The winds of change in the macroeconomic landscape are swelling rapidly. Within days of President Trump’s inauguration, the world has had to deal with trade tariffs, a breakthrough in AI technology with DeepSeek, and a pause in the Fed cutting cycle, just to name a few. While the public markets have shown some fragility in the midst of all this uncertainty, the asset class of private equity seemingly continues to stand out for its resilient performance. With risks not expected to abate under a new regime, we think it is an opportune time for investors to continue to build portfolio resilience through private equity exposure.

Private equity has historically outperformed both large- and mid-cap public equivalents under both high policy uncertainty and high-rate regimes. When policy uncertainty is high, stock markets registered significant drawdowns, whereas private equity registered strong positive returns on average. This is unsurprising given that private assets generally exhibit strong negative correlations to stock market returns (current: -0.65), underscoring their diversification benefits. Noteworthily, private equity performance even displayed an anti-fragile streak, registering an uptick in performance against rate stress. Intuitively, high interest rates should precipitate higher cost of financing, diminish distributions (via dividend recapitalisation), and depress valuations – all of which ought to bode poorly for private market investors. However, the reality appears to be more nuanced. A deeper look, reveals that private equity’s antifragility during rate stress may likely stem from investors’ influence over portfolio companies.

Investors, by virtue of gaining controlling stake, have the flexibility and agility to optimise company efficiency and structure deals in a manner that is the most optimal under prevailing macroenvironment. Under moderate- to high-rate environments, investors can structure deals with lower leverage, improved profitability, and faster exit distributions. In practice, these translate to prioritising (i) middle market deals which offer significant value generation through revenue and profitability optimisations, rather than relying on leveragedriven multiple arbitrage; (ii) mid-cap buyouts which provide majority ownership in fundamentally sound, low-debt companies; and (iii) secondaries which allow flexible exits to generate distributions and avail portfolio rebalancing opportunities without using additional debt. Breaking down the outperformance of private equity indeed reveals buyouts and secondaries as key contributors of private equity returns across moderate- to high-rate environments.

While middle market buyouts present a compelling investment case in a high-rate environment, it is important to highlight that not all mid-cap buyout segments offer the same risk-reward, and success depends heavily on manager selection. Empirically, from 2014 to 2024, the mid-cap segment of USD50mn to 100mn exhibited the greatest probability of upside compared to larger cap deals. However, this trend is heavily contingent on the quality of managers. Under bottom-quartile managers, the same mid-cap segment displayed the highest likelihood of loss-making (more than 50%), reversing the trend seen with stronger managers. This empirical observation underscores the critical role of managers in optimising deals outcomes. Notably, there is a growing proportion of top-quartile managers in the mid-cap segments, and this will undoubtedly further improve the odds of success in middle market private equity investments going forward.

Finally, opportunities for value plays continue to exist in private equity. For new investors, a golden window of opportunity has opened up as the 2022 dip in valuation multiples bottomed out following the Fed’s decision to embark on an easing trajectory in late 2024. The Fed’s recent rate pause will temporarily suppress multiples and extend this opportunity window. Fundamentally, the easing cycle should persist – albeit gradually – and this should support a steady uplift in multiples. Trump’s deregulatory and pro-growth policies, coupled with private equity managers’ focus on profitability and deleveraging, will aid multiple expansion in private equity even as rates remain elevated. For existing investors, private equity multiples are trending upward on a 5-year trailing basis. The booming secondaries market also avail opportunities for rebalancing and capitalising on low entry multiples. Importantly, private equity remains undervalued relative to public counterparts. The valuation gap with the S&P500 now stands at 3.6x, marking the most significant divergence in at least a decade, and highlights private equity’s relative attractiveness.

In summary, amid a changing macroeconomic environment, middle market private equity buyouts stand out as resilient investments. They offer strong potential for value generation, particularly when executed by seasoned managers with a proven record of optimising profitability without relying on leverage. A skilled manager’s ability in navigating complexities whilst fostering growth will ultimately determine long-term returns. With relatively attractive valuations, investors who commit capital now can secure favourable entry points before further market shifts.