Private market appetite hits record high as AI risk reshapes portfolios

Private market allocations are climbing to levels not seen in years, even as institutional investors and independent allocators grow increasingly wary of the risks artificial intelligence is introducing into global portfolios, according to two surveys published this week.

Morningstar's fifth annual Asset Owner Perspectives Survey, covering more than 500 asset owners across 11 countries representing in excess of $20 trillion in combined assets, found that institutions expect their private market exposure to rise from 19 percent of assets under management today to 23 percent within five years.

Separately, Dynamo Software's fifth annual Limited Partner survey found that 63 percent of limited partners now plan to increase allocations to alternative investments over the coming year - the strongest reading in the survey's history.

The twin findings come at a moment when AI is reshaping not just technology portfolios but the entire framework through which advisors and their institutional counterparts assess risk, valuation, and capital concentration.

AI drives allocation shifts and portfolio anxiety

For financial advisors working with institutional clients or high-net-worth individuals, the AI dilemma is no longer theoretical.

The Morningstar survey ranked the evolving generative AI landscape as the second most material global investment issue, cited by 71 percent of asset owners, trailing only rising inflation at 76 percent. Energy and supply chain disruption came third, cited by 66 percent - a figure Morningstar connects directly to AI's surging power demands.

Nearly six in 10 asset owners said AI-driven energy demand could push up both energy costs and broader inflation, according to the Morningstar report. That concern is already influencing portfolio construction: AI-related environmental considerations more than doubled year-over-year, from 12 percent to 25 percent of respondents flagging it as a material factor.

"Asset owners are navigating a market increasingly shaped by artificial intelligence," said Lindsey Stewart, director of institutional insights at Morningstar, based in Chicago. "They are weighing innovation opportunities against higher valuations, sector and geographic concentration, environmental and social impacts, and governance concerns among leading AI companies."

The compounding effect of AI valuations and capital expenditures topped the list of macro-market concerns for asset owners, cited by 73 percent. AI-driven market concentration risk followed at 65 percent, and overdependence on a handful of mega-cap technology providers was flagged by 63 percent. Together, those numbers describe a risk landscape that wealth managers counseling diversified portfolios will need to address directly with clients. Wealth advisors have been signaling a bigger role for private markets in 2026, a shift that both surveys suggest is now translating into firm allocation decisions.

Private markets: from ambition to conviction

The Dynamo Software data tells a story of meaningful acceleration. While limited partner interest in alternatives has remained consistently elevated - 55 percent planned to increase allocations in 2022, and 54 percent in 2025 - the nine-point jump to 63 percent in 2026 represents the sharpest single-year move the survey has recorded.

"The past few years have been characterized by rate uncertainty and repricing across asset classes, which understandably put LPs in a guarded posture," said Hank Boughner, chief executive officer of Dynamo Software, headquartered in Boston. "What we're seeing now is LPs much more confidently moving from caution to conviction, increasingly looking to alternatives not just for diversification, but as a bigger part of the return equation."

Reliance on fund managers rebounded sharply in 2026, after two consecutive years of decline. Seventy-eight percent of limited partners said they intend to access alternatives through fund managers, while plans for co-investments climbed to a multi-year high, with 64 percent planning to pursue this more direct route alongside existing fund relationships.

Among the primary reasons asset owners cited for increasing private market exposure, Morningstar found diversification versus public markets leading at 56 percent, followed by higher expected returns at 42 percent, and access to specific themes - such as AI electrification and data transmission infrastructure - at 29 percent. Manager selection has emerged as the defining risk factor in alternative investments precisely because performance dispersion among managers is widening, making due diligence a more consequential exercise than it was even two years ago.

Liquidity risk remains the primary barrier. Sixty-three percent of asset owners in the Morningstar survey cited liquidity concerns as a constraint on private market investment, followed by transparency issues at 43 percent and limited data availability at 28 percent.

North America reasserts its lead; Asia falls back

Geographic preferences are shifting. The Dynamo data shows North America regaining ground as the top destination for alternative capital, with more than half of limited partners planning to direct new commitments toward the U.S. and Canada, reversing a decline that had persisted since 2022. Europe held broadly steady as a second priority.

Asia moved in the opposite direction, with LP intent falling from 23 percent in 2025 to just 12 percent in 2026, a sharp reversal that Dynamo attributes to greater selectivity among allocators around risk-adjusted returns by region.

For wealth management professionals advising clients on alternatives, that geographic recalibration matters, particularly as international diversification arguments need to be weighed against the concentration risk the Morningstar data flags for the U.S. technology sector specifically. Private credit dynamics in Europe and the United States are already diverging sharply in 2026, adding another dimension to geographic allocation decisions.

How AI is changing the back office, not just the portfolio

The Dynamo survey also offered a first look at how limited partners want artificial intelligence applied within their own operations - a question with direct implications for advisors evaluating tech vendor relationships and platforms.

The most valued AI capability, cited by more than half of respondents, was automated data extraction from manager reports, capital calls, and notices. Portfolio monitoring and anomaly detection ranked second, followed by summarization of investment memos and due diligence materials. All three describe labor-intensive back-office functions where technology has long promised more than it delivered.

Creating efficiencies and optimizing workflows emerged as the leading technology priority for LPs overall in 2026 - ahead of cost reduction, which has historically dominated the conversation. The finding suggests that the framing around technology investment is shifting from pure cost containment to capacity expansion.

"We don't see cost discipline ever going away. What's changing is the path LPs see to achieving it," said Boughner. "Certainly, AI is changing the economics of efficiency. For LPs, the math starts to look different when technology allows the same team to accomplish significantly more."

Meanwhile, Morningstar found that asset owners are increasingly applying AI through bottom-up experimentation rather than top-down mandates — with 38 percent citing a bottom-up approach versus just 20 percent reporting a top-down one - and that governance concerns remain a persistent drag on faster adoption.

Margaret Stafford, director of product management at Morningstar Indexes, said asset owners are specifically seeking forward-looking measures to support portfolio construction and risk management in the current environment. "The survey suggests they are increasingly seeking forward-looking measures to support portfolio construction and risk management," Stafford said.