Solving for 2026

3. The Worst Is Over for Long Rates

Fiscal overreach and debt sustainability have dominated the debate regarding sovereign fixed income valuations for years, but we believe that long-term yields already reflect known risks. In our view, the worst may be over for long interest rates.

In the U.S. and Europe, improving carry profiles in longer maturities on the back of lower policy rates should provide support to the long end of yield curves. In addition, governments may look to fight back against bond vigilantes by shortening their bond issuance and executing buybacks (shifting from quantitative tightening back to quantitative easing), among other measures. Finally, fiscal balances could improve and sovereign debt concerns could ease because of rising tariff revenues in the U.S., or, if the AI trend works as advertised, by generating higher productivity growth over time.

In credit, we think that current spreads are largely justified by fundamentals, but recognize that the nature of the economy is changing at a point when credit spreads are quite tight. As new winners and losers emerge across a host of industries, a new phase of the credit cycle may emerge where credits once seen as safe are put at risk. These disruptions could also support long-term government yields.

5. Seismic Shifts Take Shape

We see a mix of challenges and fresh opportunities across private equity, private debt and hybrid solutions heading into 2026.

In terms of challenges, subdued distributions stemming from constrained M&A and IPO activity have led to longer asset holding periods and a tougher fundraising environment. Although dealmaking continues to pick up, it may take several years to work through the backlog of private equity portfolio companies looking for exits. On the bright side, this backdrop continues to create opportunities for various providers of liquidity to private equity sponsors and their limited partners. Secondaries, capital solutions and equity co-investment all have a potentially attractive, multiyear opportunities, in our view.

Meanwhile, several structural shifts are taking firmer shape, including deglobalization, a potentially less benign macroeconomic regime, and aggressive AI adoption, setting the stage for greater dispersion of returns throughout private markets. In this environment, we believe investment selection will be even more critical, and that managers with deep expertise and resources dedicated to creating value in their portfolio companies will prove most successful. Furthermore, given the long-term and flexible nature of private capital versus more traditional markets, we expect private markets to play a significant role in funding the massive buildout of AI-related infrastructure. Yet another, potentially more seismic shift: the rapid expansion of private markets across the high-net-worth and retail segments, spurred by new U.S. Department of Labor rules allowing defined contribution retirement plans to offer private-market investments.

On the private debt side, direct lenders continue to maintain significant share of the leveraged lending market versus broadly syndicated loans arranged by traditional banks. We believe private debt markets will continue to grow as direct lenders demonstrate their ability to offer faster execution, more flexible terms and greater reliability; however, as in private equity, we also expect a widening dispersion of returns as competition intensifies. Manager selection remains crucial.