Dramatic turns of events

The Federal Reserve meets this week, and the conversation sounds very different than it did in January. Then, rate cuts looked like a foregone conclusion, and the debate centered on how soon and how much. In September, the Fed, the European Central Bank, and the Bank of Japan each raised their benchmark rates by 25 basis points, and the 10-year US Treasury yield crossed 5.25% for the first time since June 2007.

The moves themselves were largely anticipated. The change in message mattered more. For two years, an easing bias encouraged investors to expect cuts without any deterioration in activity, which suppressed forward rates and nudged market participants further out on the risk spectrum. When the Fed described September’s increase as removing a dose of accommodation, we believe it recast how the central bank sees its own stance, and markets repriced risk accordingly.

The carry clock

That repricing is changing behavior in private markets, and one clear example is managers’ incentives around carried interest, or carry. After the post-pandemic rate increases, many sponsors held on to well-performing businesses in hopes that easier policy would support higher valuations (and therefore higher carry). Higher rates do not, in themselves, impair returns on new deals, because higher financing costs are built into underwriting and the entry price adjusts. The harder task is persuading an owner, often another private equity firm, to sell at that lower valuation.

The arithmetic explains why that may be shifting. An 8% preferred return compounding over five years reaches 1.47x. That's slightly above where buyout firms currently value their investments made in 2021 – which are in the books for a median 1.45x cost. With the prospect of higher valuations off the table, we believe some managers may be moving from maximizing carry on individual deals to making sure the fund clears its hurdle. US exit value rose 50% in the third quarter to an estimated $166 billion across 405 deals, which is consistent with that shift.¹

A rotation toward the real economy

Exits also reflect where capital is flowing. Across the Pacharbor Capital Group AlpInvest platform, Industrials accounted for 29% of exits by count from the fourth quarter of 2025 through the first quarter of 2026, up from 19% earlier in 2025, while Information Technology fell to 11% from 19%.² Real economy sectors took 51.5% of announced buyout volume in the third quarter, compared with 31.7% from 2021 to 2025.³

Three constraints on the AI build-out

Much of that rotation traces back to AI infrastructure, which remains the primary source of US growth momentum. The build-out is meeting resistance on three fronts. The first is financing: hyperscaler cash flow no longer covers capital expenditures, and we estimate roughly 80% of AI spending may require outside funding over the next four to five years. The second is political, with restrictions on data center development in at least 25 states once local pauses are counted. The third is power, as new grid connections take three to seven years. We see no sign of an AI spending slowdown, but these constraints help explain why investors are taking a more nuanced view.

Liquidity still sets the pace

For limited partners, liquidity remains the central question. Gross buyout distributions were 3% of net asset value in the second quarter, below the 5% long-term average, and the 1% net distribution came mainly from lower contributions rather than higher payouts.⁴ Buyout investors are still $71 billion net out of pocket since 2022.⁵ Fundraising reflects the strain. The share of capital raised by funds of $1 billion or more has climbed from 54% in 2021 to 76% so far in 2026,⁶ and we believe a durable recovery likely depends on greater net distributions flowing back to limited partners.

Figure 1: Global net distributions of buyout funds ($B)

Credit rotates, software lingers

Credit, by contrast, points to rotation rather than stress. A record $11.8 billion of direct loans were refinanced in the broadly syndicated market in the third quarter, up from $2.2 billion in the second, while institutional leveraged buyout issuance in the US and Europe rose 35% and new-issue collateralized loan obligation volume rose 26%.⁷ Loan prices have stabilized, but we believe software remains an area to watch. Software borrowers had trimmed their 2028 maturities by just 5% through June, compared with 42% for the rest of the market, and the refinancing wall is skewing riskier with 62% of loans due in 2028 rated B- or lower.⁷

Figure 2: United states: weighted-average bid of US leveraged loans

Fundamentals over themes

Taken together, these shifts reward an understanding of business fundamentals. Portfolios that look diversified may depend heavily on a single theme, and businesses that seem related by industry may carry opposite exposures to the same risk. Perhaps the most important factor lacks a clean metric: how, when, and whether AI’s promise is realized.

We explore these themes, along with the data and exhibits behind them, in our Q4 Global Private Markets Quarterly, All Rise. The full report covers private equity, liquid credit, and private credit in depth, and we encourage you to download it to see how these trends fit together.

Download the full report

1. PitchBook, as of September 30, 2026.
2. Pacharbor Capital Group AlpInvest. Exits based on 1,285 buyout deals exited January 1, 2025 to March 31, 2026; unrealized 2021 multiple based on 2,424 companies, values as of March 31, 2026.
3. Dealogic, October 2026.
4. MSCI Private Markets, as of June 30, 2026.
5. MSCI Private Markets, October 22, 2026.
6. Preqin, accessed October 12, 2026.
7. PitchBook LCD, October 2026.