is supportive to both hedge fund demand and returns. Lower beta/market return expectations and unstable correlations between fixed income and equity have made uncorrelated hedge fund returns more valuable to asset allocators.⁵ Volatility and dispersion have also made positive hedge fund returns more possible. Consequently, there has been a resurgence of interest in hedge funds and liquid alternatives and, as part of this, the return of portable alpha and extension strategies (extending long-only approaches to include limited short exposure) as a means to implement.

The hedge fund and liquid alternatives industry has also evolved. Dispersion has gotten wider, making manager selection matter even more; more so than most other asset classes. At the same time hedge funds have gotten even tougher to access and assess. The landscape has evolved to become more binary between platform hedge funds vs specialized hedge funds, and more expansive where skill can now be better accessed via not just funds but also separately managed accounts (SMAs) and co-invests. The lines are also more “blurred” between platform hedge funds vs funds of hedge funds, proprietary vs external, and hedge funds vs liquid alternatives that are designed to deliver the returns and risk of the hedge fund industry in a systematic and transparent way, without directly investing in individual managers.

1. How should investors assess different private market vehicle structures?

We believe there is a role for both closed-end drawdown funds and evergreen vehicles in private markets. Four key dimensions may drive the vehicle decision: liquidity and investor control; program complexity; performance impact from fund structure; and product availability. Evergreen funds are advantaged on the first two dimensions, while drawdown funds are advantaged on the latter two. The ultimate choice—whether one structure or a combination—should consider the investor’s time horizon, relative importance of the four key dimensions, and resources to implement the program.

2. What is a GP’s distribution quality?

With fewer exits, private equity GPs have turned to creative liquidity solutions, such as dividend recapitalizations, net asset value (NAV) financing, and continuation vehicles (CVs). While these solutions help create distributions and lock in value (albeit sometimes subject to clawbacks), they may ultimately increase the range of outcomes. In aggregate, dividend recapitalizations have been used prudently and increased the average deal’s internal rate of return (IRR), but assets can be vulnerable if the underlying company is not well-selected for the transaction.⁶ NAV financing adds leverage, cross-collateralizing portfolio assets and creating potential to magnify returns on the upside and downside. Continuation vehicles let GPs keep creating value, giving the company time to recover from a temporary dislocation and avoiding having to sell a prized asset to a competitor. However, in some cases maintaining a strong growth trajectory calls for a different operational value creation plan, that may be better executed by a different GP. Over time, the quality of a GP’s distribution will become apparent.

3. Is AI becoming “crowded”?

We believe the AI investment theme is underlined by secular trends but should be addressed thoughtfully. In venture capital, the difference in investor enthusiasm for AI vs other sectors is becoming apparent in valuations and investment terms. In real assets, while AI-driven data center demand should remain a strong theme, the market’s ultimate size will depend on demand, the ways in which technological progress influences space requirements for hardware and cooling solutions, and power availability. With data centers in scope for both real estate and infrastructure managers, assets may see demand from both investor types. Some attractive opportunities may come in the form of providing more efficient energy and water services. Holistic, creative solutions (e.g., incorporating the physical space along with power generation and/or cooling) may be well positioned. 

For more of our 2025 investment views explore A New Equilibrium, Landing on Bonds, Broader Equity Horizons and Disruption from All Angles and the potential sources of attractive returns they could create.

¹ Burgiss, Goldman Sachs Asset Management. As of October 22, 2024.

² LCD. As of September 30, 2024.

³ Goldman Sachs 2024 Private Markets Diagnostic Survey. As of October 2024.

⁴ Nareit, Goldman Sachs Asset Management. As of October 31, 2024.

⁵ MSCI, Barclays, Goldman Sachs Asset Management. As of June 30, 2024.

⁶ Leveraged payouts: how using new debt to pay returns in private equity affects firms, employees, creditors, and investors. Authors: Abhishek Bhardwaj, Abhinav Gupta, Sabrina T. Howell. As of July 1, 2024.