History shows that concentration in trending sectors can heighten portfolio risk. Today, information technology stocks dominate US public markets, with the Magnificent 7 accounting for nearly one-third of the S&P 500 Index. This underscores the importance of diversification across sectors and asset classes. Private markets provide exposure to sectors less correlated with public markets, reducing vulnerability to single-theme drawdowns. Institutional allocations have steadily increased, reflecting their ability to enhance diversification, reduce volatility, and deliver returns that are less correlated with traditional markets.
Our top picks for diversifying beyond public markets
1. Private equity: Positioned for renewed momentum
Public equities have experienced a strong period of performance, but returns have not fully caught up. This creates an appealing opening for investors who seek access to unlisted growth companies and to operational value creation. Corporate fundraising has also shifted away from traditional banking channels, which reinforces the strategic relevance of private markets.
Improved financing conditions and normalised interest rates have reignited deal activity, with larger transactions signalling confidence in market resilience. Industry sentiment also points to a pickup in exit activity, reinforcing a constructive outlook.
Private equity strategies are designed for so called “patient capital”, making them most appropriate for investors with a long-term perspective. As the market evolves, dispersion among managers is likely to widen, making rigorous due diligence critical.
2. Private credit: A compelling alternative
While private credit encompasses a broad range of lending strategies, our focus is on sponsor-backed, senior secured direct lending. This involves loans to profitable, growing companies acquired by private equity sponsors. . Scale, sourcing networks, and underwriting discipline will separate leaders from laggards. We believe that specialised segments such as European direct lending present compelling opportunities.
3. Hedge funds: Enhance portfolio resilience
Hedge funds remain an important tool for enhancing portfolio resilience. Market-neutral strategies, often referred to as ‘absolute return approaches’, target positive returns with low correlation to traditional markets. By controlling volatility and limiting drawdowns, these strategies help improve risk-adjusted returns, compound them, and preserve capital across market cycles.
4. Private infrastructure: Long term drivers to offer stability
Private infrastructure complements hedge funds and other alternative investments by providing predictable cash flows and exposure to long-term structural growth drivers such as digital connectivity and renewable energy. Both asset classes reinforce the importance of building a diversified allocation to alternatives that can withstand evolving macroeconomic conditions and may deliver stability over time.
Building a robust allocation to alternatives
Strategic asset allocation remains the cornerstone of long-term portfolio success. Approach allocation with disciplined pacing, mindful of liquidity constraints and lock-in periods. While the outlook for alternatives is constructive, success will depend on selecting top-tier managers, maintaining diversification across strategies, and aligning commitments with long-term objectives.
Curious about the bigger picture? Download the complete Market Outlook 2026 brochure below.
Frequently asked questions
How can I diversify beyond public markets in 2026?
Allocate to private equity for growth exposure, private credit in Europe for yield, and hedge funds and/or private infrastructure for low-volatility, uncorrelated returns.
Could private debt, and specifically direct lending, pose a systemic risk?
Direct lending has grown rapidly as banks face tighter regulation, prompting questions about systemic risk. At present, the risk appears contained because direct lending funds are largely equity-financed. Furthermore, the fund-level leverage remains manageable, and current loss ratios for the sector are below 1%. Banks do provide financing for some fund-level leverage, but this exposure is limited compared to their traditional lending activities.
Systemic risk is typically associated with interconnected large banks that hold substantial retail deposits and can transmit contagion across the financial system. These characteristics are not present in direct lending, which involves discrete investment funds backed by professional and sophisticated investors rather than retail customers. Furthermore, direct lending funds usually provide senior secured debt for a portfolio of leveraged buyouts, an approach that has generally proven resilient over time, apart from isolated incidents.
The real uncertainty is how the sector will perform under stress as it continues to expand. For investors, this is not about avoiding the space but about choosing managers with established performance track records over cycles, disciplined credit processes, and diversified portfolios, which will be essential as the market matures.
Is private equity still worthwhile amid lower distributions?
Recent years have challenged investors accustomed to consistent cash flows from private equity exits, notably in the case of leveraged buyouts. Between 2019 and 2023, leveraged buyout distributions lagged capital calls, reversing the positive balance seen from 2011 to 2018. This shift is largely a result of a sharp rise in interest rates and market volatility, which slowed exits after a post-pandemic boom fuelled by low rates and positive investment sentiment.
Today, conditions are improving. Interest rates are easing, initial public offering windows are reopening, and leveraged buyout distributions have turned positive since 2024. Meanwhile, managers have deployed significant capital into opportunities created by market dislocation, positioning portfolios for future gains.
Ultimately, private equity remains compelling for long-term investors. When the leveraged buyout sector matures further and fundraising eventually plateaus, distributions should sustainably exceed capital calls. For now, patience and confidence in skilled managers remain key.