The coordinated attacks on Iran by the United States and Israel, which began on Saturday, February 28, have jolted markets, with the clearest effects showing up first in energy. Tanker traffic through the Strait of Hormuz, a critical passage for about 20% of global oil and liquefied natural gas (LNG) supply, has dropped sharply. At the same time, production across the region, including in Iran, Kuwait, Iraq, Saudi Arabia, the United Arab Emirates, and Qatar, has also been disrupted. Because oil demand is relatively insensitive to price in the short run, even modest supply losses can push crude prices meaningfully higher. That dynamic helped drive front-month ICE Brent futures up 46% from when the conflict began to $106 per barrel in trading today, prompting G7 countries to consider releasing petroleum from their strategic reserves and renewing concerns about inflation.

Many economists estimate that a $10 per barrel increase in oil prices would add roughly 15 to 30 basis points to US headline inflation. On that basis, a sustained 50% rise in oil prices could add about 0.5 to 1.0 percentage point (ppt) over the following year. The incremental inflation pass-through from further oil price increases may also diminish at higher price levels and over time as demand weakens. The impact on core inflation, which excludes food and energy prices and matters more for monetary policy and asset prices, would likely be much smaller. This is because energy is often only a modest input into the cost of goods and services relative to labor and other expenses, and firms may absorb part of the increase in margins rather than pass it through fully to consumers. The broader impact is also likely to be more limited than in the 1970s, when economies were far more energy intensive. In fact, in many advanced economies, energy use per unit of output has fallen by more than half since then as efficiency has improved.

Still, the inflationary impact will not be uniform across countries and regions. Economies that are net importers of oil, LNG, and other affected goods such as fertilizer are more exposed. In Europe, for example, prices for a key natural gas benchmark rose 67% last week, compared with an 11% increase in the United States, even though supplies from the Middle East account for only about 5% of the EU’s combined LNG and pipeline gas imports. Similar dynamics have played out in parts of Asia. For many non-US energy importers, the challenge could be compounded by the tendency of the dollar to strengthen during periods of market stress, which raises the local currency cost of dollar-priced commodities such as oil and LNG. Taken together, the hit to headline inflation in some non-US economies could be meaningfully larger, perhaps twice that of the United States. But, as in the United States, the effect on core inflation would likely be more limited for the same reasons.

Of course, the impact of the conflict on inflation will depend largely on its duration and scope. President Trump has sent mixed signals on how long it could last, at times suggesting it may end within weeks and at others that it will continue as long as necessary, likely as part of a pressure campaign aimed at securing a deal. Even so, he appears to prefer a short conflict. He has long criticized the protracted wars in Iraq and Afghanistan, and a prolonged campaign would raise the risk of greater US casualties, backlash from some Middle East allies, and higher inflation, all of which could weigh on political support at home ahead of the November congressional elections. That helps explain the administration’s move to support the war risk insurance market, which could limit further disruption to shipping flows if the conflict remains contained. Longer-dated oil & gas prices in both the United States and Europe likewise suggest investors expect the conflict to subside rather than become prolonged.

Even if the conflict were to last longer than most expect, the inflation backdrop would still differ markedly from the one that produced the pandemic-era surge. That episode reflected an extraordinary combination of fiscal and monetary stimulus and severe supply constraints, especially labor shortages. In the United States, annual inflation rose by 8.8 ppts, from 0.2% in May 2020 to 9.0% in June 2022, an increase comparable in scale to the major inflation episodes that peaked in 1974 and 1980. By contrast, today’s inflation risk is more concentrated, with higher energy prices rather than a broad-based demand and supply shock serving as the main transmission channel.

The conflict is likely to reinforce this year’s existing rotation within equity markets. Energy and industrial equities could benefit further as investors place a higher premium on sectors tied to commodity supply, defense, and industrial capacity, while the risk of firmer inflation may limit central banks’ willingness to cut rates, creating a less supportive backdrop for rate-sensitive growth sectors such as technology. We expect this dynamic to continue supporting our July 2025 recommendation to tactically overweight Latin American equities within emerging market portfolios, given the region’s significant valuation discount and more moderate, though still present, exposure to geopolitical risk. Across geographies, US equities may continue to benefit in the near term from safe-haven demand. Over time, however, the broader aftermath of the conflict could support greater marginal flows to ex US assets, consistent with the trend evident earlier this year, as some investors reconsider the risks of concentrated exposure to US assets and the dollar amid greater policy uncertainty and elevated valuations.

More broadly, periods of heightened geopolitical risk are a reminder of the value of diversification and discipline. As we noted in our 2026 Outlook, investors that have allowed their equity allocations to drift higher over the last decade or two should evaluate increasing their policy exposure to diversifying strategies such as hedge funds, given the broader shift in the risk-reward profile across asset classes. While markets often recover quickly from geopolitical shocks, the case for diversifying strategies is particularly compelling today relative to broad equities, which remain expensive, unusually concentrated in a small number of names, and less geographically diversified than is typical. Put differently, today’s environment calls for portfolios built to withstand a wide range of outcomes.

The post Will the Iran Conflict Trigger a Pandemic-Style Inflation Spike? appeared first on Cambridge Associates.

The US residential real estate sector remains a weak spot in an otherwise resilient economy, with residential investment contracting at a 4.4% annualized rate through the first three quarters of 2025. Affordability has worsened due to high home prices, elevated mortgage rates, and tight credit, all of which have dampened activity. Recent Federal Reserve easing has helped stabilize the market, lowering the 30-year mortgage rate by about 170 basis points since late 2023. However, a sustained recovery is likely to require a sharper decline in rates or a significant increase in supply, both of which are unlikely. Supply-side reforms are difficult to implement, and a substantial drop in rates does not appear likely, given the current macro environment. Mortgage rates are closely tied to long-term Treasury yields, which have limited room to fall unless the Fed eases more than expected or growth expectations weaken. Additionally, the spread between mortgage rates and Treasury yields has moved back near their historical average, leaving little room for further compression.

In response, the Trump administration has proposed measures with the goal of improving housing affordability, such as restricting institutional ownership of single-family homes and directing Fannie Mae and Freddie Mac to acquire $200 billion in mortgages. Several other potential ideas were floated as well. However, these policy interventions are unlikely to overcome the sector’s headwinds in the near term. For example, a ban on institutional investors would face legal challenges and have little immediate effect on supply, as they own less than 1% of single-family homes. The planned $200 billion in mortgage purchases may exert some downward pressure on rates, but the scale is modest compared to the Fed’s $2.3 trillion in mortgage-backed securities (MBS) purchases across the three previous quantitative easing programs. With the Fed still unwinding its MBS holdings and mortgage spreads near their historical average, these factors may further limit the impact of government-sponsored enterprise (GSE) purchases.

For investors, the proposed policies are unlikely to materially change the outlook for most asset classes tied to US residential real estate. Homebuilder and home improvement stocks, after trailing the broader market by more than 18% in 2025, have recently rebounded, with the S&P Homebuilders Select Industry Index up 15.8% year-to-date versus -0.1% for the S&P 500 Index. Still, the outlook remains challenged. These stocks are highly sensitive to mortgage rates, and with affordability still stretched, sales volumes are flat, and price appreciation is fading. Revenue growth is under pressure, with 12-month forward earnings per share for homebuilders at -1.6% versus 15.1% for the S&P 500. Elevated input costs, driven by tariffs and labor shortages, have further compressed margins. Despite these headwinds, valuations are not particularly cheap, suggesting limited scope for sustained outperformance.

Within credit, residential agency MBS remain among the most attractive segments in the investment-grade universe. In 2025, agency MBS returned 8.6% versus 7.3% for the Bloomberg Aggregate Index, benefiting from tightening spreads and lower volatility. While upside is now more limited, newly issued agency MBS still offer both competitive yields and superior risk-adjusted returns compared to corporates, given their higher credit quality. Although the ultimate impact of new policies remains uncertain, the administration’s affordability push and planned GSE mortgage purchases may provide a modest backstop for spreads and help reduce downside risk. With corporate bond spreads historically tight, agency MBS stand out as a high-quality alternative should credit spreads widen.

Among other segments, REITs and private funds focused on single-family rentals face the most direct policy risk, but most have already shifted to build-to-rent strategies, reducing their exposure to restrictions on institutional buying. The affordable and apartment sectors are two areas we continue to favor, given limited policy risk and supportive structural tailwinds, including persistent demand for affordable housing and the elevated cost of owning versus renting.

In sum, we do not expect the Trump administration’s affordability push to meaningfully improve conditions in the US residential real estate market. Given this view, we believe the best tactical opportunity is in current-coupon agency MBS, while private residential real estate segments like affordable and apartment properties will continue to benefit from strong structural supports.

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by Sean Duffin

Hedge funds remain a vital part of diversified portfolios, and building resilience requires a thoughtful mix of strategies. In today’s environment—marked by elevated dispersion, low correlations, and ongoing policy uncertainty—equity long/short (ELS) managers are especially well positioned. Advances in AI and persistent tariff-related disruptions have driven pronounced outperformance in select sectors, notably technology and communication services, resulting in significant gaps between winners and laggards. Skilled ELS managers can exploit these market inefficiencies and others through both long and short positions, offering the potential for attractive risk-adjusted returns. Given these considerations, investors should consider leaning more than typical into ELS—either through portfolio rebalancing or by adding a new position—as part of a well-diversified hedge fund strategy mix.

The investment landscape is being shaped by a complex interplay of macroeconomic and geopolitical forces, including tariff-related uncertainty, sticky inflation, and evolving labor market dynamics. These crosscurrents are creating opportunities for nimble hedge fund managers. Global macro and other absolute return strategies are well positioned to navigate these challenges, given their flexibility across asset classes and regions. Yet, what distinguishes the current environment is the pronounced sector dispersion and volatility driven by technological innovation and policy shifts—conditions that are particularly favorable for ELS managers, who can capitalize on both broad market trends and stock-specific inefficiencies.

Hedge fund strategies offer distinct trade-offs for investors navigating the uncertainties of 2026. While a recession is not our base case scenario, the potential for episodic volatility and policy-driven market disruptions remains elevated. ELS approaches provide a practical way to position for this environment, offering reasonable defensiveness without sacrificing significant growth potential. Over the last 20 years, ELS strategies have captured about 70% of the equity market’s total gain but have lost roughly half as much as broader equity markets during major drawdowns. In contrast, more defensive hedge fund strategies such as trend-following and global macro have excelled during sustained market stress, providing diversification and crisis alpha, though these strategies have significantly lagged equity markets over the long term. By combining ELS with these and other defensively oriented strategies in a diversified hedge fund allocation, investors can position portfolios to participate in market upside, while maintaining robust protection against extended periods of volatility or unexpected downturns.

Another supportive factor for hedge funds that short securities is the current level of interest rates, which has increased the short rebate—the interest earned on cash collateral from short sales. While this is a structural feature of the strategy rather than a source of manager alpha, it does provide a tailwind for funds employing short positions, boosting baseline returns compared to the low or negative rate environment of 2010–21. As long as rates remain elevated, this dynamic should continue to benefit hedge funds with meaningful short exposure.

While we recommend leaning into ELS strategies, given current market dynamics, it remains essential to prioritize manager quality and ensure each allocation fits within the broader portfolio. Investors should avoid over-concentration in any single strategy or style and align allocations with overall portfolio risk and objectives—whether adding risk or protecting capital. For taxable clients, selecting managers that actively consider tax implications and demonstrate a track record of tax-aware trading can further enhance after-tax outcomes.

Leaning into hedge fund strategies in 2026 is prudent for investors seeking both performance and protection. ELS strategies are especially well positioned, given current market dynamics, but a diversified approach that includes other defensive hedge fund strategies remains critical for portfolio resilience. By focusing on high-quality managers and strategic fit, investors can harness the diversification benefits that hedge funds provide—helping portfolios remain resilient and adaptable amid today’s market uncertainties.

Investors should lean into real asset secular themes in 2026

by Wade O’Brien

In 2026, investors should favor real assets that benefit from secular themes like digitalization, decarbonization, and demographics. However, as competition for these assets has driven up pricing, choosing skilled value-add managers who can develop projects and look beyond traditional plays is essential to unlocking high returns. Secondaries funds in both infrastructure and real estate are also attractive given access to high-quality assets at often favorable pricing.

Recent returns for infrastructure funds underline the dual role they can play both in generating absolute returns as well as protecting against inflation. Private infrastructure funds have generated annualized internal rates of return (IRRs) of around 11% over the last five and ten years. Returns have been even higher for skilled managers who capitalized on these secular themes, with value-add funds investing in areas like energy transition and data centers often outperforming generalist infrastructure funds and even some buyout strategies.

Infrastructure valuations have risen for many assets, reflecting demand that has exceeded forecasts. For example, last year Grid Strategies predicted that US power demand could increase by 8% over the next five years, given surging data center demand, almost 3x the pace it had modeled just two years prior. Even when strong demand growth is well telegraphed, supply can struggle to respond. An aging US population will require between 35,000 and 45,000 new senior living units per year, but supply has fallen well short in recent years, given rising labor and financing costs.

Rising price tags for certain infrastructure assets favor funds developing new projects over those acquiring existing assets, though in some markets—such as US renewables—distressed sales will present opportunity. As partners in developing new projects, investors should carefully search for managers that bring specialized toolkits to the table. Developing complex assets like data centers requires navigating challenges like permitting, power supply, cooling, and scaling traditional designs to meet today’s massive compute needs. Underwriting tenant risk is also important, as long-term contracts with deep-pocketed hyperscalers may prove more secure than short-term rentals with more speculative players. Diversified private infrastructure funds also can have an edge in identifying related plays, for example in the case of data centers identifying companies that generate and store power or help upgrade grids to connect these assets.

Global infrastructure funds are an attractive choice, given the diverse opportunities and varying valuations across markets. For example, publicly traded utilities in the United States fetch higher valuations than those in other markets, reducing their attractiveness as take-private candidates. Also, while data center capacity is expected to experience almost uniformly rapid growth across the United States, Europe, and Asia in future years, renewable growth in the United States may be slower due to recent policy shifts.

In real estate, as in infrastructure, we favor value-add managers focused on secular themes. Elevated valuations for core real estate assets limit the potential for price appreciation and reduce the appeal to lock-up capital. Instead, value-add strategies targeting themes such as demographics (e.g., senior housing) and digitalization (e.g., cell towers) are more compelling.

For investors seeking to accelerate portfolio deployment, secondary funds are worth considering, though the rationale for doing so varies across asset classes. Infrastructure secondaries can provide immediate access to cash-flowing assets, though at modest discounts. In contrast, real estate secondary stakes can offer substantial discounts, offering a margin of safety for assets with deteriorating fundamentals.

Looking ahead to 2026, real asset investors should stick with secular winners. While valuations have risen for some of these assets, partnering with private infrastructure and real estate funds that add value through design and operation can enhance return potential. Should economic growth disappoint or inflation surprise to the upside, these strategies should be supported by strong long-term fundamentals.

Investors should overweight California Carbon Allowances in 2026

by Celia Dallas and Justin Hopfer

California’s Carbon Allowances (CCAs)—permits issued under the state’s cap-and-invest program—present an attractive investment opportunity relative to global equities. CCAs offer an asymmetric return profile: the program’s price floor limits downside risk, while tightening supply, linkage with Washington state, and regulatory changes create significant upside potential. As the market transitions from annual supply surpluses to persistent deficits, we believe CCA prices are poised for accelerated appreciation. Current pricing offers an attractive entry point, with prices near the price floor, whereas global equities remain constrained by elevated valuations and index concentration.

California’s cap-and-invest program, run by the California Air Resources Board (CARB), requires entities to surrender allowances equal to their emissions in three-year compliance cycles. Allowances are distributed through free allocation and quarterly auctions, with auction prices supported by a price floor and the Allowance Price Containment Reserve (APCR). The cap, a state-set limit on emissions, declines each year to meet climate targets by reducing free and auctioned allowances. Once prices reach containment tiers, CARB releases additional allowances from the APCR at set prices. After APCR units are depleted, CCAs can rise to the price ceiling. Price tiers rise annually by inflation plus 5%. Entities may “bank” allowances for future use and use carbon offsets, credits earned from emission-reduction projects, to meet part of their compliance.

Since 2019, the cap has decreased by 4% annually, while emissions have declined by 2%–3%, tightening supply relative to demand. Prices remain subdued, given the large bank of allowances, but as the cap tightens and these are depleted—projected by the early 2030s—prices should rise sharply. CARB’s proposal to accelerate the annual cap decline would remove 118 million allowances from 2027 to 2030. This would likely drive the market into persistent annual deficits starting in 2027, ultimately exhausting banked supply by 2031 and supporting higher prices. Even without accelerated cap declines, deficits are projected to emerge by 2034.

Asset manager Aetos’ base case scenario, with 118 million allowances removed through 2030, indicates the program could hit the first containment tier in 2031 and the second in 2032. Current CCA prices are $30, with Tier 1 and Tier 2 prices estimated at $96 and $134 in those years, implying annualized returns of 24% over the next six to seven years. Across four managers, expectations range from banked allowances being depleted from 2031 and 2034, with projected IRRs of 24% to 14%, respectively. Furthermore, the anticipated linkage with Washington state’s program, expected by 2027, would likely drive price convergence and support higher prices. Even in bearish scenarios, returns remain positive, as the price floor rises annually. This underscores CCAs’ attractive, asymmetric risk/reward profile, especially compared to global equities, which face subdued return expectations as outlined earlier. For US taxable investors, CCAs also benefit from long-term capital gains treatment, enhancing after-tax return potential.

Despite compelling return potential, the thesis faces regulatory, political, and market volatility risks. An immediate concern is further implementation delay, especially after the program extension to 2045 took longer than expected. Next steps—Initial Statement of Reasons (ISOR) publication and rulemaking—must be completed before the October 2026 issuance of free allowances to enable accelerated allowance removals and deplete banks allowances. Recent federal executive orders have also prompted legal challenges, creating ongoing litigation and regulatory uncertainty as a tail risk. Nevertheless, the program has withstood past legal challenges and enjoys strong state support, reinforced by its fiscal contributions—$33.7 billion since inception.

The investment case for overweighting CCAs remains strong as the market shift from surplus to persistent deficit. Prudent position sizing is essential, given political and regulatory risks, lower liquidity, and event-driven volatility. Overall, CCAs offer differentiated return and diversification potential, with significant upside relative to global equities if anticipated catalysts are realized.

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What We’ve Observed

In 2024, real estate fundraising slowed not only in the United States but also across Europe, Asia-Pacific (APAC), and global emerging markets, as shown in Exhibit 1. Historically, approximately 25% of institutional fundraising activity has targeted European and APAC markets. Cambridge Associates clients have historically allocated a similar proportion to these regions. However, evolving regulatory, monetary, and tariff dynamics in the United States are prompting investors to reassess geographic allocations. This potential shift reflects both the search for diversification and the responsiveness of institutional capital to changing global market conditions.

Though past performance is not a reliable indicator of future results, particularly for regions like Europe and APAC with smaller sample sizes compared to the North American region, Cambridge Associates’ database of real estate fund performance data offers meaningful insights. We analyzed the performance of more than 210 ex-US (Europe and APAC) focused value-add and opportunistic funds from vintage years 2009 to 2020. Due to the limited number of funds in early vintages, we grouped the sample into three-year buckets to minimize variability and provide a clearer picture of performance over time (as shown in Exhibit 2). We excluded emerging markets managers (where underperformance is prevalent) from our analysis due to the small number of funds focused on those regions, wider performance dispersion, and limited opportunities for institutional capital historically.

From 2009 to 2020, ex-US funds had a median net internal rate of return (IRR) of 6.3% compared to 10.3% for US-focused funds and have generally lagged US funds. However, in some vintage year groups (e.g., 2012-2014), upper quartile ex-US funds outperformed US funds and experienced less return dispersion and downside outcomes. Reduced dispersion likely reflects the smaller sample size of ex-US funds but can also be attributed to experienced regional GPs who manage downside risk more effectively, amid somewhat limited upside due to broader macroeconomic factors. Underperformance also reflects currency drag, as US investors faced, on average, a 150 bps hit in Europe and 270 bps in APAC due to weaker local currencies. The currency impact was most pronounced during the GFC and its aftermath (2009–2013), which involved significant currency headwinds and a slower recovery in European and APAC markets compared to the US.

European Real Estate Outlook

Unpacking the regional performance further, developed European funds have lagged the US in performance over the past decade, partly due to challenges like Brexit, sovereign debt issues, and a weaker currency. Since their mid-2022 peak, European real estate valuations have fallen by over 20%, slightly more than US real estate valuations. While the European Union has experienced only 8% GDP growth over the last ten years compared to 28% GDP growth for the US, interest rates have stabilized (2.0% European Central Bank rate versus 4.25%–4.5% in the US). Alongside an improving macroeconomic outlook, muted tariff impacts from diversified trade relationships, and the potential for currency appreciation (with the Euro and Pound sterling undervalued relative to the dollar), these factors have created attractive entry points in the European real estate market.

Supported by strong demographics and economic growth, certain regions, such as Southern Europe (particularly Spain) and the Nordics demonstrate compelling dynamics. Residential and alternative sectors, including student housing, are particularly attractive due to persistent housing shortages and rising demand from migration. Logistics assets also continue to benefit from the growth of e-commerce. While the UK remains the largest and most liquid market, its persistently high inflation and corresponding monetary policy make it more challenging at present.

Investors can gain European exposure through diversified pan-European funds or by selecting regional and sector specialists. However, if choosing the latter, it is important to maintain broader diversification across the overall portfolio.

Asia-Pacific Real Estate Outlook

Developed APAC real estate funds have delivered a median net IRR on par with US-focused funds (9.3%), with greater dispersion. The Asian-Pacific real estate environment has been challenging in recent years due to elevated uncertainty and financial market volatility, but Australia, Japan, Singapore, and New Zealand still offer growth and diversification benefits for investors seeking to capitalize on market repricing and strong fundamentals.

While fundraising for APAC real estate reached a record low in 2024, transaction volumes have picked up, signaling renewed market activity. Investor interest is most pronounced in Japan, which is viewed as a relatively safe haven due to its low borrowing costs and the ongoing wave of large corporate real estate dispositions. As of 2022, Japanese corporations owned about $3.2 trillion in domestic real estate. Government reforms and pressure from investors are encouraging companies to improve low price-to-book ratios, prompting them to divest real estate holdings for greater balance sheet efficiency. By March 2024, 40% of large cap listed companies were trading at a P/B ratio of 1.0 and held approximately ¥180 trillion (about $1.2 trillion) in fixed assets, creating significant opportunities as these firms sell real estate to focus on core businesses. Japan’s hospitality and multifamily sectors are particularly attractive, with value-add strategies focused on operational improvements such as leasing up vacant assets. There is also increased interest in alternative real estate sectors across APAC, including data centers, student accommodations, life sciences, and infill logistics, where supply-demand dynamics are favorable due to limited new construction.

Opportunistic strategies—especially those acquiring distressed assets at deep discounts or developing under-supplied assets with proven demand—are attractive in the current interest rate environment. Similar to Europe, investors can gain APAC exposure through diversified pan-Asian mandates that offer flexibility to pursue the best risk-adjusted opportunities across the region, while Japan stands out as a safe haven for more risk-averse investors. While ex-US markets present intriguing opportunities to deploy capital in the current environment, if long-term rates remain elevated, investors focused on yield may consider income-oriented strategies, particularly as the distribution environment for traditional private real estate funds remains muted.

Slowdown in Distributions and the Spotlight on Income-Oriented Strategies

As discussed previously, slow fundraising activity can be attributed to muted transaction volume and lower distribution yields, which remain well below historical averages. By the first quarter of 2025, closed-end real estate funds launched in 2020 had distributed approximately 24% of total fund capital back to investors. This distribution level is about half of what earlier vintage funds (2010–2018) had distributed at the same stage in their lifecycle. This pronounced slowdown in distributions reflects broader macroeconomic headwinds prompting GPs to focus on capital preservation and liquidity management in response to persistent macroeconomic uncertainty and higher financing costs. As a result, LPs are recalibrating their allocation strategies and are increasingly seeking liquidity through current yield. Below, we discuss different strategies LPs may consider to generate current income.

Real Estate Credit Outlook

The rise in interest rates (as seen in Exhibit 3), valuation resets, the “maturity wall,” and the temporary pullback of traditional lenders from real estate have reshaped the lending landscape. Alternative lenders and credit funds have filled the liquidity gap, offering higher yields and stronger protections, such as robust covenants and lower loan-to-value ratios. Today, real estate credit strategies—particularly senior and mezzanine debt—offer target IRRs that are competitive with equity, with a significant portion of returns coming from income. With limited distributions from traditional equity investments, investors have turned to credit strategies for diversification and consistent cash flow generation, though these come with limited upside potential, especially compared to other yield-oriented strategies, such as core and triple net lease strategies, that we will discuss later in the article.

Historically, real estate credit funds have accounted for less than 20% of total real estate fundraising activity, except in a few years marked by particularly strong fundraising markets. Over the last five years (2020 – 2024), the median real estate credit fund size increased at approximately a 10% compound annual growth rate (CAGR), which is double the pace of growth over the preceding five-year period (2015 – 2019). The median size of real estate equity funds has increased as well, but to a lesser degree, underscoring the broadening opportunity set within credit strategies in recent years. Notably, a growing number of sophisticated, diversified equity funds are recognizing and capitalizing on opportunities in the credit space, and while these vehicles are not always explicitly categorized as “credit,” they are increasingly allocating capital to such strategies.

In conclusion, the substantial amount of real estate credit capital raised in recent years, combined with a likely decline in interest rates, could impact returns, making managers with strong risk management and cycle-tested experience—especially those who structure deals to protect against leverage-related downside—best equipped to navigate the environment.

Triple Net Lease (NNN) Real Estate Outlook

Triple net lease (NNN) strategies also stand out for their ability to deliver predictable, long-term income streams with minimal operational responsibilities and some potential upside. In a typical lease structure, the landlord owns the asset and holds a long-term lease with a tenant who assumes responsibility for most, if not all, operating expenses, thereby minimizing asset management burdens for the landlord. This arrangement is most common in single-tenant industrial and retail properties, where the quality of cash flow is closely tied to tenant creditworthiness and lease terms.

Target returns for NNN strategies are generally in line with credit strategies, with the majority of returns derived from income. Investors benefit from contractual rent escalations that help offset inflation risk, while the long-term nature of leases (often 10–15 years) ensures income stability. However, these advantages come with considerations: tenant defaults can significantly impact cash flow and property value, and the fixed or modest rent increases may limit upside potential.

While only a few managers focus exclusively on NNN strategies, recent market data indicate that net lease investment volumes remain robust, with industrial assets dominating the sector despite a slight overall decline in transaction activity. Overall, NNN strategies offer a compelling solution for investors seeking income-oriented real estate exposure, complementing other approaches such as core/core+ real estate and credit within a diversified portfolio.

Core Real Estate Outlook

Core real estate, typically held in open-end vehicle structures, has distributed approximately 4% of capital back to investors per annum over the past ten years, even amid the recent decline in property valuations. This steady income profile stands in contrast to the volatility experienced in other segments of the real estate market; however, as valuations for core properties declined through 2023 and 2024, these funds’ total returns have been negatively impacted by decreasing property valuations.

Throughout 2023 and 2024, private credit and real estate credit strategies became increasingly attractive relative to core real estate, delivering a higher income return without the negative drag from property valuation decreases. The resulting environment placed significant pressure on the core real estate industry, as redemption queues lengthened and investors turned to alternative sources of current income return. Some parts of the core real estate industry remain challenged, and these dynamics coupled with the proliferation of new core and core plus managers in recent years have raised the prospect for industry consolidation in the years to come.

Despite headwinds, there are emerging signs of stabilization in core real estate markets. Notably, the spread between appraisal and transaction cap rates for core properties has narrowed, suggesting that valuations have stabilized. As income returns from core real estate remain stable, the potential for total returns to benefit from a recovery in property values is rising. Increasing transaction activity will help to alleviate pressure on core managers seeking to fulfill existing redemption requests and improving market conditions will likely coincide with a return of capital to the sector.

Conclusion

While the real estate market environment in 2025 has been largely disappointing relative to expectations entering the year, there are opportunities to capture value in the current market environment. European and APAC markets are increasingly attractive for investors seeking diversification and long-term growth, particularly as the US market contends with heightened policy and economic uncertainty. Within these regions, sector-specific and tactical strategies—especially in residential, logistics, and alternative assets—offer compelling opportunities, while Japan stands out as a relatively safe haven in Asia.

The muted capital distribution environment has elevated the appeal of income-oriented strategies, including real estate credit and triple net lease, which provide investors with resilient cash flows and downside protection amid ongoing market dislocation. Core real estate, though challenged by valuation declines and redemption pressures, is showing early signs of stabilization as cap rate spreads narrow and transaction volumes begin to recover. The proliferation of credit strategies and the potential for industry consolidation further underscore the dynamic nature of today’s market.

Looking ahead to 2026, there is potential for improving macroeconomic conditions and a gradual normalization of interest rates will support a continued recovery in transaction activity across global real estate markets. As bid-ask spreads tighten and investor confidence continues to return, the potential for property value appreciation should increase, particularly in markets and sectors that have repriced most significantly. Against this backdrop, investors who remain disciplined in underwriting, emphasize operational value creation, and maintain a diversified, global approach will be best positioned to unlock value and generate durable income in the evolving real estate landscape. For prospective investors, it is important to maintain vintage year diversification and commitment pacing for long-term portfolio success.

_________________________________________

Authored by:

• Maria Surina, Investment Managing Director, Real Assets
• Ricky Roellke, Associate Investment Director, Real Assets
• Cameron Roy, Investment Associate, Real Assets

In partnership with PREA

The post Navigating Real Estate in 2025: Diversifying Abroad and Embracing Income Strategies Amid Market Uncertainty appeared first on Cambridge Associates.

Core US real estate assets—both public and private—have underperformed in recent years, pressured by headwinds including elevated interest rates, stretched valuations, and supply/demand imbalances in categories like office and apartments. The FTSE® NAREIT All Equity REITs Index returned 3.4% annually over the past three years (private returns were even worse ¹ ), underperforming equities and other risk assets. While longer-term returns are higher, recent performance has also reinforced our view that real estate investments are not particularly effective in protecting against spikes in inflation.

These lackluster returns have improved valuations but not to an extent that suggests high returns. US REITs now trade at 21x funds from operations, down from their 2021 peak, but still 40% above the 15x historical average. Meanwhile, the current 65-basis point (bp) spread between US REIT cap rates and BBB corporate bonds is less than half its 20-year average. This narrow spread further suggests that US REITs do not offer attractive value and argues against increasing core allocations.

Weak income growth in recent years has also impacted performance, though longer-term trends look more reassuring. According to NAREIT, US equity REITs have grown net operating income (NOI) by a compounded 8.7% per year over the last five years, and even more over the past decade. NOI growth has been strongest for secular winners including industrial (benefiting from ecommerce demand) and data centers (growth of cloud, AI, etc.). In contrast, categories such as office and hotels have experienced softer growth.

Still, rising vacancy rates and increased supply threaten income growth across many segments. Despite a growing number of return-to-office mandates, the current 14.6% vacancy rate for office remains close to levels seen after the Global Financial Crisis. Increased supply means the apartment vacancy rate has also risen around 200 bps since post-pandemic lows to 8%. Even industrial real estate has seen vacancy rates rise to the highest level since 2017 and income growth slow, given both supply and a plateauing share of retail sales from ecommerce.

Rate cuts should benefit commercial real estate assets by lowering borrowing costs and making their dividends seem more attractive relative to alternatives like investment-grade bonds. They should also flatter valuations by lowering the discount rate on future expected cash flows. Indeed, historically REITs have posted healthy returns during the 12-month period following an initial Fed rate cut, as long as recession was avoided.

However, rate cuts alone do not warrant boosting core real estate allocations. Low transaction volumes in recent years suggest valuations remain elevated in some categories. Focusing on short-term rates also obscures the fact that many real estate assets are financed with longer-term (ten years or longer) loans. While it’s possible that long-term rates fall in lockstep with short-term rates, it is not guaranteed, given inflationary pressures and the prospect of increased Treasury issuance pushing up yields.

Current valuations and sector-specific challenges make larger allocations to core real estate unattractive for most investors. Instead, we recommend investors target secular growth areas, such as digitalization (e.g., cell towers, data centers) and demographic-driven segments (e.g., senior living), where skilled operators can unlock above-trend income growth. Despite select opportunities, core real estate remains expensive, and fundamentals are weak. More compelling opportunities exist both within other real asset categories and across the broader spectrum of risk assets.

Footnotes

1. The CA Private Real Estate Index generated a negative return for the three years ended March 31, 2025.

The post Should Investors Increase Core Real Estate Allocations Now That the Fed Has Resumed Easing? appeared first on Cambridge Associates.

Today’s market environment is complicated by higher interest rates, regulatory risks, and increasing supply chain bottlenecks, and remaining selective and partnering with managers with operational expertise is critical. In this article, we explore infrastructure fundraising trends and comment upon historical performance; we also discuss emerging themes, risks, and the role that infrastructure can play within portfolios.

What We’ve Observed

In 2024, the median infrastructure target fund size was $1.15 billion versus $500 million for real estate. The relative difference in size is mainly attributable to the scale of underlying infrastructure investments and, more recently, to the increasing number of digital / datacenter and energy transition—focused funds. As shown in Exhibit 2, the share of fundraising activity targeting these sectors has increased, fueled in part by demand from generative Artificial Intelligence for computing capacity and clean power. In 2023, the number of funds exclusively targeting either renewable or digital investments rose to 43% of total infrastructure funds launched. The relative share dipped to 32% in 2024 but remained in line with the 31% average share over the past five years.

Evolution of Infrastructure

The infrastructure landscape has evolved over the past 20 years. Traditional infrastructure investments targeted essential, mature public-private partnership types of assets, such as schools, hospitals, and toll roads—each with long-term leases in place and often with government counterparties. Additionally, traditional infrastructure included regulated utilities with monopolistic characteristics (i.e., water and waste facilities, gas and electricity networks). However, as private capital flowed into the space and new societal trends emerged, infrastructure has evolved to reflect broader transformations in the modern economy, including digitalization and an increasing push for clean energy resources.

The trends in renewable energy and digital infrastructure are expanding opportunities for investors—the need for reliable, sustainable energy and robust digital connectivity becomes increasingly central to economic growth and societal development. The accelerating shift towards cleaner energy sources is driving demand for assets such as wind, solar, battery storage, and power grid modernization. At the same time, the rapid growth of data consumption, cloud computing, and artificial intelligence is fueling demand for digital infrastructure, including data centers, fiber networks, and wireless towers.

As these themes of digitalization and electrification continue to evolve, many funds will turn to greenfield (i.e., development) opportunities, which are often complex and require meaningful amounts of capital. These projects carry their own risks related to construction and planning approvals but offer higher upside potential. Consequently, infrastructure funds can serve as a growth driver in portfolios with these managers targeting higher returns (12-16% or more net internal rate of return, or IRR) compared to traditional, inflation-hedging core-plus funds (8-10% net IRR). Looking ahead, as infrastructure becomes more competitive, investors may need to seek opportunities that incorporate a combination of traditional asset management and private equity approaches. Like private equity, these funds focus on backing management teams to build and scale assets and platforms but often involve higher capital expenditure requirements that are de-risked by long-term contracts, resulting in less price risk. As the infrastructure market continues to grow, manager selection is critical to identify top performers with proven processes and strong operational skills.

Rise of Infrastructure: Performance

Although past performance is not a reliable indicator of future results, particularly for the less-mature infrastructure asset class, Cambridge Associates’ (CA’s) database of performance data offers meaningful insights. We analyzed the performance of over 120 developed markets’ private infrastructure funds with vintage years from 2009-2020. Because of the evolving nature of the asset class and the limited number of funds in early vintages, we grouped funds into three-year buckets to minimize variability and provide a clearer picture of performance over time (as shown in Exhibit 3). We excluded emerging markets managers from our analysis because of the small number of funds focused on those regions, wider performance dispersion, and limited opportunities for institutional capital historically. That said, emerging markets are becoming increasingly attractive for infrastructure development, driven by advancements in technology, security priorities, and shifts in global trade dynamics, making this an area to watch in the future.

For funds with vintage years ranging from 2009- 2020, the median net IRR was 9.8%, and median returns have stayed relatively consistent over time, highlighting the attractive, stable, risk-adjusted returns that infrastructure investments offer. After median returns peaked in the 2012-2014 vintage year cohort (10.6%), returns have started to normalize as more capital and players have entered the space. Furthermore, dispersion has widened and is especially pronounced in the most recent cohort (vintage years 2018–2020), which may be attributable to a more competitive market environment, disruptions from the COVID-19 pandemic, and fewer realizations in recent funds that can heavily impact returns.

Top Performance Comes in Different Sizes

As we did for real estate in the Spring edition of the PREA Quarterly, we examined the relationship between infrastructure fund size and performance. We grouped funds by their total capitalization and reviewed the performance of funds from vintage years 2009-2020 (as shown in Exhibit 4). We found that the smallest funds (under $1 billion) had the lowest median net IRR (9.2%) but the highest top quartile returns and the widest dispersion. At the other end of the size spectrum, the largest funds (over $10 billion) delivered a higher median net IRR (10.0%) with lower return variability and no negative outcomes among bottom performers. Similar to real estate funds, the smallest infrastructure funds had the greatest dispersion of outcomes, and the largest funds had the least dispersion with no negative outcomes. As we noted earlier in the article, infrastructure funds are typically much larger in size because of the scale of underlying projects, and the sample size for this analysis is much smaller than the one used for real estate funds.

Multiple factors contribute to the relationship between fund sizes and returns. Larger funds typically execute large-scale investments with less development risk and more stable return profiles and are often more diversified across sectors and markets. However, as funds target larger infrastructure investments, exit options are more limited, with only a few buyers able to absorb assets of such magnitude. Conversely, smaller funds are often raised by emerging managers that face greater execution and portfolio concentration risk, which may contribute to the greater performance dispersion. As a result, we believe manager selection is especially critical for smaller funds, because success depends on both investment/execution skill and the ability to build a strong organization. We discuss how these managers approach investing in the sector later in this article. From a portfolio construction perspective, investors targeting smaller funds should spread their commitments across a larger number of funds to account for the increased variance of returns. Similar to real estate, investors with limited resources or smaller infrastructure allocations may be better served gaining exposure to the asset class through diversified funds.

Top Performance Comes in Different Forms – Emerging Trends

We have also compared performance of diversified infrastructure funds and sector specialists (renewables, power, and digital). In vintages 2009-2020, sector-specialist funds slightly outperformed diversified funds (10.4% versus 9.6% net IRR) and showed greater performance dispersion. As shown in Exhibit 5, digital-focused infrastructure funds stood out, delivering the second-highest median return (14.0% net IRR) and no negative returns, though they represent a smaller cohort (in terms of fund count), and results may change as the sector grows. Traditional power-focused funds had the highest median return (14.1% net IRR) but with greater dispersion and negative outcomes than diversified or digital had, reflecting the volatility of the sub-sector. Early renewable managers’ underperformance was due to delayed technology development, slower adoption, and higher construction and financing costs. In recent years, however, the performance of renewable funds has improved, reflecting both the maturation of technologies from earlier funds and the green premium being offered for such assets recently. Going forward, secular trends like decarbonization and digitalization are expected to continue to support growth in these emerging infrastructure sectors.

There has also been a rise of lower-middle-market-focused infrastructure managers’ targeting value-added and opportunistic returns through platform developments, which are increasingly attractive. Many of these managers were spinouts from larger, established firms and are focusing on higher risk, growth-oriented strategies in niche platform buildouts that blend elements of infrastructure and private equity. These managers combine aspects of traditional infrastructure— a focus on capital preservation, long-term contracts, and downside protection—with the value-creation approach of private equity. Returns are generated through platform growth, rather than solely through financial structuring or value creation of a single asset. As a result, growth opportunities can be significantly more substantial today, and operational expertise has become more important than ever.

Conclusion

Infrastructure investments provide diversification and inflation-hedging benefits. However, unexpected or sustained periods of high inflation and regulatory or social pressures can impact valuations broadly across markets and dampen these benefits for infrastructure investors. Although infrastructure’s core attributes have remained resilient—as evidenced by steady secondary market pricing—elevated valuations, regulatory risks, and macroeconomic uncertainty could present challenges for investors.

Despite the risks, high-quality infrastructure managers should continue to serve as both a source of stability and growth in investor portfolios. In the current environment, investors have multiple ways of investing in infrastructure, allowing them to tailor portfolios to their risk-return objectives and liquidity needs. Opportunities exist, ranging from core and core-plus funds for stable income and inflation protection to value-added and opportunistic strategies for higher returns and risk. Infrastructure debt and secondaries have also become attractive options, with debt offering stable income at appealing spreads and secondaries offering access to high-quality assets, often at discounts to net asset value, while providing diversification and J-curve mitigation. As traditional infrastructure firms have matured, and fund sizes and valuations have increased, there is also an emerging cohort of middle-market managers targeting development opportunities with higher risk-return profiles that blend elements of infrastructure and private equity. Building an optimal infrastructure portfolio requires thoughtful diversification across size, structure, and strategy, as performance varies by manager and approach. An anchor commitment to a large, diversified fund manager can provide market beta and, with savvy manager selection, opportunity for upside; and smaller, adjoining commitments to sector specialists or emerging managers can better help clients dictate their sector and market weightings in search of alpha. In today’s evolving market environment, manager selection remains especially critical.

Authored by:

• Maria Surina, Investment Managing Director, Real Assets
• Ricky Roellke, Associate Investment Director, Real Assets
• Cameron Roy, Investment Associate, Real Assets

In partnership with PREA

Footnotes

1. The CA Private Real Estate Index generated a negative return for the three years ended March 31, 2025.
2. We define fundraising activity as the total number of real asset funds and target fundraising amounts in our database that either launched or held their first closes in each respective vintage year.

The post Powering the Future: Infrastructure Trends, Performance, and Portfolio Impact appeared first on Cambridge Associates.

Investment Implications Through The Tech Cycle

To navigate the AI investment landscape, it is helpful to segment the market into five archetypes that capture the diverse ways in which companies interact with AI:

1. Creators are the pioneers at the frontier of AI innovation—companies developing foundational models, advanced algorithms, the software development toolchain, and specialized hardware that form the core of the technology.
2. Disruptors create a transformative change that goes beyond integrating technology into an existing process, launching new business models that were unimaginable prior to the technological leap (e.g., Uber or Amazon of the internet era).
3. Enablers provide the essential physical infrastructure that makes AI possible, including semiconductors, data centers, and energy solutions.
4. Adaptors are businesses that integrate AI into their operations, harnessing its power to drive efficiency, unlock new business models, expand their market share, and maintain competitive advantage.
5. Finally, the Disrupted are incumbents whose market share or relevance is threatened by the rise of AI-powered competitors.

Each of these archetypes presents distinct investment opportunities and risks across asset classes.

As discussed in Part 1, where we highlighted past technology cycles, this framework echoes the dynamics of the internet era that launched the information age. During that period, Apple, Google, and Microsoft were among the creators, building the platforms and software that defined the new economy. Amazon emerged as a disrupter, fundamentally changing the retail landscape. With the emergence of cloud computing, software-defined infrastructure was developed to manage or enable compute, storage, and networking through software. Companies like Intel and Cisco served as enablers, providing the chips and networking equipment that powered the digital revolution. Today, as AI ushers in another wave of transformation, understanding where companies sit within this cycle is essential for identifying both risks and opportunities across the investment landscape.

Creators and Disruptors

Venture capital (VC) remains a crucial funding source for innovative start-ups engaged in high-risk research and product development. This dynamic drove previous technology waves, such as the internet, mobile, and cloud computing. However, the AI era presents a different landscape. Unlike the cloud era—where established companies were slow to adapt and start-ups captured early gains—many incumbents are now early AI leaders. These companies are cloud-native and deeply integrated into corporate systems. They leverage their scale and distribution to build AI capabilities internally or accelerate innovation by acquiring or investing in VC-backed AI start-ups. Notable examples include Google’s acquisition of DeepMind (which powered Google Brain and Gemini), Microsoft’s early partnership with OpenAI, and Amazon’s partnership with Anthropic. Hyperscalers’ capital expenditures have been extraordinary and are expected to continue as AI technology advances. Key areas of VC investment include large language models (LLMs), supporting software infrastructure, and “applied AI” applications built on this foundation.

As outlined in Part 2, VC investment in AI has reached record highs, with intense enthusiasm and abundant capital pursuing a limited number of high-quality start-ups. Adoption rates have surged across many companies (see Part 1), but much of the early revenue is “experimental,” reflecting trial phases rather than sustainable businesses. This momentum has spurred a wave of new company formations and AI strategy announcements, creating significant “AI noise” in the market. Interest is also growing in “physical AI,” where AI intersects with industries such as manufacturing, construction, healthcare, and aerospace and defense. However, all this frenzy has led to inflated valuations, intense competition, and overfunded segments given its relative infancy. Although AI-first companies have seen rapid revenue growth, its durability is uncertain due to the experimental nature of adoption and the lack of strong competitive moats—even companies with $50 million–$100 million in revenue can be overtaken whereas in prior cycles that typically signaled victory. While a few leaders have already created significant value, many AI start-ups are likely to fail due to oversaturation, poor management, and rapid sector evolution.

Historically, major technology shifts often result in commoditization, and it is rarely clear at the onset which companies will ultimately succeed. The winners are typically those that either build on existing technology through innovation or leapfrog older products and services entirely. For instance, Dell Technologies initially dominated the PC market, EMC led in on-premises enterprise data storage before the transition to cloud solutions, and Cisco was the leader in network hardware before the rise of software-defined networking. AI is likely to follow similar patterns, with rapid change and innovation making it difficult to identify long-term leaders. As open-source competition and verticalized alternatives have driven SaaS commoditization, so too will these forces and the broader open-source community drive further innovation and disruption in AI. Despite these uncertainties, we expect long-term VC returns in AI to remain attractive.

Who will be the winning investors? We recommend diversifying across the AI value chain and managing risks through careful position sizing. Investors should prioritize general partners (GPs) with deep sector expertise, particularly at the foundational and network infrastructure levels, and a proven track record of business building. This expertise—whether within specialist or generalist firms—enables better deal flow, talent identification, and assessment of technical merit. Select specialists for investments where technology risk is high, and generalists for broader investment strategies, leveraging the strengths of both. As AI becomes more widespread and many start-ups incorporate it into their products, investment decisions will increasingly focus on how AI is applied rather than on the technology itself. This trend mirrors previous technology cycles, where, as markets matured, investment success depended more on careful selection and curation than on technical expertise. Many GPs focused on AI are relatively new and still gaining investment experience, given the technology’s rapid rise in prominence. Large generalist firms have captured many early AI successes, often partnering with specialists to combine strengths. These generalists offer larger capital pools, enabling them to support AI start-ups through multiple funding rounds, provide customer access, and offer business-building expertise. Their broad go-to-market and business development capabilities help start-ups as they scale.

Enablers

Enablers are the backbone of the AI revolution, providing the physical infrastructure that supports AI’s rapid expansion. The primary beneficiaries to date have been semiconductor manufacturers (especially those producing AI chips), hyperscale data center operators, and the power and utility companies that support this ecosystem. However, the scale and speed of investment in these areas have raised concerns about sustainability, valuations, and the risk of overbuilding—reminiscent of the internet era’s fiber optic boom and bust.

The rise of generative AI and LLMs has driven unprecedented demand for high-performance chips, particularly GPUs and custom AI accelerators. Companies like Nvidia, AMD, and emerging players such as Cerebras have seen orders and backlogs soar. Supply constraints and technological leadership have enabled leading chipmakers to command premium pricing and margins. Dominant players, especially Nvidia (through its CUDA platform), are building integrated hardware-software ecosystems, creating high switching costs and network effects, but also raising antitrust concerns. Valuations remain high, with Nvidia trading at a forward price-to-earnings (P/E) ratio of 32.3, as of June 30, 2025. While this is below 2024 peaks, it remains vulnerable to correction if AI adoption slows, or competition intensifies. As such, consider modest tilts away from expensive public equity mega-cap tech stocks to reduce valuation risk and enhance portfolio diversification.

Data centers are also major beneficiaries, driven by AI, ongoing cloud adoption, and rising data usage. McKinsey estimates data center capacity demand will grow at an annual rate of about 20% through 2030, with generative AI data centers accounting for a small, but growing share of new demand. Investors should partner with infrastructure and real estate managers with specialized development and operating expertise that are well-positioned to benefit from this supply/demand imbalance. However, transaction multiples have risen materially, averaging 25x EBITDA over the last four years according to Infralogic, compared to a 13.5x average for private infrastructure more broadly. This makes careful underwriting essential for attractive returns. Like other AI infrastructure assets, data centers face risk of overbuilding, as well as regulatory and environmental concerns and constraints such as local opposition and permitting delays. These risks can be mitigated by focusing on managers who can develop assets at lower multiples (e.g., low double-digit EBITDA) and sell into a strong market, often with long-term contracts from investment-grade hyperscalers (e.g., Microsoft, Amazon) seeking development partners. In contrast, speculative and remotely located data centers with more limited utility face heightened risks. From a portfolio construction perspective, data centers offer lower expected returns than private investments in innovative AI firms but can provide returns competitive with broad equities (e.g., 15%–20% target gross IRR) with diversification benefits.

Other enablers, such as utilities and grid infrastructure, have also seen increased demand and capital inflows driven by electrification and digitization trends. McKinsey expects global data center capacity demand between 2025 and 2030 to drive investment in power (including generation and transmission) to total between $200 billion (constrained momentum) to $600 billion dollars (accelerated demand), with $300 billion as their baseline for continued momentum. US on-grid electricity demand is expected to increase 2%–3% per year through 2030 up from virtually flat growth over the last decade, with faster growth in Asia (from a lower base) and slower growth in Europe. While difficult to estimate, rapid AI adoption and potential onshoring in the United States could further boost energy demand. Although AI energy efficiency is expected to improve, associated cost reductions may spur broader adoption, likely resulting in net energy demand growth. Investment in essential electricity infrastructure with inelastic demand is critical. Data centers require reliable power, necessitating redundant infrastructure such as back-up generators and batteries.

All enabler segments have strong growth potential, with chips and data centers experiencing the fastest expansion, but they also trade at heightened valuations and have the greatest exposure to overbuilding. Scale, technological edge, strong customer relationships, and specialized expertise are critical for managing these risks.

Adaptors and the Disrupted

Building on the productivity themes from Part 2, growth equity and private equity-backed companies are increasingly using AI to boost revenue and improve margins. As private entities, they have more flexibility to integrate and scale AI across operations, though successful implementation requires careful execution. While many companies are still experimenting, some are already seeing early benefits in product enhancements and margin gains.

Private equity investors are actively assessing both the opportunities and risks AI brings to their portfolio companies and industries. They look for cost savings through automation (e.g., customer support, onboarding, coding) and revenue growth from AI-driven products (e.g., sales planning, demand forecasting). At the same time, they remain cautious about risks, such as commoditization (e.g., graphic design, digital marketing) and increased competition from low-cost automation (e.g., auditing, document preparation, call centers). Technology-focused managers have an edge due to sector expertise, but both specialist and generalist firms are hiring AI talent to support investment teams and portfolios. The full impact of AI will unfold over time as new use cases and broader adoption and understanding of AI technologies and their impact continue to emerge.

Similarly, public companies must adapt to AI or risk disruption. Investors should focus on active management to distinguish winners from losers and to assess price risk, selecting managers with deep sector expertise. Employ long/short and fundamental strategies to manage risk and exploit valuation dislocations. Public investors face the challenge of avoiding overvalued AI leaders while not overlooking lower-priced companies that may lag behind. Many leading public companies are cloud-native and well-positioned for AI, but investors should consider the entire spectrum of innovators and disruptors. Public market valuations for AI-enabled companies have dropped from their late 2021 peak; forward P/E ratios relative to the S&P 500 Index hit a nine-year low earlier this year, and have since rebounded, but remain below recent historical spikes. This environment favors long/short managers that can identify mispriced companies amid the current AI hype.

As outlined in Part 1, we recognize that non-technological factors—particularly regulatory and policy uncertainty—are increasingly shaping both the AI investment landscape and broader societal outcomes. The concept of Responsible AI (RAI) is gaining more attention as generative AI models and systems grow in complexity and become more deeply embedded across industries. RAI frameworks address the development and deployment of LLMs and broader AI applications, emphasizing principles such as fairness, transparency and explainability, accountability, privacy, safety, and security. From an investment perspective, effective governance is inherently complex, intersecting regulatory, ethical, technological, and human considerations. This complexity necessitates cross-disciplinary collaboration and often involves navigating trade-offs and misaligned incentives. As AI adoption accelerates, reported incidents of ethical misuse have increased in recent years. A recent survey found that only 14% of businesses have dedicated AI governance roles, yet 42% reported improved operations and 34% noted increased customer trust due to RAI policies and investments. ³ Companies should proactively assess, and address financially material risks associated with neglecting RAI practices, such as regulatory actions or erosion of their societal license to operate, which could result in negative commercial consequences. Governments worldwide are trying to address complex issues like data privacy, algorithmic transparency, antitrust, and national security, and new regulations could significantly impact sector competition. Investors must also monitor regulatory developments closely, as evolving rules and policies will likely influence long-term value creation and competitive differentiation in the rapidly evolving AI sector.

The “AI noise” phenomenon extends beyond private investments. Most technology companies now market themselves as AI-focused, and those that do not, risk appearing outdated. Enterprise software incumbents with high switching costs, complex technology, and strong innovation pipelines may continue to thrive, while agile start-ups can exploit weaknesses and expand from niche solutions into strategic adjacencies, potentially displacing incumbents. For example, it is unclear whether established security firms will lead in AI security or whether nimble start-ups will secure the AI/ML software supply chain. ServiceNow, a leading enterprise software provider, has thus far demonstrated successful AI adoption by leveraging its integrated suite and existing customer base to pivot toward AI-driven solutions. Given the rapid pace of change, both long-only and long/short hedge funds can find alpha by capitalizing on short-term disruptions and mispriced companies. Valuation-based and fundamental short strategies remain relevant, though it can be difficult to short declining businesses that retain temporary relevance or to identify companies prematurely dismissed as AI losers. Investors should consider managers with crossover expertise—spanning both public and private markets—as they are well-positioned to capitalize on rapidly evolving AI developments by spotting trends in private markets before they are reflected in public market valuations, and can continue to invest post IPO.

AI-related risks and opportunities are increasingly influencing credit markets. Credit managers are financing core infrastructure—such as GPUs, data centers, and energy projects—while also supporting the broader AI ecosystem. Several large managers are establishing dedicated asset-backed finance teams and raising capital specifically to pursue these opportunities. Direct lenders, in particular, have significant exposure to technology and business services, which will need to adapt in response to AI advancements.

More broadly, credit managers must evaluate the adaptability of their portfolio holdings. Many software companies—particularly those with high leverage and business models vulnerable to AI automation (e.g., HR, legal, accounting, and other back-office SaaS providers)—face considerable disruption risk. The past decade’s low-rate environment led to aggressive leverage and high valuations, leaving some companies with thin interest coverage and little margin for error. These firms are especially vulnerable if AI-driven disruption erodes their revenue base. Should AI agents automate or disintermediate core functions, revenue models may be cannibalized, and even modest declines in topline revenue could threaten debt service capacity.

Some credit managers are proactively encouraging portfolio companies to adopt AI, aiming to drive efficiencies and mitigate disruption risk. Lenders are increasingly evaluating management’s AI strategy as part of their underwriting process. Companies that successfully integrate AI may improve margins and creditworthiness, while laggards risk being left behind. As disruption accelerates, a wave of distressed opportunities may emerge among over-levered incumbents unable to adapt to AI-driven change. However, the timing of this transition is highly uncertain: some companies may be “slow melting ice cubes,” experiencing gradual market decline, while others may yet adapt successfully.

Investors should select credit managers who proactively assess AI-related opportunities and risks, including overbuilding in data centers and other infrastructure, while proactively managing exposure to incumbents in sectors vulnerable to AI disruption, such as highly leveraged back-office SaaS providers. Credit opportunity managers may be best positioned to benefit from distressed cycles arising from AI-driven disruption, as these managers can capitalize on market dislocations.

Investors should question managers on their approach to AI, both in terms of portfolio company adaptation and exposure to AI-related risks and opportunities, as part of ongoing due diligence.

Conclusion

AI is fundamentally reshaping the investment landscape, presenting both extraordinary opportunities and new risks across asset classes. The technology’s reach extends from the innovators building core capabilities, to the enablers providing critical infrastructure, to the adaptors and disrupted incumbents navigating a rapidly changing environment. Although substantial investment has already driven rapid growth in AI and its supporting infrastructure, we remain in the early stages of this technological shift, which is expected to evolve over the next decade and beyond. In previous technology cycles, the initial investments and returns from foundational innovation were ultimately surpassed by the gains generated by disruptive companies. These disruptors leverage the established or rebuilt technology infrastructure and benefit from network effects as commercial adoption accelerates, enabling them to redefine industries or create entirely new markets and business models. Attractively valued companies that can leverage AI to improve their profitability should also benefit meaningfully.

Investors should strategically seek opportunities to incorporate AI Creators, Disruptors, Enablers, and Adaptors within their portfolios, all the while maintaining a careful watch on potential disruption risks and the possibility of inflated valuations and overbuilding. Investment success in this new era will require investors to combine deep sector expertise, rigorous due diligence, and a willingness to adapt as the technology and its applications evolve. Investors that partner with managers that can distinguish between hype and enduring value, anticipate regulatory shifts, and identify the true drivers of sustainable growth will be best positioned to capture the far-reaching potential of AI in shaping asset allocation for years to come.

Grayson Kirk, Graham Landrith, and Archie Levis also contributed to this publication.

Footnotes

1. The CA Private Real Estate Index generated a negative return for the three years ended March 31, 2025.
2. We define fundraising activity as the total number of real asset funds and target fundraising amounts in our database that either launched or held their first closes in each respective vintage year.
3. Nestor Maslej, Loredana Fattorini, Raymond Perrault, Yolanda Gil, Vanessa Parli, Njenga Kariuki, Emily Capstick, Anka Reuel, Erik Brynjolfsson, John Etchemendy, Katrina Ligett, Terah Lyons, James Manyika, Juan Carlos Niebles, Yoav Shoham, Russell Wald, Tobi Walsh, Armin Hamrah, Lapo Santarlasci, Julia Betts Lotufo, Alexandra Rome, Andrew Shi, Sukrut Oak. “The AI Index 2025 Annual Report,” AI Index Steering Committee, Institute for Human-Centered AI, Stanford University, Stanford, CA, April 2025 and McKinsey & Company survey 2024.

The post Navigating the AI Revolution: AI’s Far Reach in Shaping Asset Allocation Opportunities appeared first on Cambridge Associates.

The measured market response appears reasonable, given the scale of Iran’s initial retaliation against the United States and the possibility that Iran may seek to limit future actions to avoid a broader conflict or risking its own regime’s stability. Historically, market sell-offs triggered by geopolitical shocks tend to be sharp but short-lived, with global equities often recovering most losses within a month (table below). A key risk is a potential global oil supply disruption if, for example, Iran blocks or impedes the Strait of Hormuz, which handles about a quarter of the world’s oil shipments. Since Israel attacked Iran earlier this June, insurance costs for shipping through the strait have surged by more than 60%. Even so, OPEC’s spare oil production capacity is currently relatively high, at around 5 million barrels per day or 5% of world oil demand, according to the US Energy Information Administration. This buffer could help offset potential supply disruptions, especially as the US Navy would likely act to ensure the continued flow of maritime traffic through the strait.

While the situation remains highly dynamic, we believe most investors are best served by maintaining their current diversified portfolios and relying on the resiliency that a diversified approach provides. Tactical shifts from policy should be sized modestly and reserved for instances where a broad and compelling set of market indicators meaningfully increases the probability of success. Regarding the current conflict, outcomes are largely dependent on the unpredictable decisions of political leaders in Iran, Israel, and the United States—an inherently uncertain basis for making portfolio adjustments. In our view, maintaining discipline and adhering to a well-defined investment process continue to be the most effective ways to manage risk and capture opportunities as they arise.

Footnotes

1. The CA Private Real Estate Index generated a negative return for the three years ended March 31, 2025.
2. We define fundraising activity as the total number of real asset funds and target fundraising amounts in our database that either launched or held their first closes in each respective vintage year.
3. Nestor Maslej, Loredana Fattorini, Raymond Perrault, Yolanda Gil, Vanessa Parli, Njenga Kariuki, Emily Capstick, Anka Reuel, Erik Brynjolfsson, John Etchemendy, Katrina Ligett, Terah Lyons, James Manyika, Juan Carlos Niebles, Yoav Shoham, Russell Wald, Tobi Walsh, Armin Hamrah, Lapo Santarlasci, Julia Betts Lotufo, Alexandra Rome, Andrew Shi, Sukrut Oak. “The AI Index 2025 Annual Report,” AI Index Steering Committee, Institute for Human-Centered AI, Stanford University, Stanford, CA, April 2025 and McKinsey & Company survey 2024.

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