The high levels of volatility and economic uncertainty seen in early 2025 made it a more challenging time to sell companies or execute IPOs, particularly at the large-cap end of the market where large, international companies are exposed to headline risks.
As investors increasingly consider private market alternatives as integral to a balanced portfolio, many of the same themes in public markets are relevant to investors in private markets. And helpfully, the growing accessibility of alternatives provided by evergreen funds has allowed more investors to invest thematically across a wider opportunity set.
In the coming year, AI is expected to remain a dominant theme. As we move from proofs-of-concept to large scale adoption, the question of where to invest in the value chain of this technological revolution becomes important. Private markets offer wide latitude here. AI enthusiasts may look to venture capital for opportunities to lean into cutting-edge development, or infrastructure to support the insatiable need for power by data centers. Indeed, the massive spending by the hyperscalers may be viewed as a transfer of value from the public to the private markets: Private equity, infrastructure and private credit funds have been key players behind the build-out of data centers and their associated infrastructure.
2025 also reminded us that AI is a disruptive and unpredictable technology. Markets got a loud wake-up call to this vulnerability in January with the revelation that Deepseek, a relatively unknown Chinese company, was able to build a large language model faster and cheaper than its more famous rivals. Those concerned about the increasing concentration of public equities in the AI theme and lofty valuations, with the Magnificent 7 making up 35% of the S&P 500, and the forward price/earnings ratio of the index touching 23X, may look to boost allocations to alternatives that have lower correlation to public markets.
Private equity (PE) has historically been a strong generator of alpha relative to public markets. A diversified global buyout index has outperformed global public equity by 500bps from 2005-2024. However, since 2023, the exceptional performance of public equities has outshone the median PE fund. The outperformance of public markets is unlikely to persist, and we expect the liquidity premium to return, but it is increasingly important to seek out managers with the ability to outperform consistently by adding meaningful alpha.
The high levels of volatility and economic uncertainty seen in early 2025 made it a more challenging time to sell companies or execute IPOs, particularly at the large-cap end of the market where large, international companies are exposed to headline risks. In this environment, small and mid-cap PE have advantages: lower valuations, domestic focus, simpler business models and more tried and tested value creation playbooks.
As interest rates come down and lower the cost of financing, this could be a meaningful tailwind to private equity dealmaking. Add this to the robust post-IPO performance of recent PE exits, a non-recessionary economy, healthy capital markets and a pro-merger regulatory environment and 2026 has all the makings of being a good year for exits, allowing PE funds to increase distributions to investors amidst still elevated company inventories.
Real estate continues to undergo a valuation recovery, as the sector rebounds from interest rate hikes in 2022 as well as a post-COVID re-assessment of the future of offices, retail and urban-suburban living patterns. The NCREIF posted its fourth consecutive positive return in 3Q25, with all sectors showing gains. Many of the factors that led to this repricing are now being re-evaluated.
For offices, investors are gaining a better understanding of what hybrid working may look like in future. In residential markets, while some markets are contending with localized over-supply, many urban centers with more restrictive building permissions are seeing robust rent growth. While markets are pricing short-term interest rates to come down by 0.5-0.75% over the coming year, mortgage rates and longer-term rates might stay elevated as fiscal concerns weigh on the long end of the yield curve. This could be an environment that keeps construction restricted and rewards patient capital investing in supply-constrained markets.
Those warning of a growing bubble in private credit may have felt vindicated when, in September, several borrowers defaulted on large debts. However, the defaults appear to be isolated to issuer-specific concerns and the auto sector rather than signaling broader systemic risks in the private credit and leveraged loan space. That said, as credit spreads have compressed, there is a renewed focus on quality of credit and adequate pricing in recognition that pockets of risk may exist. While recession appears unlikely in 2026, concerns around the economic outlook persist. Private credit continues to offer a healthy premium relative to public market credit, though investors may consider diversifying exposure and considering strategies that may be able to better weather a slowdown, such as broadly diversified secondaries investments, investment-grade private credit or opportunistic strategies like distressed debt and special situations.
Throughout 2025, hedge funds had ample opportunity for trading as policy-driven volatility and pricing dislocations provided managers with the raw material for alpha generation. However, the variety and velocity of change favored a strategy of diversification across hedge fund strategies. Global macro practitioners today have catalysts everywhere they look: Divergent central bank policies, reshoring of supply chains and geopolitical risks are creating tradeable dislocations across rates, currencies and commodities.