Outlook and update on private markets: 1H26
Private markets are operating in a more complex macro environment. Geopolitical tensions and energy-price volatility have made the outlook less straightforward, even as financing conditions have improved and activity has started to recover. In our base case, growth remains positive and policy becomes more supportive over time, but outcomes are likely to be more differentiated across strategies, sectors, and regions. That makes quality, underwriting discipline, manager selection, diversification, and liquidity awareness central to implementation.
Opportunities and challenges in private markets
Recent months have brought higher geopolitical uncertainty, energy-price volatility, and greater debate around inflation and financial conditions. Even so, financing markets remain workable in our base case and should support a gradual recovery in deal activity and distributions.
The opportunity set is improving, but not evenly. In private equity, returns are relying more on operational value creation, disciplined valuations, and manager execution. In direct lending, the long-term case remains intact, but tighter spreads, lower base-rate expectations, and wider dispersion in borrower quality support a more cautious near-term view. In real assets, infrastructure continues to stand out, while real estate is recovering selectively rather than broadly.
Private markets can help broaden sources of return and income and diversify beyond traditional stocks and bonds. But diversification within alternatives matters too. Investors with significant exposure to any single manager, strategy, sector, or theme should consider a broader mix of assets and liquidity profiles.
What matters now:
- The macro backdrop is more complex, but financing conditions remain workable in our base case.
- Selectivity matters more as dispersion rises across managers, sectors, borrowers, and vintages.
- Private equity remains constructive, while direct lending warrants greater caution near term.
- Infrastructure remains supported by AI, electrification, and energy-system investment, while real estate recovery is selective.
- Diversification across sectors, asset classes, managers, and liquidity profiles can improve resilience.
Private equity: Constructive, but more selective
Private equity remains a differentiated source of long-term return potential, and CIO remains constructive. But the opportunity set is more selective than in the last cycle, with returns increasingly driven by operational improvement, earnings resilience, disciplined entry points, and manager execution rather than leverage or broad multiple expansion.
We favor managers with a value bias, especially in the middle market and in more complex transactions such as carve-outs, divestitures, spin-offs, and add-ons. We also continue to see selective appeal in growth strategies where business models are durable and valuation discipline is maintained.
Secondaries remain attractive as slower distributions, portfolio rebalancing, and demand for shorter cash-flow profiles support activity. Thematically, we continue to see opportunity in technology, healthcare, energy, and selected industrial and hard-asset-linked areas. Regionally, we still like the US, while also seeing diversification opportunities in Europe and APAC.
The main near-term challenge is that exits and distributions may recover only gradually, particularly where public-market volatility affects valuation confidence. That should widen the gap between stronger and weaker managers.
What matters now
- CIO remains constructive on selective private equity
- We favor value-biased managers in the middle market and in complex transactions
- Buyout, selective growth, and secondaries remain areas of interest
- Diversifying across sectors and regions can improve resilience
- Manager dispersion is likely to widen as exits recover only gradually
Key risks聽
- Slower-than-expected exit and distribution recovery
- Public-market volatility affecting valuations and exit timing
- Higher financing costs or tighter financial conditions
- Sector-specific disruption in weaker business models
- Illiquidity, limited disclosure, and manager-selection risk
Private credit: Long-term value, but a more cautious near-term stance
Direct lending should remain part of a diversified, long-term private markets allocation, but current conditions are more challenging and CIO remains Neutral on the asset class. Tight spreads, lower base-rate expectations, and later-cycle dynamics have made the near-term risk-return profile less compelling than it was previously.
We currently see limited signs of an imminent crisis, but market bifurcation is increasing. Higher-quality, sponsor-backed companies in the upper middle market are generally holding up better, while pressure is building in weaker segments, especially among smaller borrowers and in loans originated under more aggressive underwriting conditions.
AI is adding another layer of differentiation, particularly in software-heavy portfolios. Mission-critical software businesses may remain more resilient, while weaker or less differentiated models may face greater pressure on earnings durability and refinancing.
The implication is not to avoid private credit, but to focus on quality: disciplined underwriting, lender protections, experienced managers, resilient sectors, and careful attention to structure, liquidity terms, and concentration risk.
What matters now
- CIO still sees long-term value in direct lending, but is more cautious near term
- Higher-quality senior-secured, sponsor-backed, upper-middle-market exposure appears more resilient
- Dispersion is rising across borrowers, sectors, and vintages
- AI-related software risk is real, but not uniform
- Investors should assess liquidity needs, structure risk, and manager concentration carefully
Key risks聽
- Tight spreads and lower base rates weighing on return potential
- Rising stress or defaults in weaker parts of the market
- Greater divergence across borrower quality and vintages
- AI-related disruption in weaker software exposures
- Illiquidity, leverage, concentration, and limited disclosure
Real assets: Selective opportunity in real estate and infrastructure
Real estate
Real estate is improving, but it is not in a broad-based recovery. Stabilizing financing conditions and better transaction activity are helping sentiment, yet refinancing pressure remains a key dividing line.
We continue to prefer higher-quality assets in living, logistics, and selected data-related property, where demand fundamentals and income visibility appear stronger. We remain more cautious on challenged office exposure, weaker secondary assets, and stretched capital structures.
Infrastructure
Infrastructure remains one of the clearest areas of structural demand in private markets. We favor diversified core and core-plus exposure in areas with predictable, and in some cases inflation-linked, cash flows.
AI is reinforcing the case, but the opportunity extends beyond data centers. Rising demand for power, grid investment, connectivity, wireless infrastructure, fixed networks, storage, and the broader electricity ecosystem should continue to support investment.
Selectivity still matters. Existing assets may be better positioned than new developments where costs, delays, regulation, or supply bottlenecks remain a risk.
What matters now
- Real estate recovery is selective, not broad-based
- Living, logistics, and selected data-related assets remain preferred
- Infrastructure continues to benefit from AI, electrification, connectivity, and energy-system investment
- Core and core-plus assets with resilient or inflation-linked cash flows remain attractive
- Existing assets may be better positioned than development-heavy exposure
Key risks聽
- Refinancing pressure in real estate
- Weakness in office and lower-quality secondary property
- Development cost inflation, delays, and supply bottlenecks
- Regulatory and political risk in infrastructure
- Illiquidity, leverage, and concentration risk across real assets
