Kerry Craig
Global Market Strategist
Published:
Alternative assets offer characteristics that can replicate or complement public market exposures, benefiting portfolios through low mark-to-market volatility and reduced correlation to public assets.
In brief
- The macro environment in 2026 has shifted, with the threat of elevated inflation and fiscal imbalances driving a positive stock-bond correlation and altering portfolio risk profiles.
- Alternative assets, private equity, private credit, and infrastructure —offer return and diversification benefits through lower volatility and reduced correlation with public markets.
- Private equity is seeing robust activity, especially in tech initial public offerings (IPOs) and secondaries, while private credit faces idiosyncratic risks from software lending but offers attractive floating-rate income.
- Infrastructure investments provide steady, inflation-resilient cash flows and are increasingly vital for portfolio resilience.
The diversification dividend
Coming into 2026, expectations were for robust economic growth and fading inflation, which would allow central banks to modestly ease monetary policy. However, reality diverged sharply, echoing 2022, when both bond and equity markets fell together and the stock-bond correlation turned positive. While this spike in correlation may eventually prove temporary, the rise in bond yields reflects deeper structural changes in inflation, policy action, and fiscal imbalances, suggesting this regime may endure and alter portfolio risk profiles.
Alternative assets offer characteristics that can replicate or complement public market exposures, benefiting portfolios through low mark-to-market volatility and reduced correlation to public assets. These features are particularly valuable in today’s environment, helping to address key pressure points.
Investors are also evaluating the impact of artificial intelligence (AI) on private markets, not just public ones. This makes manager selection crucial for successful portfolio allocations.
Private equity: Spaced out
Private equity began the year strongly, with global M&A and IPO activity in the first quarter outpacing prior years. Tailwinds from lower funding costs in 2025 and steadier public markets provided a stable backdrop for exits. Although the second quarter may be choppier due to market turbulence, the outlook for the second half of 2026 remains robust, supported by several mega-deals.
The potential size of upcoming tech IPOs is staggering—the three largest could be valued at around USD 3.5trillion. If successful, these deals could have a powerful sentiment impact across private equity, given the asset class’s relatively higher exposure to the tech sector.
Private equity’s weighting in technology at 36% is significantly higher than the Russell 2000 index (15%), representing both opportunity and risk. Poor performance in newly listed tech companies could create a negative feedback loop for private equity. Performance post-IPO is not guaranteed (Exhibit 1), and investing on the first day of public trading has mixed results. The opportunity lies in investing when companies are still private, as they are becoming larger and more profitable before going public.
Concerns around concentration risk in sector and size can be addressed through private equity secondaries, which generate liquidity and enable redistributions across managers. Prospects are emerging in both growth equity and co-investments as companies seek fresh funding or alternative exit strategies not tied to public listings. The secondaries market offers access to private equity with shorter duration and some de-risking through discounted prices to NAV.
Private credit: The cost of growth
Private credit filled the gap left by banks after post-global financial crisis (GFC) regulatory tightening, experiencing rapid growth in subsequent years. This expansion may have come at the cost of lower underwriting standards, leading to rising defaults, which could be the first real test for the sector.
Currently, defaults in private credit remain low, but signs of stress are emerging. Indicators such as rising use of payment-in-kind (PIK) and the level of non-accruals are directional signals for private credit. The use of PIK has been rising and is viewed as a form of cash flow stress, as payments are deferred to the end of the loan. But non-accruals—which indicate when a borrow has stopped paying interest or principle completely—are holding steady.
The real stress is in publicly traded business development companies (BDCs) which traded at lows not seen since 2022 earlier this year as investors sought to redeem capital from their untraded counterparts. Most private credit funds have a gating threshold of 5% quarterly redemptions to protect other investors. This limited liquidity means redemption requests are likely to continue and may weigh on overall sentiment.
Risks in private credit are idiosyncratic, centered on software loans and potential AI-driven disruption, and are an area where BDCs have elevated exposures. Concerns about broad-based financial contagion are limited by the relatively small size of private credit within overall lending and manageable linkages to banks and public insurance companies. When it comes to software lending, the outcomes will likely be uneven, depending on whether the software is deeply embedded in business practices or more generic, leading to broader dispersion in the performance of private credit funds.
The appeal of private credit in the current environment is that most direct lending is floating-rate (Exhibit 2). Rising rates to combat inflation could boost income for investors, providing meaningful income with a degree of inflation protection if the underlying loans are of sufficient quality to absorb the higher associated costs.
Moreover, private credit is not a single asset class but comprises various segments across the risk spectrum—from asset-backed finance and direct lending to mezzanine and distressed debt. Positioning across these segments will be key to balancing income and risk.
Infrastructure: Real power
Since 2008, global infrastructure has delivered approximately a 10% annualized return across various cycles and inflation environments. A key reason for this is the long-term contractual nature of investments, which allows for steady, inflation-resilient cash flow. The drive to electrify industries, ensure energy security, and satisfy AI demand means power may become a scarce commodity; power accounts for 58% of the global infrastructure benchmark.
Infrastructure’s bond-like characteristics—steady income, low volatility, and low correlation to equities—make it a suitable complement to public bonds in a portfolio. However, high investor demand can mean there is a wait time for capital deployment in some instances.
Private market assets should be viewed as a complement, not a replacement, to public market assets in a portfolio. They can enhance returns, deliver income opportunities, and provide diversification. Private equity secondaries offer an entry point for new allocations, with liquidity optionality and vintage diversification. Meanwhile, private credit’s floating-rate income can offset duration risk in traditional bond allocations.
The macro environment has structurally changed what a diversified portfolio needs to look like. Private markets are no longer a satellite allocation for only the most sophisticated clients—they are increasingly central to constructing resilient, inflation-aware portfolios.