From recalibration to resilience

It can be hard to make sense of global markets at the moment.

On one hand, the investment environment appears benign and expectations of further rate cuts in the US have fuelled investor optimism. This has driven public equities indices in many regions to be at, or near, record highs.

On the other, risks are forming on the investment horizon, maintaining an atmosphere of volatility. Concerns centre on the ripple effects of tariffs, uncertainty around central bank policies and inflationary pressures, questions of fiscal sustainability, and still-elevated geopolitical risks stemming from ongoing conflicts in Ukraine and the Middle East.

Even the recent valuation exuberance, especially around growth areas such as artificial intelligence (AI), adds to the growing list of risks, given the historical pattern of boom-and-bust valuation cycles following major technological breakthroughs.

Diversification, resilience, and return opportunities

Set against this backdrop, private equity can offer a degree of insulation from some of these prevailing macroeconomic and market risks, providing exposure to differentiated sources of risk and return that can enhance portfolio outcomes.

As we have discussed previously, our research in performance during periods of crisis over the past 25 years shows that the asset class – particularly in the lower-mid-market segment – has historically delivered its strongest relative outperformance during periods of heightened public market volatility.

At the same time, private equity is currently benefiting from a convergence of cyclical and structural tailwinds that are catalysing compelling opportunities for return generation and portfolio diversification.

Structural tailwinds include the technological revolution, which is reshaping industries and capital flows. Cyclical drivers stem from the lower transaction activity and subdued fundraising over recent years. This has created favourable capital supply-and-demand dynamics that are supporting more attractive entry valuations and improved yield potential.

Together, these factors increase the relative attractiveness of private equity, strengthening resilience and creating a more solid foundation for long-term growth. Bottom-up allocation applying high selectivity and targeting transformative value-add are crucial to capture the most attractive opportunities and drive sustainable long-term performance.

Fortune (still) favours the small and brave

Lower fundraising and exit activity are creating a more favourable environment for disciplined investors. Reduced competition, especially in less efficient segments of the market, wider pricing dispersion, and increased manager selectivity are laying the groundwork for stronger vintages ahead. We see the most compelling opportunities emerging through three complementary levers that help investors navigate today’s challenges: local champions, transformative growth, and multi-polar innovation.

• Local champions are businesses with predominantly domestic revenue bases, reducing exposure to trade frictions, tariff uncertainty, and shifting supply chains. Their earnings resilience and control over local value chains can help buffer portfolios against geopolitical shocks.

• Transformative growth involves investing in companies where complexity, operational improvement, or innovation create controllable value-creation paths that can offset broader market turbulence. In a more selective environment, operational value-add has become the key differentiator of returns.

• Multi-polar innovation captures the expanding global technology landscape. Breakthrough growth is now distributed across multiple hubs spanning the US, Europe, China, India, and broader Asia-Pacific, diversifying opportunity and reducing reliance on single-market cycles.

These themes converge across three strategy areas: small- and mid-sized buyouts, continuation investments, and selective early-stage venture.

Small and mid-sized buyouts: The resilience engine

Small and mid-market buyouts (for us, enterprise values less than $1 billion) continue to anchor portfolio resilience. They combine more attractive entry valuations, lower leverage, and greater operational agility than large-cap deals. Industry and Schroders Capital data show average purchase price multiples remain around 7.7x EV/EBITDA, over 40% below large-cap equivalents, creating significant headroom for value creation.

Small-mid buyouts trade 40–50% below large-cap and public peers

This segment’s defensive characteristics are further reinforced by its structure: over four-fifths of transaction value across private equity buyouts, the majority of which are small and mid-market deals, is now service-oriented – and portfolio companies typically generate a large share of revenues domestically.

This focus on essential, localised services reduces exposure to global trade and capital-market cycles. Exit routes also tend to be less dependent on IPO markets, with trade sales and sponsor-to-sponsor transactions offering steadier realisation pathways.

Continuation investments: Extending the value-creation runway

Continuation vehicles have become an increasingly important tool for private equity managers to extend ownership of high-conviction assets beyond traditional holding periods. By enabling managers to retain and further develop portfolio companies through their next stage of growth, these vehicles align long-term value creation with investor liquidity preferences.

The market for continuation strategies has expanded at roughly 27% annually since 2013, reflecting both cyclical and structural demand for longer-duration investments – and our forecasts show the segment could quadruple over the coming decade. In today’s muted exit environment, these structures are proving especially valuable, offering the potential for more predictable outcomes and faster time to liquidity – around 18 months shorter than conventional buyouts.

Continuation investment market growing – driven by structural factors

For investors, the appeal of continuation investments centres around the potential to generate strong, but more predictable, return profiles and faster liquidity. Schroders Capital data on realised continuation investments suggests that these deals have more normally distributed returns and a smaller tail-risk profile compared to traditional buyouts – and that hold periods are 1.5 years shorter on average, equating to a 25% faster time to liquidity.

Managed Fund

Schroder Specialist Private Equity Fund

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