Investment Strategy

Private equity recovers amid increasing concentration

Private equity markets, including buyouts¹ and venture capital², demonstrated a strong resurgence in deal activity during the fourth quarter of 2025 according to recent data from Pitchbook. This late-year strength pushed full-year deal value up by 31% for buyouts and 59% for venture capital compared to 2024 (Chart 1). The temporary slowdown in the second quarter — likely influenced by the Liberation Day tariff announcement in April — appeared to have had only a short-lived impact³. Overall, the recovery in 2025 seemed to suggest improving confidence among fund managers.

Exit activity, whereby fund managers sell their portfolio companies and return capital to investors, also showed notable improvement. Exit value for both buyouts and venture capital rose by more than 90% year-over-year, supported by increased mergers and acquisitions (M&A) and public listing activity (Chart 1). While the government shutdown in late 2025 likely delayed regulatory reviews for some initial public offerings (IPOs) and pushed them into 2026³, the overall trend remains encouraging.

Chart 1. Deal and exit activities grew in 2025 for both buyout and venture capitalSources: Pitchbook and Wells Fargo Investment Institute. Data as of December 31, 2025. For Pitchbook data disclosures, please see page 8.

Despite this growth in dealmaking and exits, fundraising continued to lag in 2025. Venture-capital fundraising declined for the third consecutive year⁴, while buyout fundraising fell for the second year in a row³.

Additionally, the rebound so far has been uneven and concentrated in certain transaction sizes, sectors, and geographies. Large transactions dominated the market last year and drove a greater increase in deal dollar value than in deal count (Chart 1). In venture capital, AI-related investments accounted for 65% of total deal value (Chart 2), and more than half of newly minted unicorns⁵ were AI-related companies⁴. According to Pitchbook, these AI-related firms also secured initial funding earlier and progressed to subsequent funding rounds faster than non-AI companies in 2025⁴. Geographically, over half of first-time AI-related financings occurred in the San Francisco Bay Area.⁴ On the fundraising side, the largest 30% of funds captured more than 60% of total capital raised, underscoring investors’ preference in established relationships and managers with track records.³

Chart 2. The share of AI-related deals and exits has grown in recent yearsSources: Pitchbook and Wells Fargo Investment Institute. Data as of December 31, 2025. For Pitchbook data disclosures, please see page 8. AI = artificial intelligence.

We believe this growing concentration poses potential risks if key technologies or companies fail to meet revenue and earnings expectations. Meanwhile, the pressures to generate cash returns to investors persist as funds hold portfolio companies longer: about 30% of buyout holdings are seven years or older³, and half of unicorns have been held for at least nine years⁴. We believe exits and deals activities need to broaden out across transaction size, sector and geography to clear this backlog of mature assets.

Until then, secondary market transactions — which allow investors to sell existing fund interests — are likely to remain strong. Secondary transactions seek to provide distributions and return capital back to investors and allow fund managers more time to grow portfolio companies.

Looking ahead, we believe factors such as financing costs, M&A activity, IPO windows, and investor sentiment will play a critical role in shaping the trajectory of private markets in 2026.

¹ Buyouts involve acquiring a controlling interest in established companies, often using a mix of equity and debt.

² Venture capital refers to funding early-stage companies in exchange for equity stakes.

³ “2025 Annual Global PE First Look,” Pitchbook, January 6, 2026.

⁴ “Q4 2025 Global VC First Look,” Pitchbook, January 7, 2026.

⁵ Unicorns are startup companies valued at $1 billion or more.

Alternative investments, such as hedge funds, private equity, private debt and private real estate funds are not appropriate for all investors and are only open to “accredited” or “qualified” investors within the meaning of U.S. securities laws.

Power demand benefits across Utilities

As we have written previously⁶, the U.S. is experiencing its first notable demand increase for electricity in over a decade, with data centers, manufacturing, and broad electrification across the economy serving as the underlying factors. Increased power demand is generally favorable for the Utilities sector considering roughly two-thirds of the sector’s market capitalization is derived from the favorable-rated Electric Utilities sub-industry, another quarter from Multi-Utilities (typically companies with a mix of electric and natural gas operations, rated favorable), and 5% from Independent Power Producers (IPPs) & Energy Traders (also rated favorable). The remaining 5% of the sector is split between Gas Utilities and Water Utilities (rated neutral and unfavorable, respectively), which are generally not driven by power demand.

IPPs tend to show the most direct, short-term sensitivity to electricity demand. Their business model is based on selling power into wholesale markets. Pricing in these markets is a function of supply and demand — as demand rises without an offsetting increase in supply, pricing increases. However, the model can be volatile as fuel-cost fluctuations can lead to swings in margins. So, while there is potential for longer-term upside given the structure, there’s a commensurate amount of volatility that should be expected from IPPs.

Electric Utilities, the vertically integrated variety that own generation, transmission, and distribution assets in a regulated structure, provide a nice mix of power-demand upside with potentially less volatility. Instead of selling power into wholesale markets, vertically integrated utilities (VIUs) generate and sell power from rate-based, regulated assets to their customers. VIUs benefit from increases in power demand, but these benefits tend to show up on a more gradual basis as assets are added to rate base and contribute to the company’s earnings.

Chart 3. Utilities sub-industry performance generally aligns with power exposureSources: FactSet and Wells Fargo Investment Institute. Data from January 15, 2024 through January 12, 2026. Past performance is no guarantee of future results.

⁶ For more information, see Wells Fargo Investment Institute’s “Sector Insights: Powering the artificial intelligence boom,” August 13, 2025.

Yen struggles despite higher Japanese rates

While most major central banks are still open to cutting rates, the BOJ is moving in the opposite direction. Higher inflation in Japan and newly announced fiscal stimulus suggest rates could continue to rise. While rate hikes in a world of rate cuts should make the returns investors earn from Japanese bonds more attractive, the Japanese yen continues to struggle near multi-decade lows.

Chart 4 shows a rise in rate expectations over the past several months while the yen continues its march downward. Japan’s previously negative or near-zero rates may have explained the yen’s struggles in recent years, but focus seems to have shifted. Political instability and rising government debt have made investors more cautious. When confidence declines, global investors are less willing to hold Japanese assets, which puts downward pressure on the currency through lower demand. Prime Minister Sanae Takaichi’s tenuous grasp on government raises political risks in Japan while rate hikes on top of large sovereign debt raises fiscal ones. These risks have worked their way into Japanese government bonds (JGBs), which have seen yields in longer maturities rise faster than those in shorter maturities⁷, suggesting higher risks in the long term.

Chart 4. Japanese rates and the yen in recent monthsSources: Bloomberg and Wells Fargo Investment Institute, as of January 13, 2026. BOJ = Bank of Japan. BOJ rates are represented by market pricing of rates following the BOJ’s October 30, 2025 meeting. A higher value for the yen exchange rate implies a weaker yen versus the US dollar. Past performance is no guarantee of future results.

Higher interest rates could eventually help support the yen — especially if U.S. rate cuts continue into 2026. However, until political stability improves and concerns about government debt ease, these benefits are likely to remain limited. Japanese bond yields may be rising, but they remain well below comparable U.S. yields, a common story for most developed economies. For this reason, we maintain a neutral view on Developed Markets ex-U.S. Fixed Income. Despite the positive returns of developed markets ex-U.S. bonds in 2025, significant weakening for the dollar in 2026 against major developed markets currencies may be difficult.

⁷ Bloomberg as of January 12, 2026. Spreads between 30-year and 1-year Japanese government bonds stood at 1.88% on January 9, 2025, and were 2.52% as of January 9, 2026.

Gold might be due for a breather

Gold has been a strong performer with the Bloomberg Gold Total Return Index (BCOMGCTR) up 67.79% over a one-year period, as of January 10, 2026. The main cause has been the demand from central banks and retail investors looking to diversify their portfolios beyond stocks and bonds. By extension, this leads to less reliance on financial assets denominated in fiat currencies, such as the U.S. dollar, euro, and yen, which are coming under increasing scrutiny around the world. Another major factor is a renewed rate cut cycle by the Federal Reserve, which tends to lower the opportunity cost of holding gold. Lastly, geopolitical uncertainty remains at high levels, with developments in Venezuela and Iran adding to it in the last week alone.

While some of these factors may lose strength in the coming months, it is hard to see most of them reversing. Still, the recent rally has left gold quite overbought, and we believe a breather is due. We believe investors should take profits and wait for a pullback to add exposure to gold and the favorable-rated Precious Metals sector.

Chart 5 shows the BCOMGCTR Index (4598) is in an uptrend, with the 50-day moving average (4237) now trading above the 200-day moving average (3668). It should find support at the 50-day moving average (4237) point followed by the 200-day moving average (3668). The relative strength index (RSI) in the panel is overbought at a reading of 70, which we believe suggests near-term gains might be harder to come by.

Chart 5. Gold has had quite the runSources: Bloomberg and Wells Fargo Investment Institute. Daily data from January 12, 2023, through January 12, 2026. BCOMGCTR = Bloomberg Gold Total Return Index. SMAVG (50) = 50-day simple moving average. SMAVG (200) = 200-day simple moving average. RSI = relative strength index. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.

Cash Alternatives and Fixed Income

Equities

Real Assets

Alternative Investments**

Source: Wells Fargo Investment Institute, January 20, 2026.

*Tactical horizon is 6-18 months

**Alternative investments are not appropriate for all investors. They are speculative and involve a high degree of risk that is appropriate only for those investors who have the financial sophistication and expertise to evaluate the merits and risks of an investment in a fund and for which the fund does not represent a complete investment program. Please see end of report for important definitions and disclosures.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. High yield (junk) bonds have lower credit ratings and are subject to greater risk of default and greater principal risk. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility. Investing in gold, silver or other precious metals involves special risk considerations such as severe price fluctuations and adverse economic and regulatory developments affecting the sector or industry. Real estate has special risks including the possible illiquidity of underlying properties, credit risk, interest rate fluctuations and the impact of varied economic conditions.

Alternative investments, such as hedge funds, private equity/private debt and private real estate funds, are speculative and involve a high degree of risk that is appropriate only for those investors who have the financial sophistication and expertise to evaluate the merits and risks of an investment in a fund and for which the fund does not represent a complete investment program. They entail significant risks that can include losses due to leveraging or other speculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests in a fund, potential lack of diversification, absence and/or delay of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation and higher fees than mutual funds. Hedge fund, private equity, private debt and private real estate fund investing involves other material risks including capital loss and the loss of the entire amount invested. A fund's offering documents should be carefully reviewed prior to investing.

Hedge fund strategies, such as Equity Hedge, Event Driven, Macro and Relative Value, may expose investors to the risks associated with the use of short selling, leverage, derivatives and arbitrage methodologies. Short sales involve leverage and theoretically unlimited loss potential since the market price of securities sold short may continuously increase. The use of leverage in a portfolio varies by strategy. Leverage can significantly increase return potential but create greater risk of loss. Derivatives generally have implied leverage which can magnify volatility and may entail other risks such as market, interest rate, credit, counterparty and management risks. Arbitrage strategies expose a fund to the risk that the anticipated arbitrage opportunities will not develop as anticipated, resulting in potentially reduced returns or losses to the fund.

Bloomberg Gold Total Return Index is a total return commodity index designed to track the performance of gold futures while incorporating the effects of the futures roll process and collateral yield.

Pitchbook Data – Pitchbook uses a variety of publicly available sources found in targeted online searches including more than 1,000,000 web crawlers using national language processing and machine learning, secondary sources (those authored by someone not directly involved in the deal or fund), news (largest source of information) and other online sources. Quality assurance uses preventive validations, corrective validations, and mutual reviews in an effort to ensure accuracy of data. Data is educational and illustrative purposes only and there are no guarantees as to accuracy of data or content.

An index is unmanaged and not available for direct investment.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

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