The Paper Trail: Such Great Heights

It was a wild month. You just wouldn’t know it by looking at the S&P 500.

While the index was relatively calm, under the hood it was anything but. Software stocks swung violently as AI enthusiasm collided with valuation math. A viral essay hypothesizing systemic AI-driven economic disruption ricocheted across our social media timelines. And a legacy Blue Owl vehicle became shorthand for sweeping claims about private credit and semi-liquid evergreen structures, despite the underlying fundamentals telling a different story.

Periods like this tend to compress nuance into attention-grabbing headlines. Growth assumptions drift from base rates. Structure gets confused with strategy. Liquidity events get mistaken for investment problems. And broad indices mask what is happening beneath the surface.

This month's edition of The Paper Trail leans into that tension. Topics featured in February's research roundup include:

• Market peaks and drawdowns
• Software due diligence in the age of AI
• Private equity value creation
• Factors influencing pricing in LP-led secondaries 
• The case for emerging managers
• Underwriting discipline in private credit
• Defining the U.S. middle market
• Finding bargains in real estate
• Performance measurement of evergreen funds
• Base rates and growth assumptions
• Modern-day conglomerates
• Portfolio effects of equity market concentration
• Holistic allocation vs. asset-class silos
• The new math of private equity

What typically happens before a market peak?

"Three things make a drawdown more likely: a lack of volatility, inflation that is too high or too low, and expensive valuations."

Such Great Heights: Lessons from 59 Peaks (Man Group)

Is AI eroding software business models, or simply separating the wheat from the chaff?

"Rather than eliminating software, AI is amplifying the gap between businesses with real moats and those whose primary advantage was code."

Private Markets in the Age of AI: Balancing Risk and Opportunity (Cliffwater)

What matters more in private equity — multiple expansion or operational execution?

"“Revenue and earnings growth have historically been significant drivers of private equity returns."

 
How Does Private Equity Generate Value? (Aksia)

When it comes to secondaries pricing, what are investors actually paying for?

"It depends upon the competitiveness of a particular process – driven by factors like restrictive transfers, advisor relationships, and size of the transaction. It could also be driven by factors relating to the underlying assets itself – quality and underlying valuations. For sellers, a larger transaction with a well-known set of high-quality, accessible buyout managers run by a credible advisor should fetch a very strong price. Alternatively, a smaller portfolio with a set of managers that are highly restrictive in more specialized asset classes could present some attractive pricing opportunities for the right buyer."

What Factors Influence Pricing in the LP-led Secondaries Market? (CF Private Equity)

Have LPs been overestimating the risk of "Fund I" private equity managers?

"While the high-risk, high-reward label contains some truth, our analysis suggests that the risk profile of Fund I vehicles in particular has been overstated."

The Case for Emerging Managers (StepStone)

What can recent private credit headlines teach us about underwriting discipline?

"We don’t view First Brands and Tricolor as warnings about the pending collapse of private credit. Private credit is here to stay. But they are reminders of something important: years of aggressive underwriting are finally being tested by a more normal investing environment."

Beyond Cockroaches and Canaries: A Clearer View of Private Credit (TCW)

What is the definition of the "middle market" in the U.S. economy?

"The American middle market is now defined by businesses with revenue between $30 million and $10 billion, our research shows."

Redefining the American middle market for the modern era (RSM)

Has real estate quietly gone “on sale” relative to everything else?

"At current levels, we believe certain pockets of the RE sector (public and private) offer attractive opportunities across the capital stack and with improved margin of safety relative to prior vintages. Furthermore, we think that healthier demand for REIT IPOs and follow on offerings, along with greater M&A activity, would signal improving capital-market conditions and help align public and private valuations, potentially positioning listed REITs as both a complement to—and a leading indicator for—private real estate performance."

Real Estate: The Brightening Case for GP-Focused Solutions in 2026 (Neuberger Berman)

Are evergreen structures misunderstood because we measure them the wrong way?

"Because capital is immediately put to work and continues to compound, a lower evergreen fund return or IRR can deliver the same MOCC as a traditional drawdown fund with a higher IRR."

Evaluating Evergreens (Ares)

Are investors ignoring base rates in their growth forecasts?

"The data reveal that no public company has grown this fast for five years in the last three-quarters of a century. The results include all industries. The average compound annual growth rate is 7.0 percent, and the standard deviation is 10.6 percent."

Bayes and Base Rates: How History Can Guide Our Assessment of the Future (Counterpoint Global)

Why are today’s mega-cap conglomerates trading at a premium instead of a discount?

"The 70% diversification premium of today’s mega-cap tech conglomerates may be the result of more valuable synergies, the market’s faith in their leadership teams, or rosy expectations about their prospects, that they will be among the big winners of the artificial intelligence (AI) revolution, for example."

Everything Everywhere All at Once: Conglomerates and the Disappearing Diversification Discount (Research Affiliates)

Has U.S. equity concentration quietly changed the rules of active management?

"In the early 2010s, when a diverse group of blue-chip companies like Apple, ExxonMobil, and Johnson & Johnson were the largest names in the S&P 500®, the risk contribution of these companies was lower than their index weight. Today, the ten largest companies are concentrated in technology-related industries, making them more correlated to one another. At the same time, they include stocks like Tesla and Nvidia that are generally more volatile than their more stable predecessors."

The Concentration Game: Understanding Portfolio Effects of U.S. Equity Market Concentration (D. E. Shaw & Co.)

Will the Total Portfolio Approach (TPA) render asset class silos obsolete?

"At its heart, TPA is a holistic approach to allocation that rejects the primacy of the asset class or public versus private split as the basis for allocation. Instead, it recasts the task of an allocator to being the curator of return streams."

Portfolio Design as Gesamtkunstwerk: The Total Portfolio Approach (AllianceBernstein)

Has the math of private equity fundamentally changed?

"Fast-forward to today and borrowing costs are in the 8%–9% range, while leverage ratios are closer to 30%–40%. Purchase multiples, meanwhile, remain in record territory yet largely stagnant. With less leverage and lack of multiple growth, these expensive deals only pencil out if you assume much larger increases in EBITDA—something closer to 10%–12% to generate that 2.5x return over five years (see Figure 1). The assumptions behind these numbers will vary, of course, but the direction of travel is clear."

Global Private Equity Report 2026 (Bain & Company)