Private Capital Navigates Trade War Volatility and Allocation Squeeze | Weekly Pulse

🔍 MUST KNOW:

BOTTOM LINE: As President Trump's tariff policies drive significant market volatility, top firms like Apollo and KKR are aggressively deploying billions while institutional investors face a perfect storm of allocation pressures from both the "denominator effect" (public market volatility) and "numerator effect" (limited distributions from existing private investments).

WHY IT MATTERS: Apollo has invested a staggering $109 billion through April (including $25 billion in April alone following tariff announcements), while KKR deployed approximately $10 billion in the four weeks after tariffs were unveiled. Meanwhile, large pension funds and other institutional investors have started borrowing against their private equity portfolios through "net asset value" (NAV) loans to raise cash without fire-selling assets at unfavorable prices.

BIG PICTURE: Despite market volatility, KKR reported that institutional investors remain in "healthy shape overall" with liquidity to deploy, while Campbell Lutyens found in a recent investor survey that policy uncertainty has actually boosted interest in private credit strategies. With firms emphasizing that investments made during market dislocations historically outperform, major players are positioning the current turmoil as an opportunity to capitalize on market dislocations, similar to their approaches during COVID-19.

🌎 MARKET SPOTLIGHT: REGIONAL DEVELOPMENTS

🇺🇸 United States: KKR executives told investors they're seizing investment opportunities arising from President Trump's trade war volatility. The firm has $116 billion in dry powder and reports that about 90% of its private equity assets under management aren't materially exposed to tariffs. Apollo's President John Zito warned that the US is risking erosion of its capital markets dominance, arguing its longstanding 40-70% valuation premiums over global peers could erode if trade policy uncertainty persists, with potential consequences "measured in trillions of dollars in lost enterprise value."

🇨🇳 China: Foreign investment flows are shifting amid escalating tensions. China Investment Corp., the nation's $1.3 trillion sovereign wealth fund, is cutting exposure to US private markets due to trade war risks. Meanwhile, KKR notes that China-based clients account for only a "low-single-digit" proportion of its assets under management, while maintaining that the firm sees opportunities across Asia despite trade tensions. Apollo CEO Marc Rowan expects foreign investors to curb US allocations if "current trends continue," but doesn't view this as a major concern, observing "there's just no place to go right now" given the dominance of US capital markets.

🇪🇺 Europe: Private equity investors are eyeing expansion in European defense assets as the continent increases military spending in response to geopolitical pressures. Firms including Tikehau and CVC are looking to benefit from military expansion in Europe as US pressure mounts for increased European defense self-reliance. Private investors have deployed about $790 million on defense investments so far this year, approaching the $1 billion mark that has only been reached in five of the last 20 years. Meanwhile, Apollo scored a significant win in the challenging German banking sector, successfully exiting OLB bank after 11 years with a 20% IRR through a €1.7 billion sale to French bank Crédit Mutuel.

🇯🇵 Japan: Sumitomo Mitsui Banking Corp. sold a $375 million significant risk transfer security to offload risk from at least $3 billion of credit lines provided to business development companies, with Apollo, Carlyle, and Ares purchasing portions of this first-of-its-kind transaction. This marks an important innovation in structured financing, with growing appetite for risk transfers in Japanese financial institutions.

🤝 DEAL SPOTLIGHT: TRANSACTIONS & STRATEGIES

🔄 Hedge Funds vs Private Equity: In a significant shift in Wall Street dynamics, hedge funds and similar trading firms are increasingly displacing private equity as investment banks' most important clients. BCG estimates that revenues from prime brokerage services to hedge funds and other traders have grown by 50% over the past four years, reaching around $36 billion in 2024, while private equity "financial sponsors" paid $20.4 billion in investment banking fees across M&A advice, bond and loan arrangements, and equity issuance in the same period. This evolving relationship is evident in Goldman Sachs' record $5.5 billion from equity financing revenues in 2024 and their record $1 billion in fixed income financing revenues in Q1 2025.

💰 NAV Loans Expansion: With distributions paid by private equity funds over the past three years at about half of historical averages, the stockpile of unsold private equity deals has hit a record $3 trillion, creating a $400-500 billion shortfall of cash that should have been returned to investors. To address this liquidity crunch without fire-selling assets at unfavorable prices, large pension funds and other institutional investors are increasingly turning to net asset value (NAV) loans. These loans, which typically have four to five-year terms and loan-to-value ratios of about 20%, allow investors to raise cash by borrowing against their fund stakes as collateral. Major providers like 17 Capital, Carlyle, and Ares Management have seen growing demand, with the largest loans reaching around $800 million and expected to eclipse $1 billion soon.

💼 Dun & Bradstreet Acquisition: Clearlake Capital Group is exploring multiple financing options for its $7.7 billion Dun & Bradstreet buyout, potentially contributing more equity to reduce debt needs. Ares Management is seeking partners for a $5.5 billion financing package, including a $5 billion funded term loan and a $500 million revolver, with pricing around 5.25-5.5 percentage points over SOFR. Morgan Stanley is also involved, blurring lines between private credit and traditional banking as it will syndicate a portion to institutional clients in an unusual hybrid arrangement.

🏆 Sports Investment Innovations: Golf star Rory McIlroy is partnering with TPG to launch TPG Sports, a new sports-focused investment fund with an anchor commitment from Lunate, an Abu Dhabi-based investment firm with approximately $110 billion under management. In a related development, EQT AB is exploring a potential tie-up with Arctos Partners, an investment firm specializing in sports team investments, potentially making a strategic investment in the firm which has stakes in teams including the Buffalo Bills, Golden State Warriors, and Los Angeles Dodgers.

🏢 Real Estate & Data Assets in Focus: BDT & MSD Partners alum Adam Piekarski has formed Derby Lane Partners, a new real estate credit investment firm expected to begin investing over $1 billion in the coming months, focusing on senior, floating-rate mortgage loans in primary markets. Meanwhile, UK private equity firm CGE Partners is exploring options for Aurora Energy Research, potentially valuing the power and energy data provider at up to £1 billion ($1.3 billion), as data firms attract outsized interest amid growing demand for specialized services in opaque markets.

💼 FUNDRAISING FOCUS: CAPITAL FORMATION

🔄 Secondary & Retail Markets Expansion: Apollo Global Management raised $5.4 billion for its S3 Equity and Hybrid Solutions fund, exceeding its target as secondary markets provide crucial liquidity in today's challenging exit environment. Simultaneously, Ares Management raised more than $3 billion for its Private Markets Fund, enabling wealthy individuals to buy discounted PE stakes with quarterly redemptions. US bond giant Pimco is joining this retail push, securing regulatory approval from Luxembourg to create the Pimco Diversified Private Credit Fund targeting European wealthy investors with exposure to asset-based credit.

🚀 Strategic Investments & Record Fundraising: Bain Capital's special-situations arm is in talks to invest up to $2 billion in insurance broker Acrisure, while Thoma Bravo secured a $10.6 billion deal for Boeing's flight navigation unit after founder Orlando Bravo personally wrote to Boeing executives. KKR reported raising $31 billion in Q1 alone, including a $14 billion first close for its latest Americas private equity fund, demonstrating continued investor appetite despite market uncertainty.

🌱 Innovative Strategies & Sector Focus: Power Corp. of Canada secured $330 million for a new decarbonization-focused private equity strategy targeting mid-market North American companies with profitability potential. Uncork Capital raised $300 million across two funds focused on early-stage AI investments. Blue Owl Capital reported $273 billion in AUM (up 57% YoY) with significant expansion in digital infrastructure and tech-focused Business Development Companies.

📊 Credit & Regional Platforms: European direct lender Apera Asset Management raised €2.9 billion for its latest fund focused on lower middle market companies in Europe. Meanwhile, Apollo's credit business generated a double-digit jump in fees (23% to $569 million) in Q1 2025, dramatically outperforming its equity segment, highlighting the diverging fortunes between credit and equity strategies in the current market.

🧠 STRATEGIC TRENDS: FIRM INITIATIVES & SECTOR DEVELOPMENTS

💼 KKR Performance & Strategy: Despite reporting a first-quarter loss of $185.9 million (versus a $682.2 million profit in Q1 2024), KKR delivered record fee-related earnings per share of $0.92 (up 22% YoY) and total operating earnings of $1.24 per share (up 16% YoY). The firm's private equity portfolio gained 4% during the quarter and 11% over the past year, while asset-management earnings rose approximately 27% as both fee revenue and asset sales outperformed the same period last year. Management emphasized the firm's strategy of "leaning into" market dislocation, noting its global diversification is proving advantageous as "Asia and Europe are less impacted so far" by trade tensions.

🔄 Apollo's Tactical Deployment: The firm posted record fee-related earnings of $559 million in Q1, surpassing analyst forecasts despite a first-quarter hit to its spread-based insurance earnings as it raised cash to prepare for market disruption. Apollo's "hybrid value" funds, designed to refinance stretched buyout deals or help public companies shore up finances, emerged as its highest-performing strategy with 3.8% gains in Q1 and 19.3% over the past 12 months—nearly triple the returns from its flagship buyout funds. The firm deployed $25 billion in April alone, primarily in public debt markets, with CEO Marc Rowan noting that "public markets were the fastest to adjust from a price point of view and exhibited what we expect to see going forward: limited liquidity."

🛡️ Defense Sector ESG Evolution: Private credit firms that could provide vital funding to Europe's expanding defense industry are exploring whether their investors' sustainable investment requirements can be watered down to allow them to lend. As European rearmament becomes a strategic priority following President Trump's threats to curtail US support, ESG restrictions that forbid lending to weapons and munitions manufacturers are increasingly being questioned. In France, the ministry of economy and finance has launched a major initiative encouraging private asset and asset management companies to be more open-minded about defense investment. Credit funds that have overcome these barriers have been rewarded with attractive returns, with Czech ammunition maker Czechoslovak Group raising $775 million in bonds offering more than 11% interest rates.

⚡ Permanent Capital & Technology Focus: Blue Owl Capital's permanent capital model with 90% of management fees from permanent capital has proven defensive amid market volatility, while the combined OTF and OTF II (tech BDCs) will generate $135 million in incremental annual management fees upon listing. Meanwhile, Vista Equity Partners CEO Robert Smith predicts a "new equilibrium" through bilateral trade agreements creating massive opportunities for AI-enabled businesses. Vista's average portfolio company delivers 625% ROI to customers, a figure Smith expects will increase "exponentially" with AI. His prediction that companies failing to adopt AI capabilities quickly "will not have a right to exist" underscores Vista's strategy of acquiring undervalued enterprise software firms for AI transformation.

👀 TRENDS TO WATCH

⚠️ Trade War & Economic Impact: Private markets are bracing for significant trade-induced volatility with potential to trigger forced selling, restructurings, and defaults. Oaktree's co-CEO warns high-yield debt markets could see high-single-digit default rates, while private credit might experience double-digit defaults driven by poorly underwritten loans.

🧩 NAV Loans Expansion: As exit timelines extend and distributions slow, sophisticated limited partners are increasingly embracing net asset value loans as alternatives to selling at discounts, with loan sizes expected to surpass $1 billion in coming months.

🌍 Geopolitical Investment Shifts: Foreign investors, including China's $1.3 trillion sovereign wealth fund, are reducing US private market exposure due to trade tensions, while European defense assets attract increased interest from private equity with investments approaching $790 million year-to-date, nearing the high-water mark of $1 billion.

🔄 Secondary Market Acceleration: The secondary market is positioned for record activity with projected deal volume of $162-182 billion and approximately $216 billion in dry powder, as private fund investors increasingly seek liquidity at varying discounts (from 90 cents to as low as 50 cents on the dollar).

💰 Hedge Fund vs. PE Paradigm: Prime brokerage revenues have overtaken private equity fees as investment banks' largest client segment, with trading-focused clients increasingly driving Wall Street profits while traditional PE firms face extended holding periods.

📊 Perfect Storm of Allocation Pressure: Institutional investors face dual challenges from the "denominator effect" (public market volatility) and "numerator effect" (limited distributions), forcing structural changes to commitment pacing strategies and acceptance of allocation range flexibility.

🤝 Asset Manager Consolidation: Industry executives predict accelerated consolidation as fundraising competition intensifies and limited partners seek to reduce their manager relationships, driving strategic acquisitions and partnerships such as EQT's exploration of an Arctos tie-up and Global Payments' $24.3 billion Worldpay acquisition.

💰 Retail Wealth Integration: Private market access for individual investors has become a strategic industry-wide priority, with semi-liquid funds growing fivefold to $300+ billion since 2020, major firms launching retail-accessible vehicles, partnerships between traditional and alternative managers, and increasing focus on bringing private assets into 401(k) plans.

🏛️ ESG Recalibration: Private credit firms are under mounting governmental pressure (particularly in France) to revise ESG policies that restrict defense investments, with rating agencies also reevaluating their scoring methodologies for the sector amid European rearmament priorities.

🌐 Adjacent Private Markets: Investors seeking genuine diversification are exploring uncorrelated niche assets existing between traditional private equity categories, from intellectual property to whiskey inventories, aiming to create portfolios where assets operate independently from traditional market correlations.

💻 AI-Driven Investment Models: Alternative asset managers are deploying significant capital to AI-powered business models, with Thrive Capital raising $1 billion for AI-enabled roll-ups and General Catalyst explicitly promoting "A.I.-enabled roll-ups" in sectors from accounting to homeowner association management. Vista Equity's Robert Smith predicts companies that fail to adopt AI capabilities quickly "will not have a right to exist" in the transformed competitive landscape.

🏦 Structured Financing Innovation: Complex structured financing vehicles are gaining popularity as private asset managers seek liquidity through new avenues, including fund-backed notes, collateralized fund obligations, and significant risk transfers, with Japan's Sumitomo Mitsui Banking Corp. selling the first known SRTs tied to BDC credit lines.

🔀 Hybrid Credit Strategies: Traditional boundaries between bank financing and private credit continue blurring, exemplified by Dun & Bradstreet's financing where Ares is leading a $5.5 billion package while Morgan Stanley will participate and syndicate a portion to institutional clients, creating novel collaboration models.

📊 Data Asset Valuations: Data firms specializing in private markets and complex sectors like energy are commanding premium valuations, with BlackRock acquiring Preqin for £2.55 billion and CGE Partners exploring a potential £1 billion sale of Aurora Energy Research.

🌐 Cross-Border Strategy Adjustments: Firms are recalibrating international strategies amid heightened nationalism and trade tensions, with KKR emphasizing that 90% of its PE assets aren't materially exposed to tariffs while noting subdued appetite for Chinese investment (China clients represent only a "low-single-digit" percentage of assets).

🏭 German Banking Validation: Apollo's successful €1.7 billion sale of German lender OLB to French bank Crédit Mutuel after 11 years of ownership (securing a 20% IRR) signals a potential turning point for private equity in historically challenging European banking sector, potentially paving the way for Cerberus, Advent, Centerbridge and Lone Star to secure exits from their long-held German banking investments.

💰 BY THE NUMBERS

• 💸 $109 billion - Apollo's total investments through April 2025, including $25 billion in April alone following tariff announcements

• 📈 $10 billion - KKR's investments in the four weeks following Trump's tariff announcement

• 🏦 $36 billion - BCG's estimated revenue from prime brokerage services to hedge funds in 2024, up 50% over past four years

• 💵 $20.4 billion - Investment banking fees paid by private equity "financial sponsors" in 2024

• 📈 $5.5 billion - Goldman Sachs equity financing revenues in 2024, growing 20% annually over five years

• 🔢 $5.4 billion - Amount raised by Apollo for its S3 Equity and Hybrid Solutions secondary fund

• 🌐 $3 trillion - Record stockpile of unsold private equity deals creating $400-500 billion cash shortfall for investors

• 📊 $800 million - Current size of largest NAV loans, expected to exceed $1 billion soon

• 💰 11.1% - Annual growth rate for private market assets (2014-2024) vs. 6.5% for broader asset management

• 🚀 $300 billion - Semi-liquid fund assets, up 5x since 2020

• 📈 48% - Global assets controlled by retail investors

• 💵 $31 billion - Total capital raised by KKR during Q1 2025

• 💰 $116 billion - KKR's reported "dry powder" to invest when others are scared by market volatility

• 📊 27% - Growth in KKR's asset-management earnings in Q1 2025 compared to same period last year

• 📉 50¢ - Lower range of discounts reported by Oaktree's co-CEO for private credit fund stakes being sold in secondaries

• 📈 $273 billion - Blue Owl Capital's reported AUM, up 57% YoY

• 🔄 23% - Growth in Apollo's credit segment fee-related earnings (Q1 2025)