The megadeals that dominated the second half of last year faded, driven by significantly reduced volume in software and the broader tech sector. The fact that deal count continued to rise, despite this, is an optimistic signal for broadening deal activity if macro uncertainty fades.

After an acceleration in both exit count and value last year, realization activity moderated in Q2 as uncertainty surrounding the Iran war and inflation put buyers—and especially strategics—on hold. Exit valuations fell below where sponsors had assets marked for three years, but that gap has now fully closed. This should prompt more sponsors to bring assets to market once macro uncertainty clears. Still, we do not expect a deluge—high-quality assets will fetch premium prices, while lower-quality aging inventory will continue to challenge the industry.

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Fundraising data continue to play into our broader theme: Selective LPs are concentrating commitments into the largest strategies. The 10 largest funds collected 48% of all PE capital during the first half, up from 40% in 2025 and an average of 37% since 2020.¹ Inflated fund sizes have pushed these sponsors toward larger deals, widening the range of entry multiples across the industry. The delta between the median middle market deal (10.4x) and the median billion-dollar deal (14.4x) has nearly quadrupled over the past decade, a symptom of increased competition at the top end of the market.² With software deal activity slowing, deployment pressure may increasingly spill into other sectors.

These trends are playing out amid a tectonic shift in how private equity sponsors drive returns, and within a broader financial market landscape faced with profound concentration risks. After a decade in which low borrowing costs and reliable valuation expansion offered managers a healthy margin of safety, the regime emerging alongside this new cycle will be less forgiving. Deals will succeed or fail based on the ability of the sponsor to drive operational improvements that lead to excess earnings growth. AI implementation provides a powerful new tool in this pursuit, while also threatening disruption for some industries. Combined with the emergent gaps being driven by capital concentration, dispersion is set to rise—across managers, segments and assets. Private equity offers a compelling opportunity for investors to source growth outside the AI theme, which now comprises over half the S&P 500. The following themes explore where these forces are creating the best opportunities.

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Broad market data point to spread compression, declining yields and moderating returns, but those numbers are highly influenced by the large-cap market segment. Large cap, sponsor-backed direct lending drove much of private credit’s recent growth as scaled lenders stepped in when the broadly syndicated loan (BSL) market was largely inactive and banks were reluctant to hold risk. Providing certainty of capital in that environment was a compelling advantage. Today, however, that advantage has become less meaningful as syndicated markets have been wide open since late 2024. What was once a differentiator is now a headwind—limiting pricing power and pushing loan terms toward public markets. Investors have taken notice.

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As the top end of the market has become more challenged, attractive opportunities remain elsewhere. Core and lower middle market direct lending—as well as non-sponsored finance—continue to offer attractive spread premiums, while areas like asset-based finance and real estate credit may simultaneously accomplish income goals and enhance diversification. In these less crowded areas, alpha is supported by solving borrower needs that remain entrenched, accomplished through capital permanency, tailored solutions and financial disintermediation. These are tangible benefits for which borrowers are willing to pay a premium.

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Such strategies often rely on specialized expertise and proprietary sourcing networks, executing deal sizes well below that of scaled private lenders and syndicated bank processes. As a result, managers can express a distinct skillset and market view in portfolio construction, rather than being takers of broad-based market volume. This allows more specialized managers to offer “something more” than income alone, and as shown, often provides portfolio solutions additive along both return and risk dimensions.

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Through the remainder of the year, a resilient economy supportive of stable operating performance will likely mitigate distress with market returns proving tolerable, if suboptimal. We expect sentiment will gradually rationalize as dire headlines continue overshooting realized outcomes, with cautious optimism potentially returning later this year. Renewed interest following the current recalibration may be catalyzed as investors adopt strategies where the core purpose of private credit remains—translating borrower solutions into differentiated investor outcomes. To that end, we observe three fundamental questions at the heart of negative market sentiment and against which managers need to prove themselves to the market.

Transaction volume totaled $279 billion during the first half of the year, up 23% from the same period in 2025, while single-property sales—the best gauge of dealmaking momentum—rose 15%. Still, the acceleration that began in the second half of last year following Fed rate cuts has temporarily stalled, not unlike the pause that followed Liberation Day in spring 2025. The result is not a disrupted recovery, but an interrupted one.⁶

In our annual outlook, we identified four forces that would support a continued recovery in CRE activity; as the table on the following page shows, each remains broadly on track. That suggests the inconsistent pace of this cycle has less to do with deteriorating real estate fundamentals than with external pressure from rates, inflation, policy uncertainty and geopolitics.

Property price growth reflects this fragmented improvement. Overall values have risen 1.6% over the past year, in line with the rate of growth since the start of 2025.⁶ As we discuss in Theme 2, the dispersion between property types is rather narrow, with hotels the exception to the downside (largely a function of weakness in economy properties). Cap rates were flat-to-up in the first half depending on property type, leaving net operating income (NOI) growth as the primary driver of price appreciation.

Interest in infrastructure has intensified in recent years as governments, corporations and investors confront a growing need to modernize aging assets while building new capacity for a world that is becoming more digital, energy intensive and informationally connected. Long-term trends including population growth, urbanization, deglobalization, artificial intelligence, electrification and national security priorities are creating sustained demand for investment across infrastructure sectors. Recent estimates suggest that global infrastructure spending needs could exceed $100 trillion by 2040.⁸

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Digital infrastructure is one of the fastest-growing and most capital-intensive infrastructure segments. An estimated $19 trillion will be needed by 2040 to build, maintain and operate the infrastructure that underpins the digital economy.⁸ Digital infrastructure forms the physical backbone of the digital economy, enabling the creation, storage, movement and security of data. These assets include data centers, fiber and broadband networks, wireless towers and connectivity platforms that support both consumer and business applications. Demand for these assets has grown exponentially in recent years, driven by cloud computing, artificial intelligence, 5G deployment and the proliferation of connected devices.