Private Markets Investment Outlook Q3 2026: Recovery, redefined
Despite a broader market recovery and reduction in hostilities in Iran, uncertainty remains a defining feature of the investment landscape – and a focus on resilience and selective diversification remain key to achieving portfolio objectives.
Autheurs
The past quarter has provided another reminder that uncertainty remains the defining feature of today's investment environment. While financial markets have demonstrated remarkable resilience in the face of geopolitical tensions, policy uncertainty and shifting economic expectations, the underlying drivers of volatility have not disappeared.
Recent developments in the Middle East illustrate this dynamic clearly. The agreement of a fragile truce in Iran has reduced immediate fears of a broader regional escalation and helped stabilise markets. Yet a durable peace settlement remains to be agreed, leaving the potential for renewed disruption. Meanwhile economic consequences from the prolonged pressure on global energy supply will linger.
At the same time, risk assets have recovered strongly. Global equity markets have rebounded to new highs, driven largely by a narrow group of technology and AI-related companies. Investor enthusiasm has been further supported by high-profile technology listings and expectations of a broader reopening of capital markets.
However, market concentration remains a key risk in both listed and private markets – and valuations across parts of the technology sector continue to reflect very optimistic assumptions about the pace and scale of AI-driven growth.
Diversification and resilience define portfolio priorities
Overall, while sentiment has improved since our last outlook, the broader investment landscape and experience over the past two years reinforces the importance of focusing on resilience as a guiding portfolio construction principle.
As we stated in our last outlook, this is not merely about preserving capital during brief periods of stress. Rather it is about constructing portfolios able to generate attractive returns over time, despite persistent macroeconomic and external challenges.
This view is reflected clearly in Schroders’ latest Global Investor Insights Survey. Reflecting the views of more than 1,000 investors and intermediaries with combined assets under management of around $72 trillion, it found:
- 85% of respondents expect greater market volatility over the next year.
- Conflict in the Middle East (69%), uncertainty over US foreign policy and global leadership (67%), and threats to energy security (60%) were the most-cited concerns.
- Diversification (84%) and downside protection (83%) were seen as the most important portfolio priorities.
Importantly, the survey also highlights a broader shift in how investors are approaching portfolio construction. Rather than viewing public and private markets as separate allocation decisions, investors are increasingly assessing opportunities across the entire investment universe to achieve their specific objectives.
Specifically, approximately half of investors they now assess opportunities across public and private equity and credit markets together rather than through separate allocation frameworks. In all cases, strategies across the public-private continuum are used to achieve specific portfolio goals.
Structural and cyclical tailwinds
It is no surprise to us that investors are recognising the important role private markets have to play within broader allocation frameworks, especially in the current climate.
Alongside their structural characteristics – including longer investment horizons, reduced sensitivity to short-term market sentiment and access to specialist opportunity sets – many private market segments continue to benefit from a cyclical decoupling that creates attractive entry points compared to public market peers.
Notably, many areas of private markets remain in the fifth year of a slowdown in terms of fundraising, with early signs of a recovery in investment and exit activity by value, but not by number, creating attractive entry points even as public equity markets trade near record highs.
At the same time, private markets are not immune to challenges. Liquidity remains constrained in some areas, and recent headlines surrounding redemption pressures in selected semi-liquid vehicles have drawn greater scrutiny. However, these issues should not be mistaken for a broad deterioration in underlying fundamentals. In many cases, they reflect structural liquidity mismatches, concentrated exposures or vintage-specific dynamics, rather than systemic weakness.
Selectivity is key
These distinctions matter because resilience within private markets varies significantly. Some strategies have demonstrated greater ability to navigate economic uncertainty, inflationary pressures and market dislocation than others.
- In private equity, small and mid-sized buyouts and continuation vehicles have proven more resilient than large buyouts, and continue to benefit from a favourable capital demand/supply balance.
- In venture, euphoria over technology IPOs have pushed valuations to above their 2021 peak across stages, especially in later-stage and AI-related rounds, which should be treated with caution.
- In private debt, scrutiny regarding direct lending focused on software-related large companies in the US contrasts with the structural soundness of the wider private debt and credit alternatives universe.
- In real estate, the gap between prime and commodity assets has never been wider.
- In infrastructure, operational assets with contracted revenues are gaining scarcity value, while a renewed focus on energy security is expected to bring tailwinds for energy transition assets.
Selectivity therefore remains critical. Across private equity, private debt, infrastructure and real estate, we continue to favour segments characterised by disciplined valuations, operational value creation, diversified income streams and structural demand drivers. This reflects our long-held views – we believe the current environment reinforces, rather than alters, this positioning.
Private equity: From recalibration to recovery
Private equity continued to show signs of an early recovery in early 2026. Investment and exit activity improved meaningfully in the first quarter of the year by value, but not by number, suggesting the prolonged downturn that followed the post-pandemic boom, which is now in its fifth year, is beginning to ease. ,
Of course, this nascent rebound faces headwinds from geopolitical uncertainty and macroeconomic volatility that is yet to feed through into data. Moreover – and importantly for investors watching longer-term trends – it remains highly uneven. Improvements in fundraising have been concentrated in venture and growth, while investment and exit values have been driven disproportionately by a small number of very large deals. Transaction counts remain subdued and the industry's exit backlog remains substantial.
Nevertheless, the current environment continues to create attractive opportunities for disciplined investors. Historically, periods of constrained fundraising and slower capital deployment have often preceded attractive investment vintages, particularly where valuation discipline and operational value creation drive returns.
From inefficiency to opportunity
In our assessment, the most compelling opportunities continue to lie within capital inefficient segments – and most notably small and mid-sized buyouts (enterprise values below $1 billion). Capital remains concentrated in the largest funds and transactions, while entry valuations in the small and mid-market remain materially below large buyouts and public market comparables. At the same time, financing remains available for high-quality assets and operational improvement opportunities remain abundant.
The valuation gap provides significant scope for value creation at a time when multiple expansion is becoming a less reliable source of returns. Smaller companies also tend to be more domestically focused, less exposed to geopolitical disruption and global trade volatility, and typically employ lower leverage levels than larger buyout transactions. Combined, these characteristics can provide greater resilience during periods of uncertainty.
Continuation acceleration
Liquidity dynamics within private equity continue to evolve. While exit activity has improved driven by some large transactions, overall distributions remain below historical norms and many investors continue to seek liquidity solutions. This has reinforced the importance of the secondaries market, where both LP-led portfolio sales and continuation investments continue to grow – and 2026 is on pace for a new record fundraising total.
Continuation investments in particular are becoming an increasingly established feature of the private equity ecosystem. While they continue to benefit from cyclical liquidity needs, our analyses show that their growth is mostly structural, reflecting their ability to retain ownership of high-quality assets with further upside potential, while providing optional liquidity to existing investors. We continue to view single-asset continuation vehicles especially as an attractive way to access seasoned assets with high visibility on operational performance and value creation.
Secondaries remain a key liquidity channel for private equity
Past performance is not a guide to future performance and may not be repeated. The views shared are those of Schroders Capital and may not be verified. Forecasts and estimates may not be realized. Source: Preqin Pro. Data as of 18 May 2026, Evercore Secondary Market Review, Schroders Capital, 2026. 2026E is annualized data based on Q1 2026. Figures indicative only. Data includes closed funds only. Data grouped by the year in which the fund held its final close. Fund count includes funds with undisclosed final close fund size.
Venture markets require increasing selectivity
Venture and growth capital are experiencing a markedly different environment. Following the post-2021 correction, valuations have recovered strongly across all stages and now sit above prior-cycle levels. However, much of this recovery has been concentrated in AI-related businesses and later-stage rounds, where investor enthusiasm has pushed valuations to new highs.
While AI continues to create compelling long-term opportunities, elevated valuations reinforce the need for selectivity. We remain cautious on areas where expectations appear disconnected from underlying fundamentals. In contrast, we continue to see attractive opportunities in earlier-stage investments and selected sectors where innovation remains strong, but valuations have not experienced the same degree of expansion. As always, underwriting discipline and access remain critical determinants of success.
Private debt and credit alternatives: Selective opportunity
Markets are increasingly rewarding selectivity rather than broad risk-taking. Strong corporate earnings, resilient consumers and continued investment in infrastructure and AI have supported risk assets, but higher energy prices, geopolitical uncertainty and tighter valuations have increased the dispersion of outcomes. Investors are no longer being paid equally for all forms of credit risk, placing greater emphasis on security selection and portfolio construction.
Areas of the market exposed to leverage, refinancing needs and concentrated sector risks are attracting greater scrutiny, while strategies supported by hard collateral, contractual cashflows and diversified borrower pools continue to offer attractive income. Recent market volatility has reinforced the value of diversification, rather than concentration within a single lending strategy.
We believe investors should seek diversified sources of income that are supported by assets, structures and cashflow resilience, rather than focusing solely on corporate fundamentals. Asset-backed finance benefits from return drivers that differ from traditional corporate credit. The underlying performance is often influenced by borrower behaviour, collateral value, contractual repayment schedules or physical assets rather than earnings growth, EBITDA or refinancing conditions alone.
Against a backdrop of policy uncertainty, we favour investments offering strong income, structural protection and lower sensitivity to interest-rate volatility. Regulatory change, bank balance-sheet constraints and ongoing demand for private capital continue to create opportunities in specialist areas where we can take advantage of inefficiencies.
Private market yield compression shows the crowding in some, but not all, sectors
Past performance is not a guide to future performance. Source: Schroders Capital, Bloomberg, CS, Swiss Re, Bank of America as of March 2026, or most recently available. The views and opinions shared are those of the Schroders Capital Securitized Products & Asset-Based Finance Team and are subject to change. Shown for illustrative purposes and should not be viewed as investment guidance.
Asset‑backed finance: Diversified
Many private credit allocations are exposed to the same underlying drivers: corporate earnings, leverage and refinancing cycles. Asset-backed finance (ABF) broadens the opportunity set by introducing different borrowers, different assets and different sources of repayment. Returns are driven by diversified pools of mortgages, consumer loans equipment leases and receivables.
The appeal of ABF is not simply diversification, but the quality of its return profile. Income is typically supported by collateral, structural protections and amortising cashflows, while floating-rate assets can help limit duration risk. These characteristics have historically contributed to resilient income generation, lower loss volatility and attractive risk-adjusted returns relative to many corporate credit sectors, particularly during periods of economic and market uncertainty.
Real estate debt: Seeking value after the reset
Investors have valuation concerns in some sectors, but commercial real estate (CRE) debt is supported by properties that have recently been through a substantial valuation reset, meaning lending today represents an attractive, lower-basis opportunity.
We favour residential and multi-family lending in housing-constrained markets across the US and Europe. These investments combine hard-asset collateral with favourable supply-demand dynamics, providing attractive income, strong downside protection and potential resilience in an inflationary environment.
Infrastructure debt: Essential assets; defensive income
Infrastructure debt continues to serve as a reliable source of stable, defensive income. We believe it represents a compelling allocation within private credit and real assets portfolios, delivering income that diversifies overall corporate exposure. With an expanding risk-return continuum, junior infrastructure debt now also offers double-digit returns for higher return seeking investors.
In the current market environment, characterised by higher geopolitical uncertainty, elevated inflation risks and increased dispersion across private credit markets, the combination of contractual cashflows, predictable income streams, strong downside protection and exposure to essential assets becomes particularly valuable.
Importantly, infrastructure debt is also benefiting from powerful structural tailwinds. The global need for investment across energy, digital, transport and social infrastructure continues to expand – as does the demand for a range of financing options to meet ambitious spending and development plans. In this environment, infrastructure debt remains one of the most effective ways to combine yield stability with downside protection.
Insurance-linked securities: A true diversifier
Insurance-linked securities (ILS) remain a distinctive and resilient source of return. Their performance is driven by insured event outcomes rather than economic growth, offering valuable de-correlation to market and credit cycles.
Current valuations are attractive, as limited loss activity in recent years has enabled repricing and strong expected returns – although there has been a compression in spreads from 2025 into 2026 as a result of demand for uncorrelated income exceeding new issuance. In a broader credit context, ILS continues to provide an important stabilising force through uncorrelated performance and consistent income.
Infrastructure equity: Structural tailwinds, near-term complexity
Infrastructure equity continues to benefit from strong structural tailwinds, with the energy transition remaining a key driver of long-term investment opportunity.
Ongoing geopolitical events have reinforced the importance of energy security, supporting the case for government investment into domestically generated, renewable and flexible sources of power. At the same time, near-term dynamics remain nuanced, with policy, financing conditions and market design influencing timing and distribution of returns.
Recent developments also highlight that disruption risk increasingly appears structural rather than episodic. While energy flows can be disrupted relatively quickly, restoring them is more complex, requiring alignment across insurers, vessel owners, governments and market participants. As a result, even after a political resolution of the Iran war, constraints can persist, contributing to sustained increases in merchant power prices.
We expect the current environment to reinforce the case for further renewable deployment, albeit with a lag reflecting grid buildout constraints and the impact of higher construction and financing costs. In the near term, operational assets with merchant exposure could benefit from elevated power prices.
Within this context, we see three areas as particularly attraction:
- Operational infrastructure with blended revenue models, combining contracted downside protection with selective merchant upside.
- Selective access to development platforms, where a repricing has created opportunities for well-capitalised investors.
- Grid flexibility and storage solutions, benefiting from increasing intermittency, volatility and demand growth.
Operational infrastructure
Operational assets remain central, providing income visibility through contracted or regulated revenues. However, we increasingly favour strategies that combine fixed revenues with selective merchant exposure, offering downside protection alongside participation in structurally higher and more volatile power prices.
Valuation dynamics remain supportive, with repricing over the past 12–18 months improving entry points. However, returns are increasingly driven by selectivity, including asset quality, revenue structure and active management.
Selective development and platform strategies
Selective investment in development assets and platforms presents an attractive opportunity following the reset in capital availability and risk appetite. Slower project pipelines and pressure on smaller developers are creating opportunities to access assets at earlier stages and more attractive valuations. However, this requires disciplined underwriting of permitting, grid and cost risks, and a focus on projects with a clear path to delivery.
Grid flexibility and storage solutions
Grid flexibility and storage are becoming increasingly important as renewable penetration rises and power systems require more balancing capacity. These assets benefit from volatility, intraday price spreads and system imbalance dynamics, accessing the distribution of power prices rather than the average. While attractive, outcomes vary by market and require careful underwriting of market design and revenue stacking.
Volatile power markets highlight the value of battery storage
Past performance is not a guide to future performance and may not be repeated. There is no guarantee that forecasted figures will be achieved. Source: IEA. Schroders Greencoat LLP, Wood Mackenzie, NECPS 2025.
Compelling environment for seasoned investors
Overall, infrastructure equity remains well positioned to deliver resilient, income-driven returns. However, performance is increasingly driven by selectivity, with the best opportunities in assets where scarcity, structural demand and well-designed revenue models combine to deliver both resilience and selective upside.
Real estate: Poised for recovery
Global real estate appears poised for recovery following several years of repricing and adjustment. Transaction activity continued to improve through 2025 and into the first quarter of 2026, while valuations largely stabilised and constrained development pipelines continue to create supportive supply dynamics across many sectors.
The recovery remains uneven and near-term headwinds persist. Economic uncertainty, elevated financing costs and the lingering effects of geopolitical disruption could slow the pace of improvement. Nevertheless, our proprietary valuation framework continues to identify a growing share of attractively priced opportunities across sectors and regions. As such, we continue to believe that we are in the midst of a compelling sequence of investment vintages for long-term investors.
Limited liquidity continues to constrain fresh allocations – and recent geopolitical developments may encourage some investors to remain cautious in the near term. Ultimately, this further supports attractive entry points and new liquidity opportunities.
We continue to favour sectors where there is needs-based resilience and operational improvement can unlock alpha – such as urban logistics, and both living and storage formats. Overall, the market backdrop suggests that disciplined deployment should benefit from favourable entry points and rising cash-on-cash yields.
Supply side remains supportive
While our economic and rental growth expectations remain modest, supply conditions continue to underpin operational performance. Elevated construction costs, higher financing costs and tighter capital availability have significantly slowed new development pipelines across most regions. We see increasing evidence of a "cost-push" effect on rents, with rising replacement costs supporting rental growth for existing high-quality assets.
Recent increases in construction input costs and ongoing supply-chain disruption risk are reinforcing these dynamics. Combined with rebased valuations and growing scarcity of modern space, particularly in sustainability-certified assets, we believe the foundations for improved long-term performance remain firmly in place.
Renewed rise in construction costs to impair development viability
Source: Federal Reserve, Green Street Advisors. April 2026 . *Data is based on producer prices. The views shared are those of Schroders Capital and are subject to change. These views should not be interpreted as investment guidance or a guarantee of any investment outcomes. Shown for illustrative purposes only.
Greater focus on asset specifics
Our preferred portfolio positioning remains relatively neutral across sectors, reflecting improved visibility on rental floors in retail and office markets and the more attractive yields now available across many asset types. Overall, we expect asset-level characteristics to become increasingly important drivers of performance. Location, sustainability credentials, operational quality and the ability to capture future rental growth are likely to matter more than broad sector allocation decisions.
Recapitalisation opportunities abound
The current environment is further accelerating the recapitalisation and secondaries opportunity set across real estate platforms, companies and other holding entities. These involve providing capital solutions to established management teams facing time or capital constraints in optimising value.
We believe this opportunity set is being supported by both cyclical and structural drivers, including refinancing requirements, operational complexity, sustainability-related capital expenditure needs and the ongoing adjustment to higher financing costs. For experienced investors, these dynamics may offer compelling entry points with attractive downside protection and value creation potential.
Multi-private market solutions: Deliberate diversification
This outlook has set out the central portfolio challenge today: markets have recovered, but uncertainty and concentration risk remain elevated. In this environment, diversification is essential — but it must be deliberate. The key question in the context of private markets is whether these asset classes are adding distinct return drivers, rather than simply recreating exposures investors already hold elsewhere, in essence increasing tail risk.
This distinction matters. As noted earlier, listed market returns have been led by a narrow group of technology and AI-related companies, and similar concentrations can appear in private markets through large-cap buyout, later-stage venture capital, direct lending or some real asset strategies exposed to the same inherent drivers, albeit to varying degrees, via investments in hyperscalers. These exposures can still be attractive, but only when they are intentional, well-priced and balanced by genuinely different sources of return.
The bar is generally higher with concentrated exposures, even more so in a multi-private asset context, where there are many more investment strategies from which to choose. As investors increasingly assess public and private markets together, asset class or strategy labels may not be safeguard against unintended concentration risk.
This is where active portfolio construction in a multi-private asset context can be powerful, with a high degree selectivity of strategies and sub-strategies, and controls on factors such as sector, region, counterparties, entry valuation and leverage.
In our illustrative comparison, a small and mid-cap private markets 60/40 portfolio generated a stronger risk-adjusted performance between 2017-2025, with a higher Sharpe ratio, outperforming both the traditional 60/40 public markets portfolio and the large-cap buyout/direct lending portfolio, with lower volatility.
The added benefit from active construction here is the diversification benefit, as measured simply in terms of exposure to corporates.
Small and mid-cap multi-private market portfolio vs large cap and public markets
Returns shown over the period Q4 2017 to Q4 2025. The Multi-Private Markets portfolio is a representative portfolio comprising 60% Schroders Capital Private Equity Co-Investments (SCPE), 13% Schroders International Selection Fund – Strategic Credit (SISZL), 13% Direct Lending (represented by the Preqin Direct Lending Index), and 13% Infrastructure Debt (applied an average premium spread from Q4’17 to Q4’25 to the ICE BofA BBB Euro Corporate Index over that period). Private equity performance is based on Schroders Capital's track record of realised investments, partial realisations and IPOs as of 31 December 2025 (IPOs valued at the last quarter-end date). The 60/40 public portfolio is represented by 60% MSCI AC World Total Return Index (USD) and 40% FTSE USBIG Bond Index - Total Return. All returns are presented in local currency, unhedged, unless otherwise stated. Past performance is not a reliable indicator of future results. Volatility statistics are based on accounting volatility, unsmoothed to reduce autocorrelations.
The point is not that private markets are automatically superior. The point is that the quality of diversification matters. By keeping the broad 60/40 structure constant, we are controlling for relative sizing to allow for the comparison to be driven more by strategy selection and underlying return drivers. Resilience came from combining differentiated exposures across private markets, not from adding private market exposure for its own sake. Additionally, the impact of tail risk events or accidents are mitigated by inherent controls on portfolio cross-over exposures.
For investors, a key takeaway is that private markets can improve portfolio resilience, but only when allocations are selective, deliberately diversified and complementary to existing holdings. In today’s environment, the objective should not be to allocate more broadly, but to allocate more deliberately.
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