Private Markets Investment Outlook Q2 2026: Resilience reinforced
The Iran conflict and market fallout reinforced the case for building resilient portfolios, including through selective allocation to private markets. Resilience within private markets varies significantly – and knowing where to find it is key. Our consistent focus on the most structurally protected segments continues to guide our approach.
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Over the past year, we have consistently emphasised one theme: how to build portfolios capable of withstanding a more volatile global environment shaped by geopolitical tensions and a changing world order, technological disruption, the energy transition and demographic divergence.
Recent developments have reinforced this message. The escalation of hostilities in Iran and across the Middle East, and related spikes and volatility in oil prices, have injected fresh uncertainty into an already fragile global outlook. While the full economic fallout remains unclear, events have demonstrated how quickly disruptions can wrong-foot traditional portfolio allocations.
For long-term investors, this underscores the importance of true resilience. This is not merely about preserving capital during brief periods of stress, but constructing portfolios able to generate attractive returns over time despite persistent macroeconomic challenges caused by powerful external forces.
Why private markets – and why now
In this context, private markets have rarely looked more relevant. They offer structural portfolio management advantages over public markets that are especially key during periods of volatility, alongside a recent cyclical decoupling. Taken together, they represent a compelling portfolio allocation both in the current environment and longer term.
Structurally, private investments are less exposed to the sentiment swings of public indices. Closed-ended fund structures provide locked-in capital, enabling managers to deploy capital opportunistically during downturns and time portfolio exits more effectively, avoiding forced sales.
Private markets are also more specialised, accessing a broader opportunity set. Managers can target segments with balanced capital supply and demand due to barriers to entry, invest in domestically focused companies that are less exposed to global shocks, and access assets with differentiated risk exposures and lower correlation to listed markets.
Cyclically, many private market segments — corporate private debt being a notable exception — have experienced four years of subdued fundraising, investment, valuations and exits, even as public equities reached record highs and credit spreads tightened. Combined with private capital concentration in larger funds and transactions, this has created attractive entry points and inefficiencies in other parts of the market, which can translate into compelling return opportunities.
Not all private market strategies are equally resilient
While private markets as a whole offer structural advantages, the degree of resilience varies significantly across and within asset classes.
- In private equity, small and mid-sized buyouts and continuation vehicles have proven more resilient than large buyouts.
- In venture, early-stage opportunities retain their fundamental appeal while late-stage AI investments carry unprecedented valuation and concentration risk.
- In private debt, scrutiny regarding direct lending 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 development-stage projects face headwinds.
This is not a new observation. As readers of our previous outlooks will recognise, our focus on structurally resilient segments – smaller and mid-market strategies, operational value creation, diversified credit alternatives and essential-service assets – has been a consistent theme. The current environment has validated, rather than prompted, this positioning.
Private equity: The end of bigger is better
Private equity fundraising remains muted, supporting attractive entry points. Investment and exit activity have recovered modestly from the lows of early 2025, though the fallout from the Iran conflict may delay a broader recovery and the exit backlog continues.
We continue to see the most compelling opportunities among smaller companies. Depending on definitions and data sources, small and mid-sized buyouts benefit from persistent valuation discounts of 20–40% relative to large buyouts – with the widest discounts at the small end of the market – while offering exposure to businesses less tethered to global markets, with greater transformational growth potential. Over the past four years, small buyouts have outperformed mid, and mid buyouts have outperformed large, supporting the view that entry discounts translate into better net return potential.
Continuation vehicles, which reached record transaction levels in 2025, are gradually and partially substituting sponsor-to-sponsor transactions (secondary buyouts), which had become the dominant deal source for large-cap funds. Critically, our research shows that over 80% of the growth in continuation investments is structural rather than cyclical. This is driven by continuation structures offering inherent advantages over traditional buyouts: lower fees, faster liquidity and more predictable return profiles with tighter dispersion.
In venture, the divergence between stages mirrors the pattern we observe across private markets more broadly. Early-stage markets offer selective and compelling opportunities globally, underpinned by multi-polar innovation at reasonable valuations. By contrast, late-stage funding rounds (Series D+) present significant concentration risk: AI now dominates deal value and valuations have surpassed 2021 peaks. We are cautious on this part of the market, given how prior technology cycles have played out.
Private debt and credit alternatives: Look for diversifying and diversified
There is quite a lot of noise in headlines around private debt. Traditional direct lending faces increased scrutiny over sector concentration – particularly in areas with risks of AI disruption, such as software – as well as redemption pressures for certain private debt funds. Importantly, the gating mechanisms embedded in these funds minimise the risk of forced selling in the corporate loan market more broadly.
The need for stable yield, income and return continues to persist. We see attractive opportunities across a wide universe of credit strategies that offers attractive diversification through collateral and contract-backed strategies, with differentiated and resilient risk profiles.
Infrastructure debt, with its structural need for capital and collateral-based investments, offers one such opportunity. Commercial real estate debt is supported by properties that have already seen a reset of its valuations and so offers a lower-basis entry point. Asset-based finance (ABF) focuses on investments in large numbers of debt contracts with a diverse obligor base and the backing of everyday things like homes, cars and airplanes. It also offers a floating-rate exposure, which is beneficial in an environment where interest rates may rise. Lastly, insurance-linked securities offer macroeconomic decorrelation in a world with more geopolitical risk.
Infrastructure: Energy transition tailwinds remain
Energy security remains a key theme supporting renewables build-out globally, and infrastructure is one of the areas where the structural advantages of private capital – long-duration commitment, operational engagement and locked-in capital – are most evident.
The Iran conflict further reinforces the strategic case for the energy transition, though acceleration is likely to be policy-driven, geographically uneven, and to materialise over time. In the near term, operational renewables benefit directly from higher power prices.
Valuations have also reset meaningfully following the interest rate cycle, with US policy changes, UK regulatory adjustments and revised long-term assumptions creating attractive entry points. Additionally, surging power demand driven by AI and data centre expansion is creating a structural demand catalyst for renewable generation capacity and grid infrastructure.
Europe and Asia remain central to future renewable expansion, while US dynamics have become more complex following policy changes. Across all geographies, renewables remain the cheapest source of new-build generation, and battery storage has emerged as a particularly compelling sub-sector.
Real estate: At an inflection point
We previously highlighted expectations of a real estate recovery, with current vintages positioned attractively. Recent quarterly data supports this view, with a nascent rebound in transaction activity and pricing, albeit highly uneven across sectors, geographies and asset quality tiers. The recovery has been predominantly income-driven, with capital appreciation still modest, and the gap between best-in-class and average assets has never been wider.
The Iran conflict, and a related potential resurgence in inflation and resulting rate implications, has the potential to stall this. However, constrained supply continues to support rental income, particularly for prime assets, with construction costs under further upwards pressure from supply chain disruption. Properties providing indirect inflation protection through shorter-term contracts, such as self-storage, or contractual inflation pass-through will provide effective near-term real cashflow protection.
Operational expertise, asset enhancement and sustainability improvements are increasingly critical to long-term value creation. Additionally, a substantial volume of maturing commercial real estate debt – further complicated by the current rate environment – is catalysing compelling recapitalisation and secondaries opportunities.
Private equity: From recalibration to opportunity
As we have reported consistently in our recent outlooks, private equity is going through a period of recalibration. Fundraising, deal activity and exit volumes have all been in a multi-year slowdown from their post-pandemic peaks, reflecting tighter financial conditions, valuation adjustments and greater macroeconomic uncertainty.
Notably, in the second half of 2025 we saw what appeared to be the beginning of the recovery, with both investment and exit activity rising. This looks set to be stopped in its tracks by the outbreak of conflict in Iran and across the Middle East, and subsequent spike in energy prices globally, which has reintroduced a familiar veil of uncertainty.
But while the prolonged slowdown of private equity continues to weigh on near-term sentiment, it has also created a more favourable investment backdrop for disciplined and long-term investors. Historically, slower fundraising cycles have preceded attractive investment vintages.
Uneven adjustments
Global fundraising has fallen sharply from its 2021 peak, while investment activity has become more disciplined and pricing more grounded. Crucially, these adjustments have been uneven. Capital remains heavily concentrated in the largest funds and transactions, which have driven recent investment trends, leaving other parts of the market less crowded and often more inefficient.
In our assessment, the most compelling opportunities continue to lie within small and mid-sized buyouts (enterprise values below $1 billion). The before-mentioned capital imbalance has contributed to valuations in this segment remaining attractive: up to 40% below large-cap buyouts – and up to 55% below comparable public benchmarks.
Small and mid-sized buyouts also see a healthier valuation environment in the software sector, which has been the subject of recent negative headlines. In our view, a sharp correction in public software comparables has been driven as much by a reversal of prior high valuations (which remain above average private equity software valuations even post-correction) as by perceived threats from artificial intelligence.
Overall, this valuation gap provides significant scope for value creation – and smaller companies are also typically more domestically focused and therefore less exposed to global trade disruptions or geopolitical shocks. Combined with generally lower leverage ratios, this can offer enhanced resilience during periods of volatility.
Small/mid buyout funds have performed strongest over the long run
Past performance is not a guide to future performance and may not be repeated. Source: Preqin Pro, data as of 4 February 2026, Schroders Capital, 2026. Currency used is $. Buyout – Small includes Private Equity closed-ended funds below $500m, Buyout – Mid between $500m and $1.5bn, Buyout – Large between $1.5bn and $4.5bn and Buyout – Mega above $4.5bn. The views shared are those of Schroders Capital and may not be verified.
Continuation acceleration
Within private equity, liquidity dynamics are also shifting. A more subdued exit environment and increasing exit backlog has helped drive the expansion of the secondaries market, with both LP-led and continuation investments playing an increasingly prominent role.
Secondary deal volumes reached record levels in excess of $200 billion in 2025, according to figures from industry intermediaries, while fundraising also hit a new high. Notably – and as we have previously shown – cyclical dynamics are only a small part of the story, with structural growth in continuation investments in particular reflecting their growing status as a mainstream mechanism to drive continued value creation.
Venture and growth capital markets with highly diverging dynamics
Alongside buyouts, venture capital is also entering a new phase following the sharp valuation correction post-2021. However, for venture and growth capital current market dynamics are particularly complex, as there is strong divergence by sector and stage.
Late-stage venture / growth capital valuations (series D+) have shot up to new records, significantly surpassing prior-cycle peaks. These developments are especially driven by investments related to AI. We see these valuation developments as a reason for caution, given how prior technology cycles have played out.
In contrast, the early-stage market has undergone a more measured recovery throughout 2025. Here, the opportunity set is expanding, underpinned by the integration of generative AI across diverse applications.
A noteworthy outlier remains the biotechnology sector; despite strong long-term demand drivers and continuous innovation, it remains mired in a historic slump. We view this disconnect as a compelling contrarian opportunity, provided investors maintain rigorous selectivity and carefully navigate the lingering risk associated with follow-on financing.
Private debt and credit alternatives: Shifting backdrop
Private credit moves into 2026 with considerably more scrutiny on direct lending. Concentration, valuation, liquidity and default risks are key concerns. Importantly, the gating mechanisms embedded in funds facing redemption pressures serve to minimise the risk of forced selling in the corporate loan market.
The desire for yield, income and return continues to persist. We see attractive opportunities in the wider universe of private debt and credit alternatives, such as infrastructure debt, real estate debt, asset-based finance and insurance-linked securities. They offer beneficial degrees of diversification in return and risk profile, accessing diversified collateral pools, essential-service revenues and natural catastrophe risk.
Collateral or contract-backed strategies are driven by distinct structural dynamics, and are less exposed to the same elements of corporate lending stress dominating current headlines. High valuation levels, macro uncertainty, and greater tail and idiosyncratic risks mean high-quality borrowers and high-priority collateral within diversified or diversifying investments are more important today than in the recent past.
With oil prices rising materially due to conflict in the Middle East, it is likely that there will be interest rate policy dispersion as a result of diverging central bank objectives. In most regards, developed market central bank policy rates are more likely to lean higher. We expect general tailwinds from regulatory change related to Basel III and Solvency II that will be favorable for certain loans or securities that relate to mortgages, MBS and CLOs, though the full impact will take time to materialise.
Private premium is higher, but not constant
Past performance is not a guide to future performance. Source: Schroders Capital, Bloomberg, CS, Swiss Re, Bank of America as of September 2025. 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
Asset‑backed finance (ABF) offers access to diversified pools of collateral. ABF investments typically focus on pools of hundreds or even thousands of debt contracts, borrowers or obligers, often secured by repayments on assets used every day such as homes, cars, aircraft and equipment. We see ABF as attractive due to its investment-level diversification, as well as its ability to diversify returns.
Our preference is for stronger borrowers with lower leverage, particularly at a time of uncertainty. We prefer having collateral that is high priority for these borrowers, such as a primary residence or service engines for aircraft. The breadth and granularity of ABF exposures help reduce reliance on a sector or issuer. Structural protections, collateralisation and floating-rate coupons are features that provide a compelling combination of income, low duration and downside mitigation.
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.
There remains a considerable inefficiency in CRE, due to regulation, creating a gap in available capital loans on land acquisition, development, construction or heavy transition projects. We see this as a compelling opportunity in the US and in certain European regions. Our preference is to lend on multi-family development, in regions or areas with a housing shortage. This investment also has considerable inflation protection.
Infrastructure debt: Essential assets; defensive income
Infrastructure debt continues to serve as a reliable source of stable, defensive income. With steady capital demand and tangible asset backing it provides a secure foundation for long-term credit portfolios. Moreover, amid renewed geopolitical uncertainty the essential nature of the underlying assets is a key driver of resilience.
Many infrastructure projects also benefit from inflation-linked revenues or regulated frameworks, which help preserve real yields even if more persistent re-inflationary pressures emerge. 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
The oil shock triggered by the Iran conflict has reinforced the strategic case for the energy transition, though the near-term investment dynamics are more nuanced than the long-term thesis suggests. Energy crises strengthen the imperative for energy independence, but they also complicate deployment through higher financing costs and delayed rate cuts.
The precedent from 2022 is instructive: after the Russia-Ukraine crisis the acceleration in renewable investment was real, but took some time to materialise and was driven by policy responses rather than an immediate market pivot. Countries with the most resilience to near term gas prices are those that had successfully rolled out new renewables plant post-2022, and in the process significantly decoupled electricity prices from gas prices.
We expect this signal for further renewable deployment to be reinforced again in response to the current situation, but with a lag in delivery from grid buildout and internalisation of inflated construction and finance costs. In the meantime, operational renewable assets with merchant price exposure will benefit in the near term from elevated power prices.
Differentiated risk and rebased prices
More broadly, renewable infrastructure provides differentiated risk exposure, including as noted to energy prices and weather. The degree of inflation protection depends on contract structure: assets with explicitly indexed revenues offer strong cashflow protection, while merchant-exposed generation benefits indirectly through energy price correlation.
Valuations have reset meaningfully following the interest rate cycle, US policy changes, UK regulatory adjustments (RPI-to-CPI indexation switch), and revised long-term power price assumptions. Listed renewable infrastructure trusts now trade at historically wide discounts to net asset value, while transaction multiples for private assets have declined to near long-term averages.
For private investors able to acquire operational assets at these rebased levels, we view the current entry points as some of the most attractive in a decade – and they are supporting attractive potential returns, as the below chart reflecting the levered discount rate for a portfolio of UK wind assets shows.
Core infrastructure returns have materially re-rated
Past performance is not a guide to future performance. Source: Listed Greencoat fund quarterly reports Q1 2015- Q1 2025. Discount rate refers to UK wind assets. There is no guarantee that this rate trajectory will remain the same in the foreseeable future.
Demand drivers and regional dynamics
Surging power demand driven by AI and data centre expansion is an increasingly important structural catalyst for infrastructure equity. This demand surge directly supports the investment case for renewable generation capacity, grid infrastructure and energy storage – and is creating scarcity value for operational assets with existing grid connections, as interconnection queues extend to multiple years in many markets.
Regional dynamics are diverging. Europe and Asia remain central to future renewable expansion, though grid connection bottlenecks and permitting delays represent a near-term constraint that is simultaneously creating scarcity value for operational assets with existing connections.
In the US, the phase-out of wind and solar tax credits has accelerated near-term deployment, as developers rush to safe-harbour projects, but will reduce (although not halt) buildout over the medium term. Notably, battery storage retained its full tax credit, creating a structural policy tilt toward energy storage as one of the most compelling and fastest-growing infrastructure sub-sectors.
Across all geographies, cost competitiveness continues to underpin the long-term investment case, with renewables remaining the cheapest source of new-build generation for the tenth consecutive year.
Compelling environment for seasoned investors
Overall, we see the current environment as particularly well suited to private infrastructure investors with operational expertise and long-duration capital. The combination of rebased valuations, constrained construction financing, grid bottlenecks that protect incumbents, and structural demand growth from the energy transition and AI, creates a compelling backdrop for patient, selective capital deployment.
Real estate: At an inflection point
Following an extended period of price discovery the global real estate market has reached an inflection point with a recovery underway. This was demonstrated by MSCI global capital growth showing a modest positive movement from recent tough levels. However, the Iran conflict and a potential resurgence in inflation and resulting rate implications has the potential to stall the nascent recovery that had begun to take hold.
Nonetheless our proprietary valuation framework continues to point to a growing share of attractively priced opportunities across multiple sectors and regions. As such, despite prevailing market circumstances, we continue to believe that we are in the midst of a compelling sequence of investment vintages to deploy into the asset class.
Improving investor sentiment in 2025 was reflected in growing transaction volumes and private real estate equity fundraising recovering in 2025, albeit from a low base, with volumes 26% higher than in 2024. Distributions activity remains subdued with recent events likely to maintain this dynamic for longer than would have been expected prior to the current situation.
Near-term, assets with contractual inflation-linkage in lease terms and those in more operational segments able to pass through inflationary upticks (including wages) more expediently, will naturally provide more cashflow protection for investors, which should better support their values. As such, we remain focussed on sectors where operational improvement can unlock alpha – such as logistics, living and storage formats and hospitality.
Significant divergence in pace and depth of repricing
Source: MSCI, Green Street Advisors, Schroders Capital, December 2025. Past Performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall.
Supply side remains supportive
While our economic and rental growth expectations remain modest, a lack of supply continues to underpin operational performance. Elevated construction costs and reduced debt availability have significantly slowed new project pipelines. We see increasing evidence of a “cost-push” impact on rents, with rising construction expenses driving rental increases to maintain development viability.
Escalating energy prices and near-term supply chain disruptions are expected to further drive-up construction costs from these elevated levels. This will also place further pressure on capital expenditure budgets. These tight supply conditions, coupled with rebased valuations, are laying the foundation for improved long-term performance.
Greater focus on asset specifics
Our preferred portfolio positioning has firmly shifted to a more neutral stance across sectors. This is owing to greater visibility on ‘rental floors’ within the retail and office sectors, as well as the elevated yields available for future-proofed assets. More broadly, we expect asset and micro location considerations, for example building sustainability profiles, to have a greater influence on relative performance going forward when contrasted with recent years, which saw record sector-level total return divergence.
The retail sector, after years of underperformance, has surprised to the upside, supported by improved operating models. Meanwhile, living and operational segments – such as rental housing, student accommodation, and healthcare – continue to demonstrate strong fundamentals, offering inflation pass-through and lower economic sensitivity.
Recapitalisation opportunities abound
The current environment may act to further catalyse compelling recapitalisation and secondaries opportunities across real estate platforms and other holding entities. These involve providing capital solutions to established management teams facing time and/or capital constraints in optimising value.
Opportunities are being fuelled by favourable cyclical and structural dynamics – particularly the need to address operational complexity and sustainability requirements - and capital value declines that have exacerbated funding challenges.
Multi-private market solutions: Resilience through diversification
As noted throughout this outlook, today’s market is characterised by a persistence in heightened levels of uncertainty. This is why we have consistently emphasised the importance, especially in times of uncertainty, of selective diversification across and within private markets.
Adding more distinct return drivers
From a portfolio perspective, investing across a range of private market segments effectively reduces drawdown risks, which is increasingly vital given we are in an environment characterised by multiple dimensions of uncertainty.
Specifically, diversification across different strategies and sources of return, especially those outside public markets, provides more stable benefits such as contractual income, asset-backed spread risk, and access to specialised finance.
Over the past 10 years, a hypothetical diversified multi-private markets portfolio has shown greater resilience across varying market regimes. For example, during the inflation shock of 2022–2023, which posed significant challenges for the 60/40 as equities and bonds both fell in tandem, the portfolio achieved positive performance (see chart below).
Periods of positive returns during various market regimes between 2015-2025
Past performance is not a reliable indicator of future results. Shown for illustrative purposes only. Source: Schroders Capital, Preqin. Private Markets growth portfolio is a representative portfolio of 60% Private Equity, 30% Infrastructure and 10% Real Estate. Private Equity is based on Schroders Capital track record of realized investments, partial realisations, and IPOs as of 30 September 2025 (IPOs valued at the last quarter-end date). Infrastructure reflects the Preqin Value Add Infrastructure Index. Real Estate reflects the Preqin Value Add Real Estate Index. All returns are presented in local currency, unhedged. 60/40 portfolio represented by the MSCI AC World Total Return in USD terms and the ICE BofA Global Broad Market Index Total Return in USD Terms. Volatility statistics are based on accounting volatility unsmoothed to reduce autocorrelations.
By connecting diversification with these distinct advantages, investors can construct portfolios that are less susceptible to downturns and better positioned to benefit from less correlated sources of return – and also to compound capital from a higher base when market conditions improve.
Most importantly, over the 10-year period, the multi-private markets portfolio has delivered not only higher returns but also lower volatility (albeit driven by accounting and smoothing of returns). This outperformance is greatly aided by more consistent sequencing of returns, as lower volatility also means drawdowns are minimized and capital can compound harder, driving higher multiples of invested capital over time. This reduction in path dependency is critical, and an allocation to a diversified multi-private markets as part of a wider portfolio can be highly beneficial to that end.
Of course, it should always be noted that portfolio performance will be driven by the quality of the underlying investments. While we advocate for diversification, each investment needs to be backed by rigorous underwriting, emphasising a strong track record and thoughtful risk management.
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