Private-Market Performance Under Pressure

Rising rates, persistent inflation  and a tough environment for mergers and acquisitions have provided persistent headwinds for private equity and private credit. Deals are still getting done and loans are still performing, but the slowdown is starting to show up in performance reports.

In August, Canadian pension La Caisse reported a 5.1% return, compared to a 7.5% return for its benchmark, during the first six months of the year. In a statement on its investment performance, the pension fund’s team noted that private equity was the main drag on performance, declining 4.3% during the first half of 2026. The pension cited AI-related disruption as one contributing factor to the underperformance.

The Massachusetts Pension Reserves Investment Management Board  also reported performance in August and the $19.5 billion private equity portfolio returned 8.4% net over the previous year. That performance beat State Street Buyouts’ benchmark return of 8.3%. However, in Mass PRIM’s investment update, pension fund staff noted that overall returns were lower than State Street’s Private Equity benchmark, as well as that company’s U.S. and developed-market public equity markets.

Also in August, New York City Pension Funds reported a one-year, time-weighted return of 7.2% for its private equity portfolio in fiscal year 2026, the first year of performance reported since the city’s pension system held a significant sale of PE holdings on the secondary market that trimmed back and repositioned its core private equity portfolio. The pension fund staff noted in the performance update that near-term performance for the asset class remains under pressure, but that the funds are maintaining a positive long-term outlook for private equity.

At the end of September, the Alaska Permanent Fund released its annual report, which includes investment performance. The sovereign wealth fund wrote down the valuations for three private credit funds, 42 private equity funds  and one infrastructure fund for fiscal 2026 because it determined that that the fund likely would not recover the carrying cost of those investments over the remaining estimated holding period for the assets, according to the report. This represents an increase over fiscal 2025 when the permanent fund wrote down five private credit funds, 27 private equity funds and two infrastructure funds. Despite the devaluation, in fiscal 2026 the fund returned 12.42%, ending the fiscal year at a value of $91.9 billion and generating a record $8.2 billion in statutory net income. The Alaska Permanent Fund is derived from a combination of state mineral royalty deposits and investment returns.

Some changes are showing up outside official performance reports. The Arizona State Retirement System completed its most recent asset allocation study last year, updating its allocation targets. According to a report published by FundFire, staff unofficially lowered its target allocation to private credit to 20% from 22%, citing poor short-term performance. The cut is still within the acceptable target range which is 17% to  26%. The pension system is said to be refocusing on middle-market private equity and real assets.

As CIO recently reported, Oregon Investment Council, which started investing in private equity in 1978, has cut its target allocation from 28% at the time of its last asset allocation study to 19% for 2026 and beyond. OIC had previously been overweight the asset class.

Cyclical or Something Else?

 Private equity and private credit investments previously have exhibited a certain cyclicality in their returns. Which means institutional investors in 2026 likely are asking whether the recent performance represents the down period of a cycle or if, several years into a slowdown, the change is something more structural. The answer seems to be that it might be a bit of both.

“There are some challenging headwinds for private equity that I think are going to keep playing out over the next few years. Inflation, rising interest rates, geopolitical uncertainty, economic uncertainty, AI growth—all of that is creating headwinds for the market,” says Gary Creem, corporate partner and co-head of the private credit group and a member of the finance group at Proskauer. “That said, there is still significant investor demand and we are still seeing deals get done. But there is a flight to quality and it’s likely we will see a greater dispersion between managers who have scale and sound track records versus these who don’t.”

Creem points to the range of competing factors impacting private equity performance at the moment. High-quality deals are getting a lot of attention and competition to invest in them remains high. But investors also are getting more selective around fundraising. Alongside that, recent increases in interest rates have  slowed down deal activity as buyers and sellers reassessed what the uptick might mean for cost of capital. Companies under operating pressure are also feeling the pinch even more.

Taken together, these factors are creating tension in private equity portfolios. Companies may be performing well—or, at least managing—but financing and entry/exit points for investors are being harmed by rates and where things are in the credit cycle.

“What’s changed with private equity is that [in the past] having diversified exposure to middle-market managers was enough to get solid returns in that part of the portfolio,” says Aaron Sack, head of Morgan Stanley Capital Partners. “But over the past seven years, and certainly over the past five years with the change in interest rates, people have realized that simply buying the market doesn’t guarantee the level of returns most people are used to when they think of private equity.”

Sack adds that the bar for attracting new investors and retaining current ones is getting higher. Investors want to see a clear improvement plan for a company alongside an exit strategy. Many investors are looking closely at not just returns but rates of distribution to paid–in capital and are asking for a clearer picture about how a given fund will differentiate itself and its performance in the current market.

“The clear takeaway of the current environment is that, in order to continue to drive successful private equity returns, the most important factor is going to be sustainable earnings growth in portfolio companies. That does stand in contrast to earlier eras where multiple expansion, interest rates  and financial engineering were often bigger drivers of return,” adds Patrick Whitehead, managing director, operational improvement at Morgan Stanley Capital Partners.

“According to Bain & Co’s Annual Private Equity Report, under today’s higher interest rate regime, achieving the same multiple of invested capital or private equity return today requires the equivalent of 12% earnings growth [from portfolio companies] compared to 5% in years past when rates were lower,” Whitehead says. “So that means that the companies that we invest in now have to be able to achieve that level of organic growth.”

Uncertainty Ahead

The ground is also shifting a bit in private credit. Fitch Ratings’ evaluation of alternative investment managers—a group that includes rated issuers Apollo Global Management, Inc., Ares Management Corporation, Blackstone Inc., Blue Owl Capital Inc., Brookfield Asset Management Ltd., Brookfield Corporation, The Carlyle Group Inc., Foundation Holdco LP (Fortress), KKR & Co. Inc. and TPG, Inc .—shows stable performance and increasing fee-earning assets under management. Fee-earning AUM for the group increased 16.4% year-over-year, to $4.3 trillion as of June 30, 2026.

But sources say investors are asking more questions about their exposure to interest rates— and the impact these rates are having—across both private equity and private credit. Private credit tends to be a floating-rate offering, so higher interest rates typically boost returns. But rising rates and persistent inflation also mean an uptick in input costs for portfolio companies and potentially higher credit risk.

“I think some of the write downs [in private equity] that are happening are interest–rate driven,” Creem says. “Vintage 2021-22 funds with high purchase multiples may face refinancing pressure due to rising interest rates and purchase price multiple compression. We may see industry challenges recede if interest rates and inflation go down but it’s unclear of the direction of interest rates at the moment.”

Morgan Stanley’s Sack says the impact of the change in rates could be more permanent than initially expected. “When rates first went up I think people were still driving forward while looking in the rear view mirror, thinking it was going to be temporary,” he says. “It’s taken years to change that mindset. Those rates aren’t coming back. If rates like that do come back, it’s for a bad reason like a major recession. Even if rates go slightly lower, I don’t think you’re going to see a big movement because we still have persistent inflation, data centers are crowding out a lot of [other] financing, there are other secular reasons why long-term rates are spiking.”

Creem adds that hybrid capital solutions are providing a way forward for both buyers and sellers in this environment. The approach offers financing through a mix of debt and equity, and can include warrants, payment-in-kind instruments, asset-backed financing or royalty finance, among other options. These mechanisms can be used to get deals done and  get cash back to investors in an otherwise constrained environment.

Current versions of these approaches include redemption structures that limit the impact they have on investor exits, Creem adds,  noting that the market has shown a relatively high level of comfort pricing these instruments when they come up in deals. General partner-led continuation vehicles also remain popular as a way of raising money while extending the runway for performing assets and getting cash back to investors.

Hyperscaler Crowding

The use of these tools is likely to continue, and might even expand, in part because of financing constraints created by the massive uptick in financing demand from hyperscalers and other digital infrastructure companies. Sources say growth in this sector is pulling attention and dollars away from financing for deals in other industries.

Such constraints will make it harder to find solutions for companies that are under stress and it could make it hard for performing, but not excellent, funds to make it to their next vintage. “You’re going to see a retrenchment around new fund formation,” Sack says. “This was a long time coming, everyone knew it was going to happen. The environment we have right now is going to weed out managers.”

Investors may also find it more challenging to prune back their private market exposures through the secondary market. As CIO previously reported, when New York did its big secondaries sale last year, discounts were highest in those vintages underwritten when rates were lower, 2019 to   2022. Funds and assets from those years are still floating around in portfolios.

“I do think we’re going to see a portion of the current PE universe stuck, meaning unable to be sold. They’re going to try to roll into continuation vehicles, but I think you’re going to see a wipeout of the tail of portfolios constructed from 2019 to   2022,” Sack says. “I think we’re going to have a wave of zombie funds and you’re starting to see it grow now. The secondary market has been a healthy way people were dealing with that, but not every portfolio or portfolio company can be sold to secondary funds. The bid-ask spread is going to increase over time, as people perceive that the companies that are available are not the ones that secondary funds want to own.”