Private market allocations set to rise

As policy rates rose in 2022, private debt began to present increasingly compelling opportunities. The asset class is underpinned by all-in yields in public credit markets, which rose sharply at the time (see Figure 3). 

Private debt also offers an illiquidity premium. For investors who can invest patient capital in less liquid private debt, this premium offers the potential to harvest additional returns over public credit.

When combined, the higher public credit all-in yields and the illiquidity premium resulted in elevated yields for private debt.

In parallel, while the hiking cycle brought private debt yields to compelling levels, it also triggered a repricing in real asset equity. The speed of the hiking cycle created a temporary inversion in risk-return dynamics: in many cases, debt returns could satisfy investor requirements with less risk than equity. Capital, being efficient, sought to allocate to this opportunity.

The weather is changing, however. Policy rates across many markets are expected to come down or have already been cut, public credit spreads remain very tight, and more capital is targeting private debt. This capital will be looking for a home, putting pressure on the latter’s illiquidity premium.

As a result, while private debt still offers attractive risk-adjusted returns and will continue to satisfy some investor requirements, all-in yields are moderating to a more typical level compared to equity (see Continued momentum: The outlook for European infrastructure debt).² Investors seeking higher returns may have to seek them through equities.

Meanwhile, real-estate equity saw an opposite trend. As shown in Figure 4, rising interest rates drove a period of sharp repricing, resulting in negative capital growth between 2022 and 2024. During this period, real estate went through a price discovery journey and, understandably, investors held back until clarity emerged.

In 2024, prices began to stabilise across the UK and Europe, with performance trending once again towards historical levels.

Looking to 2026 and beyond, the rebased asset pricing and macro environment are supportive for real-estate equity returns, as demand and supply fundamentals remain in balance across most sectors and regions.

Higher income returns, supported by the rebasing of capital values and positive, albeit muted, rental growth, are expected to drive performance over this next cycle.

As all-in yields on debt begin to moderate, investors are more likely to be tempted back into equity, where yields have also stabilised. The cost of debt is now at a level where it is adding to real-estate equity performance (see Figure 5), albeit not equally in all sectors and markets.

Throughout the rate hiking period, infrastructure demonstrated its resilience, with contractual cash flows, inflation protection and strong pricing power that softened the impact of rising discount rates.

Looking ahead, the stabilisation of real yields in Europe (as measured by ten-year government bond yields less annual inflation) is supportive.

It offers infrastructure equity investors both downside protection and the opportunity to capture meaningful upside if real yields go down (see Solid foundations: The case is building for infrastructure equity).³

Moreover, the changing geopolitical environment is focusing minds on the strategic importance of infrastructure.

Expansionary fiscal policy and alignment with long-term thematic drivers like the energy transition and technology advances are creating additional tailwinds for growth, most notably in infrastructure, but also more broadly across equity.

On the fiscal side, Europe will need to invest an estimated €12 trillion in infrastructure by 2040, requiring annual spending of €800 billion. This represents around 3.5 per cent of the region’s GDP, more than double historical levels.⁴

And in terms of structural themes, private markets present strong alignment with what we call MegaTRENDs – the long-term thematics that shape our societies and economies: Technology, Resilience to climate, Energy transition, New global order, and Demographics.⁵ This presents tailwinds for growth across equity strategies.

For example, over the long term, infrastructure is set to benefit from the energy transition, and from the focus on energy security in a changing global order. It is also a second-order beneficiary of the artificial intelligence boom (see House View 2026 Outlook).⁶ Meanwhile, real-estate equity will be supported by changing demographics, with the undersupplied housing market in Europe presenting strong opportunities.

This is an important consideration given that private-market investments are by nature longer term, less liquid and less transparent than public markets.

The current policy-rate environment means that all-in yields in private debt remain compelling on a risk-adjusted basis. 

But equity is also now positioned for growth. The asset-class fundamentals have stabilised and are further supported by the macro environment. Investor sentiment is continuing to improve, and capital allocation is increasing across the board. Tailwinds from fiscal stimulus and alignment to long-term MegaTRENDS are also strengthening the outlook.

This is restoring the natural balance between debt and equity, whereby expected returns align to the level of risk.

As debt’s staying power meets equity’s revival, private-market investors in 2026 will need to navigate the shift. The good news is, they will have increasing options to meet their investment objectives.