Speculation around an equity market bubble is gaining traction. While we believe these concerns are overblown—today’s technology rally is supported by earnings, unlike the late 1990s—elevated valuations do heighten the importance of diversification across asset classes. In this context, private assets offer a great opportunity in both enhancing expected returns and reducing overall portfolio risk.

A compelling case for private assets

The case for allocating to private assets is both structural and cyclical. Structurally, diversification is often described as the only “free lunch” in finance. Although private assets tend to exhibit slightly higher volatility than public markets, this is more than offset by their higher expected returns. For example, Standard Chartered estimates expected annual returns of over 11 per cent for private equity, compared with 7 per cent for public equities, with expected volatilities of 20 per cent and 18 per cent respectively. Crucially, private assets also introduce additional sources of diversification—one reason institutional investors and sovereign wealth funds have continued to increase their allocations.

From a cyclical perspective, elevated US inflation has further strengthened the case for private assets. First, higher inflation tends to increase the correlation between equities and bonds as central banks face greater constraints in supporting growth through looser monetary policy. In such an environment, diversifying beyond public markets becomes even more important.

Second, private markets can offer better protection against inflation. This is most evident in private real assets such as real estate and infrastructure, where income streams often rise in line with inflation. Private credit also provides a degree of inflation hedging, as loans are typically floating-rate. When inflation remains elevated, interest rates tend to stay higher, supporting returns. By contrast, most bonds pay fixed coupons, meaning rising inflation and interest rates can erode their value—temporarily in nominal terms and permanently in real terms.

This naturally leads to concerns that have recently dominated headlines around private credit. Regulators are increasingly focused on transparency, particularly regarding links between private credit and the banking sector. The growth of private credit itself stems from regulatory changes after the Global Financial Crisis (GFC), which required banks to strengthen liquidity and capital buffers. Understandably, regulators are wary of similar risks emerging elsewhere in the financial system.

There are also concerns that the influx of capital into private credit could lead to weaker due diligence, a fear amplified by several high-profile defaults. However, these concerns can be mitigated by two factors. First, while leverage in private credit has increased, it remains well below the levels seen in the banking system ahead of the GFC. Second, the recent defaults were not predominantly private credit transactions, and the majority of losses were borne by banks.

Why manager selection matters more than ever

Importantly, default risk varies significantly across strategies and managers. While the overall default rate is estimated to hover around 2 per cent in 2025, Standard Chartered continues to see wide dispersion across private lenders. This reinforces the importance of selecting first-tier asset managers with strong origination networks, rigorous underwriting standards, and proven performance across market cycles. From a valuation perspective, private credit also appears attractive, with pricing reflecting more pessimism than in public markets. While much of the focus has been on the US, opportunities in European private credit are equally compelling.

That said, no investment is risk-free. History shows that the poorest investments are often made in the most favourable conditions. Many deals struck in 2021 are underperforming, having been priced on the assumption that interest rates would remain near zero. When the US Federal Reserve abandoned its view that inflation was transitory and raised rates by more than five percentage points in under 18 months, valuations across private equity and private real assets were reassessed, and stress emerged in parts of the private credit market. Against this backdrop, manager selection is more critical than ever. Investors should prioritise partners with a strong track record across different interest rate and economic environments. At Standard Chartered, we work with first-tier managers to help clients capture the diversification and return potential of private assets, while maintaining appropriate exposure to liquid public markets.

As seen in Tatler Singapore