INTRODUCTION Contributed by: Elizabeth Shea Fries, Sidley Austin LLP
both private equity and venture capital are not only investing in AI but also deploying AI strategies in their portfolio companies to be more operationally efficient and enhance decision-making. AI is also driving a need for more energy, with increased investment in infrastructure and in data centres that have a huge appetite for energy, power generation and related digital infrastructure. To the extent that interest rates and therefore borrowing costs lower, or inflation increases, we can expect to see more real estate investing and capital investment in the infra - structure sector. Credit funds, particularly those engaged in direct lend - ing, real estate and infrastructure debt, continue to grow in size and stature, while many benefit from a dif - ferentiated strategy. Global regulators are increasingly focused on “non-bank financial institutions”, which could curtail investment activity and limit access to financing especially outside of the USA. The credit funds space has led the development of the hybrid or evergreen structure, which is a deliberate structur - ing to match the liquidity of the fund with the liquidity of the portfolio assets. In the USA, fund structures may include those electing to be treated as “business development companies” (BDCs) or “interval funds” under the Investment Company Act of 1940 (“40 Act”), each of which presents a tax-efficient structure for non-US investors. In the case of mortgages and other real-estate-related debt, non-traded real estate investment trusts or even interval funds under the 40 Act provide similar liquidity and tax efficiency. The secondary market for private assets is also strong, with continuation funds and GP-led secondaries pro - viding much-needed liquidity for investors with long- held assets. Notably, secondaries are expanding from the private equity, real estate and infrastructure sec - tors to include more credit, venture and other assets. Last but not least, hedge funds have seen the strong - est inflows of the last decade, and their strategies have demonstrated that they can benefit from market dislocations and uncertainty. Global trade and rates uncertainty have provided macro funds opportunities that have been harder to capture in recent years, and in general hedge funds have benefited from the abil -
ity to hedge in volatile markets (including with long/ short strategies). With the high returns in public equi - ty markets, hedge funds may represent an attractive opportunity for uncorrelated returns with downside protection. Artificial intelligence, technology and blockchain/ tokenisation In addition to driving certain investment themes, AI is becoming more commonly used by managers for their own operations and within their portfolio compa - nies. It is an area in which managers need to keep a watchful eye on compliance and regulation, particu - larly with increasing focus on the regulation of cross- border investing and concerns about cybersecurity and privacy. Technology is also the driver for many fintech plat - forms that are democratising access to alternative investments through distribution channels. These plat - forms can facilitate fractional ownership and smaller minimum investments, but managers will want to con - sider carefully the appropriate limitations around sales efforts in the hands of third parties. Finally, 2025 is witnessing an uplift in the use of block - chain technology to tokenise or represent digitally both physical and intangible assets. Tracking and trading these assets may become much easier, but whether that is a benefit to many alternative strategies remains to be seen. In addition, the speed of adop - tion of these technologies has raised concern over compliance with existing laws and regulations, and has generated a surge of interest from legislators and regulators. “Retailisation”/democratisation High net worth investors present an opportunity for alternative fund managers facing challenges in insti - tutional fundraising, particularly as the economy has not been kind to traditional 60/40 stock/bond portfo - lios, and the most recent trend is that these investors (and their advisers) are driving demand for alternative investments. The widely held view is that financial advisers to wealthy individuals have offered portfolios that are significantly underweight in alternatives, lead - ing to an increased demand for both new products and distribution.
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