Great Rotation: Opportunities in Private Markets
Every generation of investors gets at least one defining moment to reposition capital ahead of a major market shift. The “Great Rotation,” a term popularized during the 2011–2013 period to describe the exodus from bonds into equities, is one of the more recognizable examples.
The pivots have rewarded investors who were early in recognizing the change in outlook. Shifting allocation in response to the Inflationary Pivot of the 1970s, the Bond Supercycle from 1981 to 2021, and the Technology Boom and Bust of the late 1990s provided immense returns to investors who recognized the inflection point early and acted decisively.
Today, a similar rotation is underway in private markets. After a decade of explosive growth, private credit is losing its luster. Investors who entered these vehicles expecting yield and liquidity are discovering that neither promise is holding up. Capital is moving, and the question is not whether a rotation is happening, but where it is heading.
Private credit AUM expanded from $0.7 trillion in 2016 to $2.3 trillion in 2025. That growth attracted enormous capital but also planted the seeds of today’s problems: deteriorating underwriting standards, rising defaults, valuation questions, and a liquidity architecture that was never suited to the underlying assets. That capital needs a new home. We explain below why we believe private real estate should be one of those destinations.
Catalyst for the Rotation
The cracks in private credit are widening. Rising defaults have caused investors to scrutinize how credit funds calculate and report net asset values (“NAVs”). As confidence in NAVs erode, redemptions accelerate. As redemptions accelerate, the funds are forced to sell even performing assets to meet the liquidity requirement. Consequently, the gap between stated and realizable value widens further. It becomes a vicious cycle.
The underlying flaw is a liquidity mismatch that should have been obvious. Credit vehicles were marketed with short-term liquidity despite holding assets with much longer maturities and meaningful extension risk. Redemption gates – once rare and uncomfortable– are becoming routine.
Though we believe these cracks will provide ample opportunities for credit investors in the future, investors may want to avoid the proverbial “falling knife” by limiting net new investments into the asset class until liquidity returns. This is not an indictment of private credit as an asset class. Disciplined managers with sound underwriting still have a role in diversified portfolios. However, investors may be better served in an asset class with stronger fundamentals, a more honest liquidity profile, and more favorable tax treatment.
Why Real Estate Should Win the Rotation Race
Tax-Equivalent Yield Tradeoff
Private credit attracted capital on the strength of headline yields and perceived safety. Both are under pressure. Morgan Stanley expects yields on newly originated senior loans to compress to the 8.0%–8.5% range in 2026, before fees, credit losses, and taxes.
The tax treatment is where the real damage is done. Private credit income is taxed as ordinary income. For a California resident in the top brackets, that translates to an after-tax yield closer to 4% – again, before fees and credit losses.
Private real estate is currently transacting at average cap rates of approximately 6.0%[1], representing an attractive unlevered cash flow before fees. Crucially, depreciation and other tax provisions allow a significant portion of real estate distributions to be tax-deferred – producing a materially higher after-tax yield as shown in the following chart. For high-income investors, this difference is not marginal. It is the difference between a compelling allocation and an uncompetitive one.
**Assumes real estate taxes are deferred in perpetuity or are eliminated through basis step-up or other tax avoidance strategies; tax deferrals may need to be paid at a later date at a combination of capital gains and depreciation recapture tax rates. Tax-equivalent yield assumes 37% federal tax rate & 13.3% CA tax rate.
Growth & Appreciation
Private credit is a single-engine investment. The headline yield is the ceiling, and actual outcomes are frequently lower due to defaults and fee drag. There is no mechanism for cash flows to grow.
Real estate operates differently. If rents grow faster than operating costs, income expands. Higher cash flows support higher asset values. Investors are not simply clipping a coupon.
They are participating in the compounding of an operating business. Two return engines (yield and growth) working in tandem is a fundamentally different and better proposition than a fixed coupon with default risk.
Liquidity Mismatch
The private credit liquidity problem was not an accident – it was a marketing decision. BDCs, interval funds, and tender-offer vehicles were structured with monthly or quarterly liquidity because it made them easier to sell, even though the underlying assets didn’t support it. The current wave of gates and suspensions is the predictable consequence.
Private real estate takes a different approach. Closed-end and evergreen structures with defined lockups are not limitations. Instead, they are features that protect the integrity of the investment. The structured illiquidity in real estate funds is a built-in safety mechanism. When managers don’t have to focus on redemptions, they can stay invested through dislocation, deploy capital opportunistically, and manage for long-term value creation – all of which benefit investors.
Inflation Advantages
Fixed-rate credit instruments offer no meaningful inflation protection. The coupon does not adjust. In a world where inflation remains elevated, private credit investors are accepting a fixed real return that can only deteriorate.
Real estate is different. Leases reprice at renewal, passing rising costs to tenants over time.
When paired with long-term fixed-rate debt, growing revenues and stable financing costs produce expanding margins that flow directly to equity holders. Both long-term fixed-rate debt and growing revenues serve as hedges against inflation. Real estate does not merely tolerate inflation – it embraces it!
Real Estate in Action
Buchanan Income & Growth Performance Table
*Performance Summary as of 12/31/25. Inception date is as of the first quarter of 2018. Net returns are calculated quarterly using a time-weighted return method based on adjusted investor contributions at the start of each quarter. Income Return reflects dividends declared at quarter-end and paid in the following quarter. Appreciation Return reflects fair market value adjustments recognized each quarter. Totals are rounded. Individual investor returns may vary based on valuation at the time of admission. Past performance is not indicative of future results. The NCREIF Fund Index – Open End Diversified Core Equity (NFI-ODCE) is presented for comparative and informational purposes only as a general performance benchmark.
Buchanan Income and Growth (“BIG”) Fund’s performance is more than just a track record. It is proof of concept for the thesis described. Over the past eight years – through a global pandemic, a historic rate-hiking cycle, and significant sector dislocation – BIG delivered annualized net returns of 9.9%, outpacing the NCREIF-ODCE benchmark by a wide margin.
Approximately 60% of those returns were generated through tax-advantaged income distributions; the kind of stable, recurring cash flow that anchors a portfolio through volatility.
Concluding Remarks
Some of the capital that built private credit into a $2.3 trillion asset class is looking for better ground. We believe that ground is private real estate – an asset class with a more honest liquidity profile, a more compelling tax-equivalent yield, and a return structure that benefits from growth rather than just surviving it.
We believe the decision is not a binary one. Private credit still belongs in disciplined portfolios. But for taxable investors seeking durable income, inflation protection, and long-term appreciation, a meaningful and permanent allocation to private real estate is not just timely – it is overdue.
The rotation is already underway. The only question is whether your portfolio is positioned to take advantage of it.