The Democrats gained ground in this week’s midterm elections, especially in the Senate and in several governors’ races. That reduces economic tail risks and could broaden the private assets opportunity set. For a diversified private markets allocation, though, the drivers of returns are largely untouched.

Tailwind for private markets?

The reality is that gridlock rules out most new legislation, including on private equity. Most bills need 60 Senate votes to pass and overriding a presidential veto needs two-thirds of both chambers.

Specific policy changes are therefore unlikely. Private markets have compounded through every configuration of Washington since the asset class existed.¹ What matters more to fund returns is the cost of capital and the health of exit markets and both moved in a helpful direction this week, as treasury yields,² the base rate for deal financing fell and oil dropped sharply.³ ⁴

Foreign policy and geopolitics

The war with Iran was a major issue in this election, as voters dealt with high fuel prices, food costs and inflation.⁵ The result gives Congress more leverage over how the war is funded and conducted. The new majorities could write the defence and foreign aid spending bills, hold hearings on the executive’s foreign-policy decisions and in the Senate, block votes on national security nominees.⁶ This will likely raise the price of continuing the war for the administration.

That said, the president retains broad latitude on foreign policy, including tariffs, so we don’t expect trade-related cost pressures on portfolio companies to change significantly.⁷ Still, the result gives the White House political cover to seek an off-ramp from the war. A negotiated end would ease energy costs, bring inflation down and give central banks more room to cut interest rates.

It would also be a meaningful stimulus for Europe, where the EU President Ursula von der Leyen has recently said that the Iran War has cost European households some €127bn in higher energy costs.⁸

The AI question

Domestically in the US, we expect closer scrutiny of AI, from data centres and energy costs to investment incentives, just as investors are questioning the returns on enormous AI spending.⁹ Much of that pressure will play out in the states, which control the permitting, power pricing and tax incentives that data centres depend on. Texas, slated to host just under a third of new US data-centre capacity, for example, now has a Democratic governor-elect.¹⁰

Federal legislation would still face a presidential veto, yet a more measured pace of infrastructure spending may make AI investment less concentrated and more sustainable over the long run. The overall implication is that hyperscalers and their lenders may now carry more political risk, while the applied AI in healthcare, finance and industry that private funds have been backing carry less of that risk.

Governance moves up the agenda

Governance is a central variable across private markets and that emphasis may eventually reach private credit in particular. It would likely take the form of closer attention to underwriting standards, disclosure and conflicts of interest. Even without new legislation, the Senate carries institutional weight through its power to confirm or block nominees to the Federal Reserve, the SEC and other regulators.

The practical consequence is that governance and reporting are going to move up the due diligence checklist. The managers who already do both well are better placed to withstand closer scrutiny, particularly in private credit, where standards vary most.

Senate Democrats now also control the committees that could advance carried interest reform, which would tax managers’ share of fund profits as ordinary income rather than capital gains.¹¹ The idea has been debated since 2007 and nearly made it into law in 2022. Passage before 2029 is unlikely, however, and even if reform did pass, it would matter far more to general partners than to fund investors.

The long term is unchanged

Beyond the election cycle, the structural themes that matter most for private markets remain intact. Europe still needs to build its defence and security infrastructure, capital markets continue to evolve quickly and the next phase of AI will reward running models efficiently as much as building raw computing power. None of these depends on who controls Congress.

What investors could potentially lose is the prospect of further deregulation and fiscal stimulus before 2029, but they may gain a slightly more sustainable business cycle. For those with a ten-year horizon, this trade-off doesn’t change the case for a diversified private markets allocation.