Liquidity pressure and shifting capital flows
Liquidity remains a defining challenge across private markets. Although average private equity holding periods fell slightly in 2025 to 5.1 years, down from a peak of 5.3 years in 2024, they remain elevated compared with 4.3 years in 2017. A substantial backlog persists, with many portfolio companies held for seven years or more.
Residual value also remains high. Approximately 35 percent of value is still locked in 2014 and 2015 vintage funds, limiting investors’ ability to recycle capital. While internal rate of return remains important, distributions to paid-in capital have become critical. Among funds that closed in 2024 and 2025 at or above target, roughly one third achieved this outcome, and those managers demonstrated above-average IRR and DPI in prior vintages. Investors are rewarding visible distribution track records.
Secondaries markets are playing a larger role in restoring capital flow. Private equity secondaries fundraising reached $93 billion in 2025, with several funds targeting $20 billion or more. Private credit secondaries are also developing, with GP-led transactions overtaking LP-led deals for the first time.
Hedge funds experienced renewed momentum in 2025, with net inflows in every quarter, a trend that is likely to continue into 2026. Several large mandates have already been awarded, and a number of pensions and other institutional investors are increasing allocations within broader risk-mitigation frameworks. While top-tier multi-managers remain capacity constrained, smaller multi-strategy firms have gained traction by leaning into differentiated niches.
Across asset classes, the message is consistent: liquidity discipline, realizations, and structural resilience are shaping capital allocation decisions more than headline growth.
Artificial intelligence: capital intensity and corporate reinvention
Artificial intelligence is now viewed as a structural force that demands portfolio integration, not thematic curiosity. Investors increasingly see adoption as either an offensive strategy to enhance productivity or a defensive necessity to avoid obsolescence.
The scale of hyperscaler capital expenditure over the next five years is reshaping expectations. Firms traditionally regarded as asset-light have become capital-intensive. To justify this investment cycle, returns must exceed 10 percent or more. The question is no longer whether AI will be adopted, but whether the capital committed will generate sustainable economic value.
Open-source large language models are accelerating enterprise adoption by lowering cost barriers. Accessibility enables companies beyond the technology sector to embed AI in research, management, and workflow redesign. The productivity gains will not come from automating linear tasks alone, but from rethinking entire processes.
The workforce implications are significant. AI reduces some entry-level demand while amplifying experienced professionals’ productivity. The risk lies in hollowing out the talent pipeline. Leadership responsibility now extends beyond efficiency to stewardship. Firms must balance automation with long-term human capital development.
Lower middle-market private equity: alpha through operational leverage
With more than $1 trillion in unfunded capital concentrated largely in large funds, attention is shifting toward lower middle-market private equity. This segment offers inefficiencies that larger transactions increasingly lack.
Definitions vary, but the attraction lies in operational transformation. Smaller companies often exhibit under-managed structures and excess cost layers. Managers with strong sourcing networks and operational toolkits can unlock value beyond financial engineering.
Risk in this segment is best understood as capital impairment rather than volatility. Loss probabilities may be slightly higher, but disciplined purchase pricing and active governance can produce attractive return multiples. Sustaining informational advantage remains difficult as capital crowds the space, reinforcing the importance of manager discipline and strategic clarity.
Liquidity: strategic tool or behavioral trap
Liquidity has moved from being a passive feature to a strategic design choice. In a higher-rate environment, cash allocations have generated respectable returns, reducing pressure to deploy capital.
Investors value a strategic liquid bucket. Liquidity enables opportunistic allocation during volatility and protects against forced selling. Holding 5–10 percent in cash may create drag, but it can prevent materially larger losses during market dislocation.
At the same time, liquidity can create behavioral risk. Left-tail shocks receive significant attention, yet right-tail risks such as currency debasement and inflation erosion may pose greater long-term threats to intergenerational wealth. Rising sovereign debt and monetary expansion introduce risks that were less prominent two decades ago.
The illiquidity premium is not broken, but it requires alignment. Entry and exit timing, trust in managers, and capital pacing matter more than ever. Continuation vehicles and secondaries are expanding options, but governance and transparency remain central to maintaining confidence.
Evergreen structures: access with accountability
Evergreen private debt structures continue to expand rapidly, with assets reaching $644 billion as of 30 June 2025, up approximately 45 percent year over year. They are increasingly positioned as a bridge between traditional and alternative allocations. They offer smoother entry, rebalancing flexibility, and broader access, particularly for private wealth and increasingly for institutions.
Regulatory changes in the US and Europe are accelerating retail access to private markets, while some large managers now derive around 40 percent of assets from perpetual capital strategies.
Institutional investors are monitoring the implications on their existing and future GP relationships. However, these structures are not liquid substitutes. Gating remains a feature. Net asset value is an estimate determined by committees rather than market pricing, which heightens the importance of independent third-party valuations and incentive alignment.
Evergreens appear best suited to cash-generative assets such as core infrastructure, real estate, and private debt secondaries, where yield can support redemptions. Opportunistic strategies with predefined exit horizons remain better aligned with closed-ended structures. Relying on timing for return on investment is risky. Even in evergreen structures, the underlying investments are by their nature long-term.
Fee discipline and alignment are perpetual themes. As institutional allocations approach limits, the push toward retail capital increases scrutiny. Semi-liquid structures will succeed only if governance frameworks match access ambitions.
Private credit: durable allocation with selective opportunity
Private credit shows signs of a maturing cycle. Average loan durations have lengthened to four to five years, and while headline default rates remain between 1 and 2 percent, broader measures suggest closer to 5 percent when selective defaults are included. Within this backdrop, opportunistic credit strategies have raised around $100 billion over the past two years in anticipation of dislocation.
Private credit remains a core allocation for many investors. Record fundraising reinforces its attractiveness, particularly in specialty finance and asset-based strategies, which provide diversification and can help match the required return profile.
Yield compression is visible in direct lending, but systemic risk concerns were muted. Instead, dispersion and underwriting discipline dominate the conversation. The central question is whether risks were identifiable at origination and priced appropriately.
Geographic diversification and collateral-level differentiation are gaining importance. Strategies such as significant risk transfer, NAV finance, and litigation finance offer differentiated exposure, though scale may compress excess returns over time. Timing-driven strategies were viewed as fragile, reinforcing the need for long-term discipline.
Asset allocation in a multipolar world
Higher rates, persistent inflation, and geopolitical fragmentation are reshaping allocation frameworks. Public markets have outpaced economic growth, driven largely by mega-cap concentration and AI narratives. However, investors are increasingly questioning sustainability.
Developed versus emerging markets is not a binary choice. Opportunities exist across both. China remains a significant uncertainty, while parts of ASEAN benefit from more favorable demographics. Public uncorrelated strategies are attracting attention as diversification tools.
Strategic asset allocation continues to anchor governance and return expectations. The total portfolio approach offers flexibility within defined guardrails. These frameworks are complementary rather than competing. Discipline provides structure; adaptability allows for response.
The guidance for 2026 markets was pragmatic: maintain dry powder, avoid excessive heroics, and remain grounded.
Energy markets: stability beneath geopolitical strain
Despite heightened physical vulnerability, sanctions deployment, and tariff risk, the oil market remains relatively well supplied.
OPEC+ is expected to continue moderate production increases in the near term. Spare capacity among major producers provides flexibility for roughly one year of moderate additions. However, the market remains in implied surplus under current OPEC+ increases. Key variables include Chinese stock-building, the impact of sanctions on Russia and Iran, and US shale responsiveness to price declines. Wildcards include evolving sanction regimes.
Mid-2026 may prompt a reassessment of OPEC+ quotas. Structural capacity increases in the UAE and Iraq strengthen bargaining power, while Russia faces revenue pressure, with projected oil revenues potentially falling 18 percent short of plan and a budget deficit of 3.5–4.4 percent of GDP.
Iran continues to export at discounted prices, with China remaining its primary paying customer. Revenue leakage under sanctions remains material. Venezuela presents upside potential, though not transformational without structural reform.
For regional investors, fiscal positions remain manageable despite elevated spending. Oil revenues remain dominant, though diversification efforts continue.
Concluding thoughts
The region is positioning itself for structural resilience rather than short-term outperformance. Artificial intelligence demands disciplined integration. Private markets require governance and selectivity. Liquidity must be intentional. Energy markets remain complex but manageable under current supply dynamics.
Across asset classes, the consistent message is clear: maintain discipline, preserve flexibility, and prioritize governance. In a multipolar world defined by technological disruption and geopolitical uncertainty, durable returns will depend less on bold forecasts and more on structural alignment.
