Amid rising concerns about concentrated and volatile US listed markets, the firm has backed private equity as an attractive alternative for the coming year.
With listed markets long dominated by large-cap tech and the artificial intelligence (AI) boom, concerns about overconcentration and a potential bubble have been building for some time.
This was a topic raised by Morningstar in its global outlook earlier this week who said investors may be holding more exposure to AI than they realise as US indices are crowded by technology companies.
In its 2026 Outlook, Schroders positions small and mid-cap private equity as a compelling antidote to the downsides of increasingly overconcentrated listed markets.
Commenting on the report, Schroders’ head of investment directors, public and private markets, Claire Smith, said while things may still look reasonable for listed markets, the reality is that there are still rising concerns for investors around geopolitics and weaponisation of trade.
In contrast, she argued small to mid-cap private equity assets can provide investors with sound fundamentals, attractive valuations, and improved sector and geographic diversification.
Reflecting on the past year, she noted that small and mid-cap segments have continued to outperform large-cap private equity, pointing to the heavier leverage burden in large-caps amid today’s interest rate environment and a more favourable exit environment for smaller companies.
“Our activity continues to be in small- and mid-cap private equity, where we see more attractive valuations and better prospects for diversification compared to crowded large-cap share markets,” she said.
She noted that while listed markets are crowded with tech giants and big names, private equity offers tremendous scope for selectivity, with around 450,000 small and mid-sized companies available to choose from.
At the same time, she argued that their performance is often less dependent on broader economic factors like GDP growth or interest rate cycles – staying away from the “noise” of listed markets.
Smith highlighted the broader exit options in small and mid-caps as particularly appealing, offering increased agility in navigating today’s turbulent markets.
“Exits are a critical part of the private equity proposition – identifying strong companies, growing them and ultimately exiting them – and the small to mid-cap part of the market provides the greatest diversity of exit routes,” Smith said.
Additionally, Smith advised that a global perspective beyond the US is key, as companies in Europe and other regions often trade at lower valuations and can outperform, citing European private equity’s edge over the US in 2024.
At the same time, she also cautioned that certain areas of the private equity landscape may offer opportunities but also require careful selection. In particular, she highlighted the rising appeal of evergreen funds, which offer investors quicker access to private equity and greater liquidity compared with traditional closed-ended funds.
“Recent private equity fundraising trends indicate rising interest in strategies that promise increased liquidity, diversification, and flexibility.
“But this raises important questions for investors, especially around pricing, fund manager discipline in the private equity space and future sources of return,” Smith advised.
Her comments echo the findings of a July report by bfinance, which found that while these funds offer greater accessibility, they can also pose risks, including illiquidity mismatches and potentially diluted returns.
She also highlighted the surge in secondaries funds, with the number raising capital having quadrupled over the past six years. Like evergreen funds, the secondaries market is appealing to many investors for its greater liquidity compared with the primary market.
Smith was discerning in this market, noting that she remained cautious about Limited Partnership (LP) secondaries, believing that competition is driving prices higher.
However, she was bullish GP-led secondaries or continuation vehicles (CV) – recently highlighted by this publication for their resurgence this year – believing they offer investors more compelling returns.
“CVs 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,” Smith said.
She concluded that as 2026 approaches, markets will remain complex, and small- and mid-cap private equity provides a relatively structured and resilient alternative for investors.
“Markets continue to present a complex picture – optimism in the headlines, balanced by ongoing economic and geopolitical uncertainties – and a careful approach is essential.”
