Why Private Equity? Why Now? Reasons to Invest in Private Equity in 2026

As we forge ahead in 2026, there are a few key questions we believe investors and advisors should focus on as they consider private equity allocations:

1. How does private equity provide diversification and resilience? Why is that important?
2. How does private equity stack up from a return perspective relative to other asset classes over the next five years?
3. Why is quality important for compounding capital in this environment?
4. How are managers positioned to generate alpha in this cycle?
5. What role does market timing play in generating differentiated returns?

Our perspectives on the current macro and investing environment inform these key takeaways, which we will dive into throughout this article. In summary, the global macro backdrop remains constructive, but we are clearly later in the cycle. Productivity is strong, growth is resilient, and financial conditions remain accommodative. At the same time, however, expected returns across public markets are compressing as valuations rise and correlations increase. Volatility too remains elevated. In this environment, our macro conviction at KKR is not to step back, but rather to upgrade portfolios, capital structures, and managers with a sharper emphasis on quality, resilience, and diversification.

Private equity sits squarely at the center of this framework. It allows investors to lean away from market beta and towards alpha driven by active ownership, operational improvement, and long-term secular trends. The patient capital approach shifts the emphasis from timing the near-term ebb and flow of markets to multi-year transformation and compounding. Importantly, the cost of “High Grading” remains unusually low today, creating an attractive window to position portfolios for value creation.

1. How does private equity provide diversification and resilience?

The growing emphasis on private markets in portfolio construction reflects a structural shift in how investors should think about long-term capital formation, diversification, and retirement security. One important driver is the illiquidity premium. Other drivers of private equity’s excess returns as compared to the public markets are factors like active asset selection, thoughtful portfolio construction, operational improvement, and incentive alignment, among others.

Also important are the diversification benefits private equity provides, particularly in what we believe is a Regime Change for asset allocation. As the global economy has transitioned away from a low-growth, low-inflation environment towards one characterized by higher nominal GDP growth, stickier inflation, and elevated geopolitical risk, traditional portfolio construction tools have become less reliable. Correlations between stocks and bonds have risen, diminishing the effectiveness of traditional bonds as a portfolio “shock absorber.” In a heightened volatility environment, investors are increasingly focused on building all-weather portfolios that rely less on a single diversifying asset and more on multiple, differentiated sources of return. Historically, private equity has exhibited more favorable correlation characteristics relative to traditional asset classes, particularly during periods of macro stress.¹

EXHIBIT 1: Despite Inflation Falling on a Cyclical Basis, Elevated Stock-Bond Correlations Underscore the Need to Lean Into Private Markets

Rolling 36-Month Local Stock/Bond Correlation

Additionally, the private universe offers access to a far broader set of companies than public markets, often at more attractive entry points. Since 2000, the number of publicly listed U.S. companies has declined by nearly 50%, even as private companies with over $100 million in revenue have multiplied.² Portfolios without private markets exposure are missing out on a massive swath of the economy.

However, capital must be deployed selectively. This is particularly important amid heightened enthusiasm around themes such as AI, where disciplined underwriting, conservative capital structures, and operational expertise matter more than thematic exposure alone.

In our view, the early February selloffs in the software and AI sectors were driven primarily by sentiment and positioning, rather than a broad deterioration in fundamentals, reflecting public marketing anxiety around how AI may reshape software pricing, margins, and competitive dynamics.

EXHIBIT 2: Private Equity Offers Access to a Broader and More Dynamic Opportunity Set

American Public Companies Compared to the Number of Private Companies with 50+ employees

We believe enterprise-oriented, mission-critical software will continue to be more resilient than the broader market, as these businesses tend to be less easily disrupted by technological evolution. Instead, they benefit from AI developments as productivity and efficiency tools—force multipliers for their core products or services. These businesses are generally characterized as core processors of information with defensive moats like proprietary data, incumbency, high switching costs, and regulatory or localized complexity. Private equity managers with deep expertise are able to make thoughtful investments into these constructive, resilient, diversified parts of the market, which is why asset allocation will be more effective than security selection alone at this point in the cycle. 

Taken together, these dynamics help explain why private markets continue moving from a peripheral allocation to a core component of portfolio construction for both institutions and individuals. The combination of an attractive illiquidity premium for long-term capital and meaningful diversification benefits in a higher-volatility, higher-correlation world make private markets increasingly essential for investors seeking resilience, durability, and improved risk-adjusted outcomes over the cycle ahead.

2. How does private equity stack up from a return perspective relative to other asset classes over the next five years?

Over the last three decades, private equity has delivered approximately 4–5% of annualized excess return over public equities on a net basis, and this relationship has held across regions and cycles.³ Historically, private equity has delivered its most consistent relative outperformance during periods of modest or choppy public market returns⁴, rather than during environments dominated by multiple expansion. Crucially, this is the precise setup our forecasts now imply.

EXHIBIT 3: Private Equity Tends to Outperform When Equity Markets Are Less Robust.  Looking Ahead, We Now Expect More Modest Public Equity Returns, Which Should Help Bolster the Value of Illiquidity Premium

Average 3-Year Annualized Excess Total Return of U.S. Private Equity Relative to S&P 500 Across Public Market Return Regimes

The current macro backdrop also reinforces this pattern. Capital markets’ liquidity remains below long-term averages, issuance activity has been muted, and buyout entry valuations continue to sit meaningfully below those of large-cap public equities. Taken together, these conditions have historically favored disciplined deployment over aggressive market timing, producing stronger vintage outcomes. From a “High Grading” perspective, private equity allows investors to tilt portfolios towards return drivers rooted in earnings growth, operational improvement, and company-level transformation, rather than just reliance on expanding public market multiples.

EXHIBIT 4

KKR's Expected Returns, %

3. Why is quality important for compounding capital in this environment?

One of the most important takeaways for the individual investor is that private equity returns are not monolithic. Dispersion between top- and bottom-performing managers is materially wider in private equity than in active public equities, driven primarily by differences in company selection and value creation. In fact, the gap between top and bottom quartile private equity managers has historically averaged more than twice that of active public equity managers.⁵ At the same time, persistence has also weakened: nearly 40% of funds that perform above the median are followed by below-median performance in the subsequent vintage, and Preqin data show that only about 30% of managers maintain top-quartile performance by their third fund.⁶ As we’ve said before, the “who” matters more than the “what” when it comes to private equity. This makes manager selection the single most important determinant of outcomes.

EXHIBIT 5: Manager Selection Matters, Particularly in Alternative Asset Classes, as There Is a Wide Dispersion of Performance Between Top Quartile and Bottom Quartile Managers

Across markets, return spreads are narrowing between one asset class and another, making quality that much more important. In this lower-return world, “High Grading” means prioritizing managers with strong track records, repeatable operational playbooks, disciplined pacing, and a demonstrated ability to improve companies, rather than relying on leverage or favorable exit environments.

4. How are managers positioned to generate alpha in this cycle?

One of the clearest messages from both our long-term data and recent experience is that the sources of private equity returns have shifted. Since the Global Financial Crisis, an increasing share of buyout returns has been driven by operational improvement rather than financial leverage. In a higher-rate environment, financial engineering matters less and execution matters more. This places a premium on managers who can “make their own luck” by improving businesses through operational optimization, product development, margin expansion, governance reform, and strategic repositioning, among other value creation initiatives. These managers are better equipped to navigate a more volatile macro and geopolitical backdrop because their returns are anchored in fundamental operational improvement to make a business better rather than favorable market windows.

This perspective is compounded by the fact that scale and efficiency gains matter today, at least until the pace of technological evolution changes, which isn’t likely to happen soon, especially in light of the recent software-sector volatility.

We are seeing a historic expansion in margins in scaled, large-cap companies, in part through leveraging technology to drive automation and digitalization. As a result, sourcing efforts and value creation plans focused on digital innovation, right-sizing businesses, and strategic repositioning for long-term growth will enable businesses to benefit from the same macro tailwinds benefiting the most scaled players.

EXHIBIT 6: Since the Launch of ChatGPT, Global Large-cap Net Profit Margins Are Up, Global Small-Caps Are Seeing an Opposite Trend

Global Large-Cap vs. Small-Cap Efficiency Gains, NTM Net Profit Margin (%)

From a “High Grading” standpoint, this reinforces our preference for private equity strategies that emphasize control, active ownership, and thoughtful capital structures, as our work suggests that the ‘purest’ source of alpha comes from company-level value creation. Empirically, private equity-backed companies have exhibited faster and more stable EBITDA growth than comparable public companies, with lower volatility across cycles.

Managers who can ‘make their own luck’ by controlling outcomes inside portfolio companies are therefore better positioned than those reliant on macro tailwinds.

5. What role does market timing play in generating differentiated returns? 

We believe the next phase of the investing cycle will be shaped less by short-term macro fluctuations and more by durable structural forces. Historically, disciplined deployment pacing and proactive monetization, rather than market timing, have helped mitigate vintage risk.

Broad, global themes such as capital heavy to capital light business models, productivity and worker retraining, the security of everything, and the expansion of global services are central to our outlook for 2026 and beyond. Private equity is particularly well suited to capture these trends because it allows investors to underwrite multi-year transformations rather than quarterly earnings momentum.

Importantly, this does not mean chasing growth at any price. It means deploying capital patiently behind secular trends where operational improvement and capital efficiency can compound over time. In an environment where beta is less forgiving and correlations are higher, private equity managers who deploy capital in a disciplined manner over time provide a more pragmatic pathway to sustained value creation.

Conclusion

Importantly, our approach at KKR isn’t changing. We continue to focus on identifying good companies we can make great, operational improvements to create value, disciplined deployment, and bringing our full suite of resources to bear in our business. Now, we apply that same framework to the global macro backdrop: increasingly positive stock-bond correlations, market complexity, narrower dispersion of returns over the next five years relative to the last five, and shifting geopolitics, among others. As discussed earlier in this article, this stage in the cycle argues for thoughtful asset allocation with an emphasis on diversification, resilience, and quality in portfolio construction, which we believe private equity can provide.

REFERENCES

¹ Cambridge Associates, KKR Global Macro & Asset Allocation analysis.

² U.S. Bureau of Labor Statistics, World Bank, KKR. 

³ Cambridge Associates, KKR Global Macro & Asset Allocation analysis.

⁴ Cambridge Associates LLC Benchmark Statistics.

⁵ eVestment Alliance database for 15-year period through December 31, 2024. US Equities include large and small cap indexes. (2) Source: Preqin online database, performance as of December 2024 (includes vintages for the 15 years to 2022), top quartile, median, and bottom quartile boundary net IRRs. Performance for later vintage funds not available/meaningful. Preqin’s database is continually updated and subject to change. You cannot invest directly in an index. Index results assume the re-investment of all dividends and capital gains. There is no assurance that the trends described or depicted above will continue.

⁶ Preqin data.