Partner,

As we trade our overcoats for something lighter in Q2, we’re also shedding some of the market confusion that made Q1 such a wild ride.

We look forward to sharing our playbook as the next quarter queues up.

We appreciate your partnership,

The Steward Team

steward@stewardassetmgmt.com

(212) 210 2920

Quarterly Highlights

1st Quarter 2026

Navigating PE Middle Market Opportunities - Issue #22

Energy, healthcare and housing have been driving inflation higher, steepening the yield curve and making the “rate cuts are coming” narrative harder to sustain. The cost of capital is rising, along with the new burden of higher energy prices, which is now more concerning than tariffs.

The Fed, for its part, is practicing “optimism with caveats”. Speeches are hopeful, but the 10-year is ticking up. In early March, New York Fed President John Williams noted that while second-round tariff effects remain contained, progress toward the Fed’s 2% inflation target has “temporarily stalled.” The short-term rate discussion is sharing headlines with the contraction in private credit as funds face redemptions.

Inflation and credit availability are just two moving components in the macro reassessment of relative value and risk. Movement by some of the largest pensions to the Total Portfolio Approach will inevitably cause capital gyrations.

What does this mean? The country’s largest pensions are moving away from rigid asset-class allocations based primarily on the optimization of expected measures of standard deviation, return and correlation.

The re-calibration will help ensure a more even pacing of deployment – less constrained by the denominator effect across siloes, providing more fluid comparisons between public and private market opportunities. Risk and opportunity assessments will expand to include leverage, manager dispersion, pacing, liquidity, valuation levels and a myriad of other risks, not just classic volatility and correlations. 

Eventually, the market is a weighing machine, rather than a pendulum. Below we show the preliminary three-year and five-year annualized returns.  In the short term (3 years), private markets are lagging the public markets, driven almost solely by the MAG-7.

And yet, PE distributions are now outpacing contributions for the first time since 2015 — a genuine turning point. The upcoming exits may finally tip the scale.

While the MAG-7 has concentrated the public markets and outperformed private equity by nearly 3:1 over the three years ending December 2025, the 5-year returns are in line, since private equity fared better during the pandemic. As exits confirm valuations and liquidity improves, private equity portfolios are expected to regain their alpha-generating title.  

What does this mean for portfolios? Equities, both private and public, remain one of the best inflation hedges, absent widespread stagflation or a recession. Prudent capital structures, rational valuations and ample room for market share growth will command a premium.

Below, we highlight 3 Middle Market sectors that we believe are under-appreciated and pack significant inflation-resistance punch primarily from recurring demand and high utility.

If AI is the disruptor in tech, it’s the accelerator in healthcare life sciences. And it’s arriving at exactly the moment other structural forces are creating exceptional entry opportunities for investors.

For buyout-only PE investors, the life science segments of healthcare are typically not in the strike zone. That said, the high utility of these businesses make them resistant to cyclical pressures. Additionally, strategic and IPO exits typically occur well before buyout-ready EBITDA margins are achieved.

The growth tailwinds of commercial stage (post-scientific risk) life sciences devices, diagnostics and therapies include:

• Gender and cultural specificity are a moat-breaker. A decade ago, it became known that the majority of well-adopted therapies were validated on non-representative patient populations. Emerging clinical evidence showing differential efficacy by gender, age and ethnicity gives challengers a legitimate scientific wedge.
• AI-compressed FDA timelines. AI isn’t just speeding up discovery — it’s compressing approval timelines. A challenger therapy that previously needed 5–7 years to prove itself against an incumbent can now potentially reach approval in 2–3 years. That fundamentally resets competitive dynamics.
• The patent cliff is driving structural demand. Major pharma faces billions in revenue erosion from patent expirations through 2030. That creates motivated, well-capitalized acquirers actively hunting for commercial-stage assets — particularly in women’s health, where pipelines are thin.
• Peak wellness management data is now direct-to-consumer and traditional medicine is performing a flat footed catch-up. Data-driven Gen X and Z consumers began with wearables and have since discover. There is so much more that can be tailored; most of which cannot be covered in an annual 15-minute annual visit. New telehealth services and diagnostics, FSA/HAS or self-pay services, are filling the needs of middle-aged populating exploring peak performance and high-quality longevity.

There’s a through-line from the B2B and B2C businesses winning today – they own the relationship with the end consumer. Not the intermediary. Not the platform aggregator. The relationship.

For investors, the opportunity isn’t on the platforms themselves — it’s in the brands being built on top of them. Loyalty and engagement are being driven with the help of media platforms, dominated by short-form social media. A single well-crafted video can introduce a brand to millions overnight, with a feedback loop that closes within 24–48 hours. Production costs are a fraction of traditional media. The algorithm is a free distribution engine that rewards engagement over ad spending.

Short-form video is the clearest expression of this right now. TikTok, Instagram Reels, and YouTube Shorts collectively reach billions of users daily — and Gen Z and younger Millennials aren’t watching TV or clicking banner ads. They’re here, and they’re paying attention, for a few seconds at a time. 

Enthusiast customers are the hidden recurring revenue. Innovative brands in the wellness, peak performance, leisure and sports sub-sectors can build brand loyalty by meeting their loyal customers on the platforms they frequent . Family units are of particular interest. Those in their peak spending years are reaching for functional health and engaged children. While the trends push experiences over consumption, neither is letting up when it comes to spending on your family.

AI is rattling SaaS valuations and forcing every investor to ask: What’s a real moat, and what just looked like one? SaaS makes up roughly 40% of the private equity capital currently deployed, per JP Morgan. And AI is forcing a brutal re-examination of what those businesses are actually worth.

The disruption hits three ways:

• The zero-marginal-cost threat. Many SaaS businesses were built on the scarcity of expertise — legal research, customer support, content creation, software development. AI collapses that scarcity.
• The distribution disruption. Businesses built on SEO or on being the “trusted intermediary” face existential questions as AI assistants increasingly answer questions directly and provide itineraries.
• The compressing moat time horizon. Historically, investors priced high-growth SaaS on 5–10-year DCF models. AI compresses that to 12–24 months of a defensible moat. That makes every growth-stage valuation feel more like a bet and less like an analysis.

The businesses that survive this period will have defensibility that AI can’t replicate, deep customer relationships, regulatory positioning, physical-world integration or proprietary real-time data that models can’t be trained in advance. That’s a much shorter list than it used to be — and a much more valuable one.

In a current anomaly of investor appetite, AI has investors apparently scrambling to overpay for newer, unproven solutions while discounting incumbents with proven revenue models. Is the Rule of 40 really ready to retire?

McKinsey. Edlich, Croke, Dahlqvist & Teichner. Global Private Markets Report 2025: Braced for Shifting Weather — The long-awaited distributions uptick finally arrived. For the first time since 2015, LP distributions exceeded contributions — and hit the third-highest level on record.

Apollo — The Daily Spark. Torsten Slock. Uncertainty is High for Businesses — The top three CEO risks: geopolitical instability, trade & tariffs, and legal & regulatory uncertainty. Worth having in your back pocket for LP conversations.

Mercedes Bent, Lightspeed. During Fundraises: 9 Investor Types — A sharp and honest breakdown of the investor archetypes founders encounter — useful for GPs thinking about LP composition too.

New York Federal Reserve. John C. Williams. Two Sides of a Coin (March 2026 Speech) — Encouraging trends acknowledged, but progress toward 2% inflation has “temporarily stalled.”

Capital Allocators with Ted Seides. Stephen Gilmore – CalPERS’ Total Portfolio Approach. Stephen Gilmore is the Chief Investment Officer of CalPERS. The conversation dives into the theory and implementation of the Total Portfolio Approach, drawing on Stephen’s experience at Australia and New Zealand, and his plans for CalPERS.

Buyouts. Emerging Manager Report 2026 - Survey. New managers are up against one of the most inhospitable fundraising environments any GP has encountered. The survey highlights the key issues facing newer fund managers.

Stepstone. The Case for Emerging Managers. LPs have long viewed emerging managers as riskier and also as a potential source of outsized alpha. The team tests whether that reputation is warranted.

Future Standard. Private Equity in the Middle Market. An examination of private equity’s impact on the growth, performance and sentiment of U.S. middle market companies…PE-backed middle market companies are well-positioned to drive value creation through revenue growth, margin expansion, and the innovation fostered through private equity ownership.

Steward Asset Management uses a strategic partnership approach to primary fund and private company allocations. Our aim is to capture excess return drivers available in the US Middle Market. Our lens focuses on next-generation innovation and growth in the Middle Market's healthcare, consumer, industrial, service and technology sectors.

Steward's strategy provides investors with early access at an influential moment. Using control-oriented strategies, our capital is a multiplier for large-scale economic growth and progress. Steward's active sourcing identifies exceptional partners with sector capabilities that form a repeatable competitive advantage to win deals and bring value-creation levers to propel companies.  Our consultative partnership helps to improve the risk-reward framework with GP stake participation and downside controls.

Headquartered in New York City, Steward is differentiated by a deep pipeline, GP stakes approach, unique assessment tools and extensive relationships within the Middle Market GP and LP communities. The team has an accomplished track record of partnering with US Middle Market talent.

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