Rising concerns about concentrated US equity markets could push investors to private equity assets in 2026, thanks to greater diversify of asset selection coupled with lower entry multiples, creating the potential for superior risk-adjusted returns, according to Claire Smith, head of investment directors, public and private markets at Schroders.
As investor attention focuses on large-cap technology companies linked to the AI boom in listed markets, Schroders 2026 Outlook reveals how small and mid-cap private equity is forging a different path.
“While on the surface, things look reasonable for listed markets, the reality is that there are rising concerns among investors. Scratch beneath the surface and there’s still plenty to keep an eye on. Inflation threatens to kick back into gear, conflicts in Ukraine and the Middle East continue are complicating the geopolitical picture and the weaponisation of trade could again fuel economic uncertainty in 2026,” said Smith.
Moreover, as capital in listed share markets continues to flow to large technology companies driven by the AI boom, concentration risks loom. In contrast, the large investable universe and favourable supply-demand dynamics of small and mid-cap private equity assets could provide investors with a unique combination of sound fundamentals, attractive valuations, and improved sector and geographic diversification, according to Smith.
“Our activity continues to be in small- and mid-cap private equity, where we see more attractive valuations and better prospects for diversification compared to crowded large-cap share markets,” she said.
“Recent private equity fundraising trends indicate rising interest in strategies that promise increased liquidity, diversification, and flexibility. But this raises important questions for investors, especially around pricing, fund manager discipline in the private equity space and future sources of return.”
Smith remains cautious around segments of the market where competition is pushing up prices, particularly in Limited Partnership (LP) secondaries, instead focusing on continuation vehicles (CVs) where she sees more compelling returns.
“CVs have become an increasingly important tool for private equity managers to extend ownership of high-conviction assets beyond traditional holding periods. By enabling managers to retain and further develop portfolio companies through their next stage of growth, these vehicles align long-term value creation with investor liquidity preferences.
Heading into 2026, Smith believes that markets will continue to paint a complex picture for investors.
“Markets continue to present a complex picture – optimism in the headlines, balanced by ongoing economic and geopolitical uncertainties – and a careful approach is essential.
“Exits are a critical part of the private equity proposition – identifying strong companies, growing them and ultimately exiting them – and the small to mid-cap part of the market provides the greatest diversity of exit routes.
“A greater selection of routes to exits allows us to bob and weave cycles to find the right pathway through today's turbulent markets,” Smith added.
