Schroders Capital is urging private market investors to favor smaller buyouts, secondaries, and diversified credit strategies as AI valuations, geopolitical tensions, and inflation increase market risks.
In its fourth-quarter 2026 private markets outlook, the investment manager warned that the AI spending boom is increasing risks across public and private markets, while conflicts in the Middle East and Ukraine could disrupt energy supplies and sustain inflation.
"As with previous investment booms associated with breakthrough technologies, there is a risk that expectations and valuations eventually correct," Schroders said, citing rising capital deployment, debt financing and market concentration.
Smaller Buyouts Offer A Valuation Advantage
Schroders sees attractive opportunities in small and mid-sized buyouts involving companies with enterprise values below $1 billion. Average entry multiples stood at 11 times earnings before interest, taxes, depreciation and amortization (EBITDA) in the second quarter of 2026, compared with 14 times for large buyouts.
"Lower entry valuations provide more room for value creation, while smaller companies can offer greater scope for operational improvement," the report said.
Smaller businesses also tend to carry less debt, reducing their exposure to higher interest rates and refinancing risks as rising acquisition multiples become a less reliable source of returns. Schroders sees an advantage in their more domestically focused operations, which can limit exposure to geopolitical disruption and trade volatility.
Secondaries Gain Ground
First-half 2026 secondary transaction volumes reached a record, and Schroders expects continuation transaction volume to exceed $330 billion by 2035, more than three times its current level.
Sluggish exits and distributions are pushing investors toward secondaries for liquidity, making it harder for limited partners to recycle capital into new funds. Continuation vehicles allow private equity managers to retain promising companies while giving existing investors an opportunity to sell their stakes.
Schroders said a broader recovery in fundraising and dealmaking will depend on narrowing the gap between buyer and seller expectations. Single-asset continuation vehicles can also give new investors access to established companies with greater visibility into their operating performance and value-creation plans.
Private Credit Faces Concentration Risks
Schroders warned that tighter risk premiums and growing concentration across borrowers and sectors make careful credit selection increasingly important.
Revenue and earnings have grown among publicly reporting U.S. leveraged-loan issuers. Still, strong investor demand has compressed spreads across much of the syndicated credit market, potentially leaving investors with less compensation for taking on risk.
The firm favors asset-backed finance, which can offer collateral protection and shorter investment periods, alongside infrastructure debt backed by essential assets with contracted or regulated revenues. Schroders cautioned that data center financing requires careful underwriting as strong demand compresses risk premiums and investors assess the risks of individual projects.
AI Power Demand Creates Infrastructure Opportunities
Rising electricity demand from AI data centers is creating opportunities in energy infrastructure, but Schroders said investors must look beyond new power generation.
"Today, in many markets, the greater challenge is no longer producing electricity but delivering it to where it is needed, when it is needed," the report said.
Grid constraints, permitting delays and interconnection bottlenecks are increasing the importance of transmission networks, storage and flexible generation.
Schroders said investment returns will increasingly depend on individual asset characteristics, including location, grid access and revenue structure, rather than broad exposure to the energy transition.
Photo: DCStockPhotography via Shutterstock