Industry Trends
Private capital fuels data center growth
Massive AI-driven capital needs are reshaping financing for data centers. Large technology companies (hyperscalers) are expected to spend about $5.3 trillion on AI and data centers from 2025 to 2030, pushing them to seek funding across public and private markets, structures, and currencies. As their borrowing grows, liquid credit markets may encounter saturation and issuer concentration constraints, increasing the importance of private capital.
Private infrastructure and real estate funds are central to meeting these needs. Infrastructure funds raised a record $221 billion in 2025, with average fund size rising to $1.8 billion and returns of 12.8% last year (second only to private equity and venture capital). From 2021 to 2024, the private infrastructure market grew roughly 11.5% annually; if growth re-accelerates toward 16%-17%, assets under management (AUM) could exceed $3 trillion by 2030. As of September 2025, infrastructure funds held just over $1.7 trillion in AUM, including nearly $400 billion of dry powder, while private real estate funds held $2.1 trillion with $600 billion of dry powder: $3.8 trillion combined. Fundraising is speeding up, with larger funds closing in 7-12 months recently versus 13-18 months previously; by May 2026, 695 infrastructure funds were targeting $555 billion.
Lines between infrastructure and real estate are blurring as data center financing spans land, power, networks, buildings, and equipment. Tailwinds include AI demand and energy security, while investors value diversification, income, and inflation protection (often via cost pass-throughs). Private construction is accelerating, but capex plans currently outpace data center builds, a gap to monitor for long-term financing needs.
Source: Goldman Sachs
Private credit trends: What's changing in direct lending
Private credit is facing unusually public scrutiny in early 2026 as concerns about AI’s impact on software business models coincide with elevated redemption requests from semi-liquid evergreen direct lending funds. This has pushed liquidity terms, valuation marks and portfolio quality into the spotlight. Investors should focus on direct lending, the largest segment of private credit, where Morgan Stanley Wealth Management’s Global Investment Office (GIO) sees a new phase marked by normalized returns, persistently elevated redemptions and heightened importance of manager selection.
Direct lending involves non-bank lenders making privately negotiated loans often to middle-market companies, typically held rather than traded. Investors commonly access it via evergreen funds and publicly listed business development companies (BDCs), with income distributions as the primary return driver.
GIO expects returns to normalize due to lower base rates (following Fed cuts since September 2024), tighter spreads (after broad tightening in 2023-25, with some recent widening for new loans) and higher credit losses amid rising defaults. Evergreen funds offer quarterly redemptions usually capped around 5% of NAV; pro rated requests can extend exit timelines. Persistent outflows may force asset sales or increased borrowing, constraining managers.
Manager selection is critical. Investors are scrutinizing quality signals such as payment in kind income, non accruals and realized losses. In listed BDCs, sentiment can create discounts or premiums to NAV; because distributions dominate total returns, discounts can boost quoted yields and present tactical entry points. Near-term prospects for direct lending are less favourable than a few years ago, while opportunities may be growing in asset based finance and distressed/opportunistic credit.
Source: Morgan Stanley
Four priorities shaping SWFs
Sovereign wealth funds (SWFs) have grown rapidly, reaching $15 trillion in AUM in 2025 (10.3% CAGR) and outpacing other institutional investors; the top 10 hold over 75% of wealth, concentrated in the Middle East (40%), Asia (40%), and Europe (20%). For funds with regular state support, growth was split evenly between portfolio returns and government injections, including about $890 billion from hydrocarbon driven surpluses. Many large SWFs face home investment limits; across the top 20, ~70% of AUM sits in public markets and ~30% in private, with private allocations led by PE (50%), then infrastructure and real estate (25% each). Direct and co-investments now account for 50%-60% of private deployments (up from ~40% in 2023); over the past year, SWFs took part in $160-$170 billion of private deals, about $120 billion directly, consistent with a five-year average of $120-$130 billion.
AUM is projected to reach $30 trillion by 2035 (8%-9% CAGR), but the growth path is changing amid higher rates, compressed valuation multiples, volatile hydrocarbon revenues, maturing private markets, geopolitical fragmentation, rapid technological disruption, and the energy transition. Ongoing Middle East tensions heighten attention to supply chain resilience, diversified partnerships (notably with Asia), and local economic impacts.
SWF leaders highlight four imperatives: recalibrate capital deployment (with >80% aiming to increase co-investments; structured leverage/debt-to-AUM has risen from 0%-5% in 2019 to 10%-15% by 2025, supported by oversubscribed bonds/sukuk and capital recycling); shift exposure east (over 80% plan higher allocations to Asia ex China; half to Europe); deliver dual mandates by catalysing domestic sectors and new industries (e.g., data centres, semiconductors, LLMs); and transform operating models with clear 2035 ambitions, capabilities aligned to scale, and disciplined execution.
Source: Bain and Company
Mid-Year Review
M&A mid-year trends shaping private capital
Macroeconomic uncertainty, shifting rate expectations, inflation, and geopolitics are keeping private markets volatile. Deal volumes are uneven, exits constrained, and fundraising is concentrating with the largest, most diversified platforms. The most resilient firms are using volatility to their advantage by building AI and data capabilities, investing in infrastructure, navigating tighter exit markets, managing private credit’s first major test, and strengthening operating infrastructure to scale across complex platforms. They emphasize raising, deploying, and compounding capital through cycles; flexibility across buyouts, growth, private credit, infrastructure, and real assets; and demonstrating realised returns and credible value-creation plans to LPs.
Sponsors are building platforms, not just portfolios- sector depth, specialist talent, governance, and better data use. KKR’s May 2026 acquisition of Arctos Partners ($1.4bn initial consideration) adds a sports franchise entry point and a scaled GP solutions platform, strengthening secondaries, sourcing, and origination. AI is now integral to investment theses and value creation, pushing capital into compute, energy, and digital infrastructure. Recent deals include Apollo’s $3.5bn capital solution for Valor’s $5.4bn xAI compute transaction, DigitalBridge’s acquisition of ArcLight (up to $1.05bn), and the Blackstone-Google AI cloud venture, reflecting a shift toward asset-heavy, cash-flowing, inflation-linked sectors.
Dealmaking is uneven: Q1 2026 volumes were flat year over year (5,174 vs. 5,176) but value fell 14% to $482bn; 34% of portfolio companies have been held over five years. Europe remains active; Asia-Pacific is selective, with Japan’s take-privates rising (EQT-Kakaku.com; KKR-Taiyo). The Middle East is shaping capital flows, including a planned global data-centre platform acquisition. Global infrastructure spend is projected to rise ~60% to $7tn by 2050. Private credit AUM exceeds $2.2tn and may reach $4.5tn by 2030; over 80% of managers expect increased allocations. Looking ahead, resilience will favour managers with strong DPI, robust fund operations (technology, AI, managed services), and transparency on suitability, liquidity, valuation, and risk.
Source: PwC
PE midyear outlook 2026
Private equity’s hoped for recovery remains deferred amid a “Groundhog Day” cycle of shocks. Early year optimism was derailed by tariff turmoil and quickly followed by an AI-driven “SaaSpocalypse” in software, redemption stress in private credit, and the war in Iran that spiked oil prices. Dealmaking fell sharply; only A plus assets are clearing at high prices. Yet nothing appears fundamentally broken, public equities buoyed by AI euphoria, a still-expanding global economy, and ample dry powder persist. A sustained upturn, however, requires a stable equilibrium and acceptance of a tougher era marked by higher rates, stubbornly high asset prices, and less multiple expansion. The imperative is sharper strategic focus, repeatable underwriting and value-creation models, and faster LP distributions via accelerated exits.
Tech uncertainty remains high. A proprietary MSCI read of Q1 buyout marks and public data show wide dispersion. Buyers are tilting toward businesses less exposed to near term AI automation and geopolitical risk, those with physical/labour-intensive elements and domestically oriented revenue. With purchase multiples and financing costs simultaneously elevated, a record “deal cost index” raises the bar for operational value creation and earnings growth. NDA activity is a useful near-term leading indicator.
Exits are sluggish after four years of record-low distributions as a share of NAV; implied capital cycles have stretched to ~7 years. Assets underwritten pre/during the pandemic have faced inflation, rate hikes, trade turmoil, and AI disruption, stressing GP-LP dynamics and fundraising. Still, marks-to-exit values appear more stable than many LPs perceive. Fundraising will lag until 12–18 months of stronger exits/distributions. Top performers close quickly; average GPs pay more (fees/coinvest) to win commitments.
Four principles: 12 is the new 5 (deal math is tougher); lean into AI (workflows, data, operating model); don’t get caught in the middle; and focus resources on winners- extend holds to compound or create new growth vectors. Uncertainty will eventually resolve.
Source: Bain and Company
Market Sentiments
Private markets remain in favor
The 44th Coller Capital Global Private Capital Barometer (June 22, 2026), surveying 108 LPs overseeing over $2 trillion, shows geopolitics increasingly shaping private markets allocations: 37% say it matters more than before, rising to 46% in Europe and 47% in Asia-Pacific. LPs are becoming more selective, with 23% planning to reduce GP relationships over three years (vs 16% in 2020), yet commitment momentum remains resilient: 33% expect to accelerate commitments and 57% to maintain pace over the next two years.
Views on exits are split: 40% think GPs balance liquidity and value creation well, 39% want liquidity sooner, and 22% see top assets sold too early. Continuation vehicles are now embedded: GP-led secondaries hit about $106bn in 2025, and 40% of LPs expect activity to keep growing even as traditional exits recover (29% flat, 31% decline). Jeremy Coller underscores that IPOs and secondaries are complementary routes to liquidity.
LPs anticipate more “zombie funds”: 54% expect an increase, 31% stability, 15% a decrease. Preferred responses in no-fault cases are fee step-downs (54%), incentive resets (18%), with 11% each for manager removal/replacement or no action.
Private credit’s primary allocation growth is cooling (29% plan increases vs 42% previously), but credit secondaries are expected to lead secondary market growth (36%). Risk views are nuanced: 18% see systemic issues, 53% isolated risks above expectations, 29% in line.
AI is expected to be a cost-efficiency tool (70%), with 67% saying it will widen performance dispersion; gut instinct remains central. Evergreen funds are set to grow (73% expect higher AUM share by 2035), while 85% do not plan to use tokenised funds.
Source: Coller Capital
Private credit faces a cooldown
Private credit’s rapid growth is cooling as U.S.-focused direct lending activity and fundraising slow. New loan issuance by private credit lenders fell to $44.76 billion in the three months ended May 2026, down about 40% from $74.56 billion in the first quarter. Issuance to private equity backed borrowers dropped nearly 37% to $28.5 billion, while direct lending tied to leveraged buyouts declined about 34% to $15.15 billion.
Managers are shifting to a more cautious stance amid softer fundraising, elevated redemption requests, heightened scrutiny of loan quality, and renewed competition from cheaper syndicated loan markets. Concerns around credit quality have intensified following weakness in software debt- a sector heavily owned across leveraged finance and private credit, where software loans in the Morningstar LSTA U.S. Leveraged Loan Index were down 4.7% year-to-date through May 31, compared with a 1.2% gain for the broader index.
A sustained slowdown in originations could pressure managers’ earnings by curbing asset growth and transaction fees, especially if funds conserve cash rather than deploy into new loans in response to redemptions. Early second-quarter filings indicate redemption pressure persisted: Blackstone and Cliffwater capped withdrawals at 5% after requests exceeded limits, with investors seeking to redeem 10% of Blackstone Private Credit Fund shares and 17% of Cliffwater’s $31.3 billion fund.
Fundraising remains muted: $45 billion committed to private credit funds in the first four months of 2026, roughly flat versus 2025 but below 2023 levels. Retail appetite has also softened, with Jefferies noting May private wealth flows across tracked retail alternatives fell 17% month-on-month and private credit flows down 35%; second-quarter private credit flows to date are 70% below the first-quarter average.
Source: Reuters
Market Opportunity/Challenges
PE firms prioritize exit readiness
The EY Global PE Exit Readiness Study 2026 finds private equity firms are embedding exit readiness as a continuous discipline amid constrained liquidity, volatile markets, and interest rate uncertainty. Despite solid portfolio performance, exits are more complex and less predictable, with distributions at about 15% of NAV versus a typical 20%-25% and assets held longer.
Early preparation is proving decisive: 86% of GPs report improved valuations when exit planning is undertaken, with the strongest results when started 12-24 months before sale. The study underscores the importance of strong alignment between sponsors and management: 82% of GPs and 70% of management teams say they are mostly or fully aligned on timing, valuation expectations, and buyer strategy. However, management teams want more support to address bidder scrutiny by crafting a clear, defensible, data-backed equity story. A persistent challenge is evidencing value creation initiatives in exit EBITDA, highlighting the need for robust data and rigorous performance attribution.
AI is emerging as a key exit differentiator. The share of GPs identifying AI as a significant challenge has more than doubled, reflecting buyer focus on credible AI strategies supported by strong data and a clear path to future value creation, not just AI activity. In an environment where exit windows can be brief and diligence intense, readiness becomes a source of competitive advantage.
The study concludes that firms best positioned to convert performance into realized returns are those that prepare early, maintain tight GP management alignment, and present a credible, data-backed, AI-informed investment case that proves sustainable value creation in both the business and the numbers.
Source: EY
A defensive bet on infrastructure debt
Infrastructure debt is presented as a defensive allocation offering resilient income with historically lower volatility and correlation, underpinned by contractual or regulated revenues, essential services, and durable asset economics. Structural demand is accelerating due to the energy transition, digitalization, urbanization, and population growth, with the G20 estimating a US$15 trillion infrastructure spending gap by 2040. As traditional lenders retreat, private capital has grown in importance, supplying an estimated 53% of infrastructure debt in H1 2025. Emerging areas include renewable natural gas, behind-the-meter energy, battery energy storage, and digital infrastructure, which can offer higher returns across varied risk profiles.
The mid-market (loans under US$100 million) is sizable yet often overlooked by mega-funds. In 2025, 795 sub-US$100 million transactions were reported versus 284 deals above US$1 billion (Infralogic), creating opportunities for proprietary origination with strong credit fundamentals, greater structuring flexibility, and size/illiquidity premiums- often with comparable credit characteristics and less competition.
Key asset-class features include duration matching; stable, often inflation-linked cash flows from long-term contracts or regulated tariffs; and downside mitigation via senior secured positioning, tangible collateral, amortization, and covenants. Moody’s data show BB-rated infrastructure debt five-year default rates of 4.6% versus 7.9% for non-financial corporates, with meaningfully lower loss rates. Diversification benefits extend relative to public markets, corporate credit, and infrastructure equity, with debt offering a more defensive profile.
Manager selection is critical in this relationship-driven market. Platforms with established sourcing, sector expertise, and direct origination are positioned to access differentiated deals and manage risk across cycles.
Source: Fiera Capital
Sector Update
Industrial PE investment hits new highs
Private equity and venture capital investment in industrials is set for a year-over-year increase in 2026 as managers capitalize on AI infrastructure, supply chain shifts, and defense. Announced industrial deals reached $82.06 billion globally from January 1 to May 31, versus $140.99 billion for all of 2025. If current momentum holds, 2026 could surpass 2022’s $160.47 billion, the highest in at least six years.
Drivers include the global build-out of data centers, electrification, grid modernization, supply chain rerouting, and defense spending. Amid software-sector disruption from AI, investors view industrials as a hard-asset safe haven, noted PwC’s Michael Fiore. Apollo’s leadership calls it a “global industrial renaissance,” spanning utilities, digital infrastructure, energy transition, advanced manufacturing, defense, and AI/data. The data center boom is lifting interest in power grids and information and communications technology; CORE Industrial’s John May said any business touching data centers is in demand. Illustratively, Apollo acquired a majority stake in Kelvion for $2.33 billion, citing its fast-growing data center segment.
Aerospace and defense drew $23.36 billion in 2025, second only to trading companies and distributors. While Europe’s growth accelerated, most capital still targets North America, aided by a U.S. pivot to cheaper, reusable, AI-enhanced systems (e.g., Anduril’s $2.50 billion round, the year’s eighth-largest industrial deal). The largest 2025 deal was the $28.22 billion buyout of Air Lease Corp., now Sumisho Air Lease. Median deal size rose to $11.6 million in 2025 from $7.2 million in 2024 as investors avoided smaller, less resilient targets.
Source: S&P Global
