Private Markets: Build Resilience in a Changing World

Private markets have benefited from resilient corporate fundamentals and a gradual recovery in transactions and exits. However, progress remains uneven, reinforcing our emphasis on manager selectivity and quality. We favor infrastructure, private equity, secondaries, and real estate, while retaining a more cautious view on direct lending and venture capital. Higher financing costs support our preference for operational value creation in private equity and existing assets with visible income in real estate and infrastructure. Importantly, diversification across sectors, strategies, regions and vintages remains central to our outlook.

In the first half of 2026, the global economy remained resilient despite geopolitical uncertainty and volatile energy prices, while corporate earnings growth broadened across sectors and regions. This provides a constructive backdrop for private markets, although persistent inflation and interest-rate risks warrant discipline. Continued investment in AI, energy security, and supply-chain reorganization supports longer-term opportunities, with a preference for businesses and assets that can translate these trends into durable cash flows.

Private equity exits and distributions have improved, but capital returned to investors remains below long-term averages. Financing costs also remain elevated, making a broad return to the conditions that previously supported leverage-driven returns unlikely. We therefore favor managers with proven operational capabilities, disciplined entry valuations, and expertise in complex transactions, rather than those relying primarily on rising valuation multiples.

In private debt, tight lending spreads and normalizing defaults have reduced the near-term compensation for credit risk, supporting greater selectivity and our Neutral stance on direct lending. Meanwhile, the need to modernize energy and digital infrastructure continues to support investment demand.

We remain constructive on infrastructure and real estate, prioritizing existing assets over development projects, visible income, and cash flows that are inflation-linked or less sensitive to economic growth.

The concentration of AI-related activity and the uneven recovery across private strategies highlight the limits of relying on a single investment theme or return driver. We favor diversification across managers, strategies, regions, and vintages, including businesses beyond the most prominent AI beneficiaries. With distributions still constrained, commitments should also reflect liquidity needs and the possibility of longer holding periods.

Private equity’s recovery has continued despite a temporary setback in returns in the first quarter. The median buyout company delivered 8% year-over-year EBITDA growth in the first quarter, although dispersion across businesses remained significant. We maintain an Attractive view on buyout, growth equity, and secondaries, with a preference for managers able to convert resilient earnings into sustained operational improvement and realized returns.

Deal activity has broadened toward energy, industrial businesses, and business services, while large software transactions have faced greater scrutiny over AI disruption. We favor diversification across health care, energy, defense, and selected technology businesses, including industrial suppliers benefiting from power demand and grid modernization. Within software, our preference is for companies where AI strengthens products and operating efficiency rather than undermining differentiation or pricing power.

Exit activity has strengthened, with global trailing 12-month exit value increasing 27% year over year in the second quarter, supported by purchases from both corporate buyers and other private equity funds. However, distributions remain below long-term averages and the stock of older, unsold companies remains elevated. We expect improving exits to support cash flows and returns, while continuing to prioritize managers with credible realization plans and realistic holding-period assumptions.

Private equity valuations remain relatively appealing. Global leveraged-buyout entry valuations moderated to 10.5x enterprise value to EBITDA, broadly in line with recent averages, while middle-market transactions continued to trade at discounts to larger deals. These conditions support our preference for value-oriented middle-market managers. Corporate carve-outs, divestitures, and add-on acquisitions offer scope to improve businesses, but their complexity makes proven execution capabilities and disciplined underwriting particularly important.

Across regions, Europe’s transaction and exit activity has strengthened, while Asia-Pacific fundraising has recovered alongside improving exits. We retain a US bias but see opportunities to diversify through European middle-market transactions and selective Asian exposure, particularly in Japan. Corporate restructuring and governance reforms support these opportunities, with a preference for buyouts over venture capital and growth strategies within Asia.

Secondary transaction volumes reached USD 118 billion in the first half, up 15% year over year, as investors continued to seek liquidity and rebalance portfolios. Average pricing for investor-led portfolio sales remained at 87% of reported net asset value. We maintain an Attractive view on secondaries, while emphasizing underlying asset quality, valuation discipline, and the credibility of expected exits.

Venture capital activity has also recovered, but AI and machine learning accounted for more than 85% of US capital deployed in the first half. This concentration means stronger headline activity does not yet represent a broad-based recovery. We remain Neutral, given valuation and execution risks and the industry’s dependence on a small number of companies and realization events.

Direct lending returns have moderated, with the Cliffwater Direct Lending Index delivering 3.0% in the first half, before fees and without leverage, versus 4.5% a year earlier. Performance improved in the second quarter as software-related markdowns eased, but tight spreads and rising defaults continue to constrain the outlook. We remain Neutral, anticipating full-year levered fund returns of 5-6%, net of fees.

Fundraising and lending activity have weakened, while competition from syndicated loans has reduced direct lenders’ share of buyout financing. First-half lending volumes declined 13% year over year, and redemptions from perpetual private business development companies continued. With spreads offering a limited cushion against credit deterioration, we favor managers that maintain underwriting discipline rather than compete aggressively on pricing or terms.
Credit stress remains contained rather than systemic, but differences across borrowers and portfolios have widened. Smaller companies, junior loans, and loans originated under more aggressive conditions are showing greater strain. Rising payment-in-kind interest and discounted loan valuations reinforce the need to scrutinize cash earnings and asset quality. We prefer top-tier managers lending to sponsor-backed upper-middle-market and large-cap businesses, with conservative leverage, senior-secured structures, and strong covenants.
Software sentiment has stabilized, although technology loans still show elevated defaults and valuation pressure. We see broad-based AI disruption as a longer-term risk rather than an immediate threat, but expect increasing differentiation. Mission-critical, industry-specialist, and data-infrastructure providers should prove more resilient than legacy vendors with weak differentiation, low switching costs, and limited pricing power.
Meanwhile, AI infrastructure investment is expanding opportunities in data-center and chip-backed financing. We favor operational data centers with high-quality tenants and contractual protections. Chip-backed lending requires conservative collateral assumptions, accelerated repayments, and loan maturities aligned with equipment life.
European lending activity has recently rebounded, though it remains below the prior-year pace. Historically stronger lender protections and lower technology exposure offer diversification benefits, but rising defaults and weaker growth warrant continued selectivity.
Widening differences in fund performance and overlapping borrower exposures make manager selection and diversification increasingly decisive. Continued redemption pressure reinforces the importance of matching fund liquidity terms to investment horizons.

Real estate

Private real estate continues to recover, with year over-year returns stabilizing at around 5% in recent quarters. Stronger operating fundamentals, stable financing costs, and recovering transaction activity support our broadly constructive view. However, performance remains uneven. We continue to favor core and core-plus exposure for greater income visibility and more resilient cash flows, while limiting development and execution risk.

Data-center demand remains strong. Shortages of suitable land and power, permitting hurdles, and growing community opposition are making new projects harder to deliver. We favor stabilized assets in primary markets, leased to high-quality tenants under long-term triple-net agreements, with diversification across geographies.

Logistics fundamentals are improving as speculative supply moderates and leasing demand recovers. We prefer modern, energy-efficient, technology-enabled facilities in high-growth suburban markets and last-mile assets in land-constrained urban locations. US residential rental fundamentals are also stabilizing, while full valuations and policy uncertainty support diversification into senior and student housing.

Infrastructure

Infrastructure’s investment backdrop remains solid despite softer near-term performance. High barriers to entry, essential services, and contractual cost-pass-through mechanisms can support resilient income and provide a measure of inflation protection.
AI is expanding demand across digital infrastructure, but elevated data-center valuations argue for broader exposure rather than concentration in a single segment. Fiber, fixed networks, and wireless infrastructure offer additional ways to participate in rising connectivity needs.
Power infrastructure offers a multidecade opportunity extending across generation, transmission, distribution, and battery storage. AI adoption, electrification, and rising living standards are increasing electricity demand, while grid underinvestment and equipment shortages constrain supply.
Energy security and supply-chain resilience are supporting investment in domestic production, strategic networks, and transportation infrastructure. We prefer existing operational assets with visible income and resilient cash flows over projects heavily exposed to construction, permitting, or execution risk.

Private markets opportunities vary across regions, reflecting differences in financing conditions, sector exposure, and the pace of recovery in transactions and exits. North America and Europe remain core markets for private equity allocations, complemented by selective exposure to Asia-Pacific. Across regions, local manager expertise, valuation discipline, and liquidity planning remain important.