KKR's Henry McVey on 'High Grading' Portfolios for 2026 Outlook

KKR's 2026 Outlook: High Grading

• 💡 KKR's outlook for 2026 suggests a global economic backdrop that favors 'high grading', meaning upgrading investment portfolios.
• 💰 The cost to achieve this portfolio upgrade is currently extremely low, driven by ample liquidity and favorable market conditions.

Market Performance and Diversification

• 📈 Over the past three years, markets have seen significant multiple expansion, credit spreads narrow, and substantial capital inflow.
• 🎯 While much of the recent appreciation has been concentrated in seven stocks and three sectors, a broadening out is anticipated.
• 🌍 Markets like Japan and other areas in Europe are performing well, presenting opportunities outside of the dominant US tech sector.
• ⚠️ Investors are advised to diversify beyond the heavily owned 'MAG 7' stocks as valuations and growth pick up in other sectors and international markets.

Private Markets and Valuations

• 🧐 McVey disputes the perception that private market valuations are inaccurate compared to public markets, stating KKR's valuations are done by third parties.
• 📉 He acknowledges that credit cycles in 2021 led some to over-deploy capital in private credit, creating concentration risk, and that credit normalization (higher defaults) is expected.
• 🚀 The rapid advancement of AI and digitalization is a significant factor, boosting revenue per employee in large companies while potentially decreasing it in smaller ones.

The Impact of AI on Business

• ⚡ AI is driving a productivity boom, similar to the internet's impact in the 90s, with significant productivity gains observed in the US.
• 🏆 This creates a bifurcation where scale players in each industry are becoming dominant, leading to a 'winner-take-most' dynamic.
• 🔄 McVey predicts a shift in capital flows from AI 'enablers' to companies that apply AI across their business and are consumer or business-facing.