A comprehensive analysis by Macfarlanes (February 2026) lays out the macroeconomic forces shaping private capital markets. Private capital markets enter 2026 in a paradox: deal momentum is returning, but liquidity remains constrained. Inflation is moderating, yet new inflationary forces are building. The US still dominates, but Europe is making its most decisive fiscal move in a generation.
The takeaway is clear: 2026 rewards investors who can read policy divergence, manage liquidity creatively, and position at the intersection of infrastructure, technology, and cross-border capital flows.
1. Monetary Policy Divergence: The End of Synchronisation
Central banks are no longer moving in lockstep. The Fed is holding at 3.50–3.75% after a December cut, the Bank of England cut to 3.75% with further easing signalled, and the ECB is comfortable at 2% with inflation near target. This divergence is structural, not temporary — interest rate decisions are increasingly driven by local fiscal conditions rather than the global cycle.
Investor Implication: For cross-border investors, this divergence creates real arbitrage in deal timing, financing costs, and exit windows. A deal that looks expensive at UK rates may pencil differently when structured through a European vehicle. Political pressure on the Fed chair has added a wild card, with some investors shifting safe-haven allocations from US Treasuries to European government bonds. For LP portfolios with significant dollar exposure, this is worth monitoring.
2. Europe's Fiscal Moment: Closing the Gap
Germany has approved a €500bn infrastructure fund and a record €58.3bn investment allocation in its 2026 budget, alongside significantly higher defence spending. This is not incremental — it represents the most expansionary fiscal shift in Europe in decades, backed by rising real wages and lower rates. The expectation is that this will reduce the economic growth gap with the US, creating diversification opportunities for investors concentrated in American assets.
In the UK, fiscal headroom remains tight, but the Mansion House Accord is a structural catalyst for private capital. Defined Contribution pension providers have committed to allocating 10% of default funds to private markets by 2030, with 5% directed to UK investments. This is not voluntary signalling — it's a commitment that will channel billions into the ecosystem.
The constraint is bond market discipline. The US, UK, and France all carry significant debt levels and remain exposed to what the ECB calls "bond vigilantes" — investors who sell off government bonds to protest irresponsible fiscal policies, raising borrowing costs and forcing course corrections. This matters for any GP relying on government-linked contracts or policy-dependent sectors.
3. AI: The Accelerator That Could Also Be the Brake
AI investment is projected to exceed $500bn in 2026. Data centre buildout alone is adding 10–20 basis points to US GDP growth. A small group of AI companies accounted for more than half of S&P 500 returns and about one-third of global equity gains as of October 2025.
But the Macfarlanes analysis highlights a risk that many investors are underpricing: AI-driven inflation. AI relies on scarce real-world inputs - power, grid capacity, rare earth minerals, specialised semiconductors - and these constraints are keeping specific cost pressures alive even as broader goods inflation cools. Reuters identified AI-driven inflation as 2026's most overlooked risk.
Large allocators are increasingly concerned about an AI bubble, showing a growing preference for non-US markets, smaller companies, and overlooked sectors. The concentration risk is real: when a few companies drive a third of global equity gains, any correction reverberates through the entire portfolio.
4. Private Markets: The Liquidity Equation
Deal Activity is Back
Global M&A rebounded to $4.4tn in 2025, with 22 of the 70 global deals over $10bn closing in Q4 alone. European M&A saw a 25% increase in Q4 compared to Q2. According to a Citizens Financial survey, 58% of mid-market executives expect M&A volume to climb further in 2026.
But Liquidity Remains the Constraint
Despite recovering deal volumes, weak distributions to LPs remain the defining challenge. The industry is still working through older assets and accumulated unrealised value. This has made liquidity solutions — particularly secondaries and continuation vehicles — essential tools rather than niche options.
Continuation vehicles hit approximately $107bn in transaction value in 2025, accounting for one-fifth of PE exits. Secondary market discounts narrowed from 9% to 6%, signalling improving confidence. But the governance questions are real: when buyer and seller sit under the same roof, transparent pricing and conflict management are non-negotiable.
Fundraising Concentration
The top 10 PE funds captured 46% of US PE fundraising in 2025, a 34.5% increase from 2024. In a constrained liquidity environment, LPs are rationally concentrating around the largest managers. However, data consistently shows wider performance dispersion among small and mid-sized managers — meaning the best risk-adjusted returns may be found precisely where institutional capital isn't flowing.
5. Private Credit: Strong Demand, Tightening Terms
Private credit enters 2026 with structural tailwinds: banks remain constrained, sponsors value speed and certainty, and rates — while no longer "higher for longer" in most markets — are still sufficient to deliver meaningful returns without excessive leverage. First-lien yields are expected to stabilise at 8.0–8.5%.
The challenge is competition. As more capital has entered, spreads have tightened and creditor protections have weakened. Some deals now include more borrower-friendly features including aggressive liability management and payment-in-kind structures. Going forward, returns will depend less on broad market moves and more on manager selection, origination networks, and restructuring capability.
A significant development is the Bank of England's launch of a system-wide stress test for private credit, engaging major managers. This signals that regulators are taking the public-private convergence seriously and that transparency and valuation discipline will be increasingly scrutinised.
6. Sector Spotlight: Where Capital Is Flowing
Infrastructure: The Decade's Trade
Infrastructure deal volumes rose 59% year-on-year in H2 2025. Digital infrastructure alone is projected to reach $19tn in global investment by 2040. The UK is seeing landmark commitments: Google's £5bn initiative, Microsoft's £22bn AI infrastructure deployment. Private infrastructure assets under management reached $1.3tn in 2024, quadrupling over the past decade with 16% annual growth — outpacing broader private capital markets at 13%.
Cross-asset strategies are dominant, with 75% of infrastructure capital raised from H2 2023 through H1 2024 going to convergence strategies that blur traditional sector boundaries. The energy transition alone requires £40bn annually through 2030 under the Clean Power Action Plan.
Sports: Institutional Asset Class Arrives
Private equity investment in sports reached approximately $6.3bn through Q3 2025. Following the NFL's August 2024 approval of PE minority stakes, the addressable market expanded to an estimated $239bn across major US leagues. Apollo's minority stake in Wrexham AFC, Sixth Street's 8% in the New England Patriots, and RP-Sanjiv Goenka's 70% acquisition of The Hundred's Manchester Originals illustrate the breadth of deal structures emerging.
Media rights remain the core value driver, but underwriting requires recalibration as younger audiences fragment across platforms and direct-to-consumer models gain ground.
UK Real Estate: The Recovery Trade
Commercial investment volumes are tracking toward a 15–20% increase through 2026. Build-to-Rent is a standout sub-sector with £581.2m in Q3 2025 investment and £3.8bn under offer. Cross-border investment rebounded to 51% of total BTR investment in 2024, with North American capital deploying over £1bn in Q4 alone. Regional markets — Manchester at 2.2% economic growth, Birmingham with 22.2% rental value growth projected through 2028 — are outperforming London-centric strategies.
The Cross-Border Imperative
The macro environment in 2026 favours investors who operate across borders, think structurally about liquidity, and can access the mid-market where alpha is less competed away. Policy divergence between the Fed, BoE, and ECB creates timing advantages. Europe's fiscal expansion opens new deal corridors. AI's demand for physical infrastructure links back to India's semiconductor and manufacturing ambitions.
Source: Macfarlanes, "The Macroeconomic Backdrop to Private Capital Markets — February 2026." Analysis with added commentary.
Full report: macfarlanes.com
Disclaimer: This article is for informational purposes only and does not constitute investment advice.
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