A Look at Private Equity and Private Credit

October 10, 2025 – The race to build out artificial intelligence capabilities continued to dominate market trends again this quarter. A.I.  spending and revenue are not confined to technology and communications companies. A.I. related money is flowing into the materials, industrial, and utility sectors to build massive data centers. A.I. investment is broad and, so far, has the momentum to continue.

Also, the Federal Reserve’s rate cut in September was widely anticipated by the markets, with expectations that it was the beginning of a rate-cutting cycle—a series of cuts—which would be positive for both the stock and bond markets. These Federal Reserve rate decisions influence the shortest maturities in the interest rate market. Longer-term interest rates are determined by the market, by bond investor’s views of inflation and economic growth. These longer-term rates are the benchmarks for mortgages, auto loans, and credit cards.

This quarter I wanted to touch on a topic broadly referred to as alternative investments. This is meant as, an alternative to cash, stocks and bonds. Twenty years ago, the focus within alternative assets was on commodities. A few years later the focus moved to hedge fund strategies. Now there is growing emphasis in the investment world on private market securities, specifically private equity and private credit. These are not new creations. In their most basic form, they are investments in privately owned businesses, or loans to those businesses outside of traditional bank loans. Supplying capital to these businesses has primarily been the domain of large institutions such as college endowments, foundations, and state and local pension funds. Those institutions allocate a percentage of their assets to funds dedicated to private equity or private credit. The funds then pool the money, and their managers decide which private businesses will receive their investment. Because these endowments and foundations are, in most cases, perpetual, their assets are well suited for long-term investment commitments. They buy private investments expecting the holding period to be 5 or 10 years.

The rationale behind these investments is that private securities funds hope to achieve higher returns with lower volatility. The lower volatility is largely a function of the shares not trading, so prices are determined only periodically by performing valuations. The higher expected returns are, in part, based on the ability to invest in earlier stage companies that have their highest growth phase still ahead of them.

The main tradeoffs are the acceptance of illiquidity and higher expenses. Traditionally, an investor in these strategies has to commit capital for the duration of the portfolio of business owned. The investor must wait for the manager to sell the businesses, return the capital, and, hopefully, also return a profit. These funds additionally charge much higher expenses, generally a 1.5% to 2% annual management fee and a performance fee of 15% to 20% profits above a certain “hurdle rate.” Given this combination of obstacles, accessing the best managers is critical.

We are now hearing more about the “democratization” of this type of investment with private equity and private credit firms are eager to broaden their investor base beyond institutions. These firms are designing products that are more attractive to non-institutional (retail) investors with rules for buying and selling that are more accommodative but still leave the investment illiquid. This concerted marketing effort has resulted in an influx of money into this category. Discussions are also underway in Washington about regulatory changes that would expedite the opening of the 401k plans to private securities. There are investors who may benefit from these funds, but suitability will be key. For very long-term portfolios, such as trust-owned accounts or family-owned assets with balances well above the those needed for withdrawals, these may be appropriate investments. However, private securities would only be suitable when liquidity is not a priority and are not a fit for portfolios that are depended upon to generate cash flow for living expenses.

We will continue to monitor private market securities as this trend plays out. If you have questions or an interest in learning more about this topic, please let us know. We would welcome the opportunity to discuss them.

Asset Class Outlook

U.S. Stocks – We have cautiously optimistic expectations for U.S. stocks, even as we ended another quarter near all-time highs. The very largest U.S. companies stock valuations—the stock price relative to company earnings—remain high, but, with continued profit growth, prices still have room to rise. Valuations alone have not proven to be a reliable indicator of future returns. The A.I. build-out and Federal Reserve’s rate-cutting cycle are both tailwinds for the markets.

Foreign Stocks – Foreign companies again posted solid returns in their local currencies in the second quarter, nearly matching U.S. returns. Currency exchange rates are a factor in foreign investment. In the third quarter, the U.S. dollar strengthened slightly relative to foreign currencies. That translates to U.S. investors in foreign shares receiving a slightly lower return than produced in their local currencies. In stock portfolios, we allocate a portion to foreign stocks and expect these companies, primarily in Canada, Europe, and Japan to continue to produce strong results.

Fixed Income – As of the quarter-end, the Bloomberg Aggregate Bond Index was up 6% for the year. As long as inflation remains tame and the Federal Reserve continues to cut short-term rates into next year, we expect bonds to continue to perform well. Our preference remains for high-quality bonds of two-year to seven-year maturities with yields currently in the upper 3% to low-4% range, depending on credit quality. For taxable accounts that are subject to higher tax brackets, we invest in tax-exempt municipal bonds. In tax-advantaged retirement accounts and accounts subject to lower tax rates, we focus on taxable securities such as CDs, Treasuries, government agency bonds, and corporate bonds. For short-term objectives, we use money market funds and Treasury Bills, which currently yield in the 3.8% to 4% range.

While we review many areas of the market, our priority is always your personal goals and creating an individualized strategy to reach those goals. As always, we welcome you to call or visit our office any time.