Private-Market Performance Under Pressure - Chief Investment Officer

Private equity and private credit are facing persistent headwinds from rising rates, persistent inflation and a weak mergers and acquisitions environment, and the slowdown is beginning to appear in pension and sovereign fund performance reports. Deals are still closing and loans are still performing, but returns are lagging. According to Chief Investment Officer, La Caisse reported a 5.1% return for the first six months of 2026 against a 7.5% benchmark, and it attributed the shortfall largely to private equity, which fell 4.3% over the period and to AI-related disruption. The Massachusetts PRIM board reported that its $19.5 billion private equity portfolio returned 8.4% net over the past year, ahead of the State Street Buyouts benchmark at 8.3%, but below State Street's private equity benchmark and public developed and U.S. equity markets. New York City Pension Funds reported a 7.2% one-year time-weighted private equity return for fiscal 2026, the first year reported since a significant secondary sale trimmed and repositioned its core private equity portfolio.

Allocation changes are also emerging. The Alaska Permanent Fund wrote down valuations on three private credit funds, 42 private equity funds and one infrastructure fund in fiscal 2026, a larger count than the prior year, because it concluded the carrying costs would not be recovered over the remaining holding periods. Despite these markdowns, the fund returned 12.42%, ended the year at $91.9 billion and generated a record $8.2 billion in statutory net income. Arizona State Retirement System staff unofficially lowered its private credit target to 20% from 22%, citing weak short-term performance, and is reportedly shifting toward middle-market private equity and real assets. Oregon Investment Council cut its target from 28% to 19% for 2026 and beyond after previously being overweight the asset class.

Gary Creem of Proskauer said headwinds from inflation, rates, geopolitical and economic uncertainty and AI growth will persist for several years, with a flight to quality likely to widen dispersion between scaled managers with strong track records and weaker peers. Aaron Sack of Morgan Stanley Capital Partners said that simply buying middle-market exposure no longer guarantees the returns investors expect, and that investors now demand clear improvement plans, exit strategies and stronger distribution-to-paid-in capital. Patrick Whitehead of the same firm argued that sustainable earnings growth is now the primary return driver, citing Bain & Co. data that the current rate regime requires roughly 12% portfolio earnings growth to achieve returns that once needed 5%.

In private credit, Fitch Ratings described stable performance among rated alternative managers, with fee-earning AUM up 16.4% year over year to $4.3 trillion as of June 30, 2026. Investors are scrutinizing rate exposure, since floating-rate loans benefit from higher rates but face greater borrower credit risk. Creem linked some write-downs to rates and warned that 2021-22 vintage funds bought at high multiples may face refinancing pressure. Hybrid capital structures, continuation vehicles and redemption structures are being used to get deals done and return cash to investors. Sack expects a retrenchment in fund formation, with capital drawn toward hyperscaler and digital infrastructure financing, and warned of a wave of stuck 2019-2022 vintage assets and zombie funds that may be difficult to sell even in the secondary market.