Private Markets Poised for Multi-Year Upswing in 2026 | Morgan Stanley Outlook
- Dec 28, 2025
- 2 min read
What's New
Morgan Stanley Investment Management's 2026 Private Equity and Private Credit Outlooks signal a decisive inflection point for alternative investments, with M&A activity recovering from a three-decade low relative to GDP and private credit yields expected to remain elevated in the 8.0-8.5% range despite rate cuts. The reports highlight that PE-backed companies leveraging AI adoption are creating a widening performance gap, while scaled private credit platforms are positioned to capture growing market share as industry consolidation accelerates.
Why It Matters
After several years of supply chain shocks, constrained capital markets, and elevated financing costs, private markets are entering a more favorable operating environment that could sustain healthy exits and distributions for investors through 2028. The convergence of lower borrowing costs, improving credit fundamentals, and a broadening M&A cycle creates a rare window where both equity and credit strategies can generate attractive risk-adjusted returns—though the benefits will accrue unevenly, favoring scaled platforms with AI capabilities and disciplined underwriting.
Big Picture Drivers
Monetary Policy: Average middle-market term loan funding costs have fallen three percentage points from peak, with additional Fed cuts expected in 2026
M&A Recovery: Private equity accounts for over half of all M&A activity, and the current cycle has multi-year runway based on historical recovery durations
AI Adoption: More than half of controlled PE portfolio companies now have active AI initiatives spanning customer support, coding, and dynamic pricing
Capital Formation: Semi-liquid wealth channel vehicles now represent nearly one-third of the $1 trillion US direct lending market
Credit Quality: Default rates and non-accrual rates in seasoned BDC portfolios are trending lower as EBITDA coverage ratios improve
By The Numbers
8.0-8.5%: Expected trough yield on directly originated first-lien loans in 2026
$1 Trillion: Size of US direct lending market, with ~1/3 now in semi-liquid vehicles
20%: Private credit CLO share of new issuance, eclipsing prior year's record volume
5 Years: Consecutive years inflation has exceeded Fed's 2% target
50%+: PE-backed portfolio companies with active AI initiatives
Key Trends to Watch
Industry consolidation will likely reduce the number of GPs actively deploying capital, shifting bargaining power toward scaled platforms with robust sponsor relationships.
Refinancing wave combined with new deal demand should overtake private credit supply, allowing lenders to strengthen terms and preserve discipline.
K-shaped recovery will separate AI-enabled platforms from those lacking resources to deploy emerging technologies effectively.
Healthcare sector exposure remains elevated risk, leading all sectors in non-accrual status over the past year.
The Wrap
The 2026 outlook favors patient capital with scale advantages. Investors should prioritize managers with demonstrated AI integration capabilities, defensive sector positioning away from healthcare, and the origination infrastructure to capture premium terms as supply-demand dynamics shift. The winners in this cycle will be platforms that married operational sophistication with underwriting discipline during the lean years.
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