Private markets in a more demanding regime
Four years into the post–zero interest rate era, private markets have undergone significant transformation. Against their history of long-term outperformance, asset classes like private equity (PE) and venture capital (VC) have struggled to keep pace with public markets in recent years. Concerns about liquidity [AB1.1]continue to mount across the industry, and deeper questions about the underlying investment quality, particularly in private credit, have emerged.
The current environment has led some investors to question the allure of private markets. Overall, while recent events have affected sentiment about the industry and disruption will likely persist, private markets’ strategic relevance has not changed. In our assessment, three broad trends emerge:
- The shakeout will likely continue in the short term as post-COVID excesses unwind.
- Despite this, investors are demonstrating long-term confidence in private markets in their allocation behavior and performance expectations, believing in the depth and diversity of the opportunity set.
- Industry changes are creating both opportunities and challenges, prompting investors to reassess investment goals and processes.
What’s driving current perceptions in private markets
Figure 1: Proportion of LPs claiming topic was a key challenge for return generation in the next 12 months.
Private markets face unique challenges, which vary by asset class. For historically high-flying asset classes like PE and VC, performance has struggled since 2022. According to Preqin’s private capital indices, VC has yet to rebound to early 2022 performance levels, while PE has lagged the S&P 500 by nearly 11 percentage points per year over the period shown in Figure 1.(1) Distribution rates continue to be well below historical averages, with PE distributions as a percentage of net asset value at 17% versus a 10-year average of 26%.(2)
In private credit, concerns around a potential crisis have lowered the share prices of publicly traded private lenders. A culmination of several factors has greatly pressured sentiment and raised questions about
Figure 2. US private credit default rate, trailing twelve months
underlying credit quality, beginning with notable bankruptcies in late 2025 and expanding with worries about AI disruption on software borrowers, year-over-year increases in default rates, and the possibility of a recession. Data on default rates, as measured by Fitch’s trailing-twelve-month count of unique defaulters that include interest payment deferrals, stressed maturity extensions, uncured payment defaults, and bankruptcies, show higher stress in US private credit (albeit, at levels comparable to points seen in early 2025, shown in Figure 2) (3) The possibility of subsequent loan losses also feeds into the concern of a “valuation contagion” in which uncertainty about valuations triggers a runoff and liquidity crunch among retail-facing structures. (4)
Has the long-term outlook on private markets materially changed?
While turbulence is likely to persist in the short term, a separate question to ask is whether this dislocation has changed the strategic case for private markets. To answer how viewpoints on the long-term prospects of private markets have changed, one place to start is examining the opinions of allocators. Acknowledging a potential lag between recent developments and when surveys were conducted, institutional investors and wealth professionals still have high confidence in the future of private markets. 81% of surveyed global institutional investors intend to increase their private allocation over the next five years. More immediately, 86% of surveyed wealth professionals intend to increase private allocations in 2026. Given the relative performance of public versus private markets in recent years, particularly in equities, one might ask why such enthusiasm exists for private assets.
Common reasons investors point to for “why private” include diversification, enhanced income generation, and potentially higher risk-adjusted returns. Over the last 30 years, the private universe of US companies has generally expanded while the public company count has shrunk, making private markets the primary access point for a large and diverse part of the economy. The number of public US companies has decreased by half since peaking in 1997, with 3,657 domestic companies listed on major US exchanges at the end of 2025. In contrast, the number of overall private sector firms of 50+ employees increased by 47,000 from Q1 1997 to Q1 2025, most recently reaching 279,000. For growth-stage companies, returns once generated in public markets are more contained in the hands of private as innovative companies opt to stay private for longer.
Private capital allocation also matters beyond portfolios: it supports small business growth, innovation, and infrastructure investment. For instance, private capital will likely be needed to fill multi-trillion funding gaps in the US to shore up critical infrastructure and meet new demands driven by technological changes.
To quantify the expected risk-return profiles for private asset classes in the longer term, we survey capital market assumptions from five leading groups, often used to guide strategic asset allocation.
Figure 3. Comparison of 10-year capital market assumptions of private asset classes (left) and range of Sharpe ratios against public asset classes assuming rf of 3.5% (right), five sources
Figure 3 presents the range of 10-year capital market assumptions for PE, real estate (RE), and direct lending with comparisons to public asset classes. While expectations are wide for these asset classes due to the choice of market proxy and the challenge of measuring illiquid assets’ volatility, the ranges of expected risk-adjusted returns generally exceed those of their public counterparts. However, it is still important for investors to consider the broader dire[AB2.1]ction of private markets as they consider both tactical and strategic decisions today.
Investment implications and conclusion
Taken together, the data points above suggest that the long-term case for private markets remains intact. However, the level of maturation in the industry, paired with recent developments, proves that the future will be different. Investors should ensure that their approach to private markets reflects their underlying investment objectives.
In pursuit of alpha, investors in PE must be confident in managers’ ability to create value through operational improvements and to navigate the opportunities and challenges brought on by AI disruption, geopolitical events, and other major developments. Opportunities may also arise for those able to provide liquidity for the pile of assets urgently awaiting exit, corresponding with the secondary market’s largest year on record in 2025 with $240 billion in transaction volume.
LP-GP dynamics continue to evolve as well, with competing pressures shaping the relationship in different ways. On one hand, current conditions have spurred consolidation across private markets, with record volumes of GP M&A and some firms confronting the possibility that their current fund may be their last. LPs are using the present environment to apply pressure on GPs for fee and co-investment concessions. For every dollar of fee-bearing capital, the median GP reported offering 33 cents of co-investment. On the other hand, many top firms’ increased focus on retail capital has led institutional investors to worry about reduced co-investment opportunities and misalignment between vehicles catered to each investor type. Other timely concerns include headline risk and management’s focus on retail investor liquidity in the context of potential gating, particularly if the performance of these vehicles comes into question.
In short, these developments connect back to the fundamental considerations of private asset allocation: strong manager selection, diversification, and thoughtful portfolio construction given return, risk, and liquidity preferences. While near-term dislocation appears unavoidable, and the timeline for effects from mega trends like AI remains uncertain, private markets are likely to play a significant role in the portfolios of many investor types.
[1] Preqin, accessed March 5, 2026.
[2] “2025 Annual Global Private Market Fundraising Report,” PitchBook, February 25, 2026, https://pitchbook.com/news/reports/2025-annual-global-private-market-fundraising-report.
[3] Compiled from Fitch’s monthly releases of non-rating action commentary on US private credit throughout 2025 and 2026.
[4] Amit Seru, “Valuation Contagion Is the Private-Credit Risk No One Sees Coming,” Barron’s, June 25, 2025, https://www.barrons.com/articles/valuation-contagion-is-the-private-credit-risk-no-one-sees-coming-8fe47422.
[5] “Nuveen’s Sixth Annual EQuilibrium Global Institutional Investor Survey: Institutional Investors Identify AI, Energy Transition and Deglobalization as Key Megatrends Reshaping Investment Strategy,” Nuveen, February 4, 2026, https://www.nuveen.com/global/insights/news/2026/nuveens-sixth-annual-equilibrium-global-institutional-investor-survey?type=us.
[6] “2026 Global Private Wealth Survey,” Hamilton Lane, January 2026, https://explore.hamiltonlane.com/2026-global-private-wealth-survey/home.
[7] Jay Ritter, “The Number of Operating Companies Listed on Nasdaq and the NYSE (including the NYSE MKT segment that was formerly the American Stock Exchange), 1980-2025,” Warrington College of Business, n.d., https://site.warrington.ufl.edu/ritter/files/number-of-listed-firms-on-US-exchanges.pdf; U.S. Bureau of Labor Statistics data through Q1 2025, https://www.bls.gov/web/cewbd/table_g.txt.
[8] “How Private Investment Can Fill the Growing U.S. Infrastructure Funding Gap,” Global Infrastructure Investor Association, December 18, 2025, https://giia.net/insights/how-private-investment-can-fill-growing-us-infrastructure-funding-gap.
[9] Henry McVey et al., “An Expanded Toolkit for the Next Investing Regime,” KKR Solutions, January 2026, https://www.kkr.com/insights/capital-market-assumptions; “2026 Long-Term Capital Market Assumptions,” J.P. Morgan Asset Management, January 2026, https://am.jpmorgan.com/content/dam/jpm-am-aem/americas/us/en/institutional/insights/portfolio-insights/ltcma-full-report.pdf; “2026 Capital Market Expectations,” Franklin Templeton, December 2025, https://www.ftinstitutional.com/insights/capital-market-expectations#10-year-expectations; “Capital Market Assumptions,” BlackRock, February 24, 2026, https://www.blackrock.com/institutions/en-global/institutional-insights/thought-leadership/capital-market-assumptions; “Capital Markets Assumptions,” Callan, accessed March 9, 2026, https://www.callan.com/capital-markets-assumptions/.
[10] Note that variation in return expectations may derive from the selected proxy used by each source. Below, we list the label of each asset class from each source that we display in the chart. For more information, please refer to the sources in footnote 9 and their respective methodologies.
For data from KKR, we show unsmoothed expectations for “Private Equity,” “Real Estate,” and “Direct Lending”; from J.P. Morgan Asset Management, “Private Equity,” “U.S. Core Real Estate,” and “Direct Lending”; from Franklin Templeton, “US Private Equity,” “US Private Real Estate” and “US Private Credit” (direct lending); from Callan, “Private Equity,” “Core Real Estate,” and ‘Private Credit” (senior debt); and from BlackRock “US private equity (buyout),” “US real estate,” and “Direct lending.” Point expectations for global public asset classes shown were taken from Franklin Templeton.
[11] “2025 Global Secondary Market Review,” Jefferies, January 2026.
[12] “Global Private Equity Report 2026,” Bain & Company, February 2026, https://www.bain.com/globalassets/noindex/2026/bain-report_global-private-equity-report-2026.pdf.
