Year-End Letter - Q4 2025

The Year in Review: From Narratives to Outcomes

2025 reminded us that market leadership is rarely permanent. After years of narrow, consensus positioning, leadership widened and valuation discipline returned. Against this backdrop, three themes stood out which we believe will matter for the years to come.

First, after a period in which American exceptionalism felt like the only trade that mattered, 2025 has marked a clear rotation. International equities have outpaced U.S. equities by the widest margin in more than a decade, and the leadership has come from the corners of the market that were most overlooked. This outcome aligns with how we positioned portfolios entering the year, as valuations and concentration risk argued for a more balanced approach.

Second, AI remains one of the most important technological shifts in decades. We never doubted that. What we questioned, consistently, was the market’s willingness to price the future as if it were already delivered. This year, the narrative has begun to mature from “hype” to “show me,” as investors focus more on bottlenecks and real-world economics.

Third, private markets are finally offering the kind of opportunity we’ve been waiting for as the supply and demand balance has shifted. For the last several years, we resisted the industry’s push to broaden access to illiquid strategies as pricing discipline was deteriorating. Today, public market reality is forcing a repricing of private markets, and we believe the next phase will reward investors who can selectively provide liquidity.

In the sections that follow, we expand on each theme and outline how we are incorporating them into portfolio construction. Our approach remains unchanged: we seek to compound capital prudently over time, anchored in diversification and disciplined underwriting.

The Return of Global Diversification: The Unloved Win

For much of the last decade, global diversification was treated as an academic concept rather than a practical advantage. U.S. equities, led by a small group of mega-cap technology companies, delivered such dominant returns that global allocations often felt like a drag. That experience created a false impression that diversification is something you do only when you are pessimistic about the United States.

We have viewed it differently. Diversification is not a statement about national decline or national strength. It is a statement about portfolio resilience. Concentration, whether in a handful of stocks or in a single currency regime, is the quiet enemy of long-term compounding.

This year’s outcome has reinforced that view. International markets outperformed U.S. equities by a margin we have not seen in 16 years, and the rotation is not subtle. The “Magnificent” has given way, at least for now, to the “Unloved.” The MSCI ACWI ex US index is up 32.4% versus 17.9% for the S&P 500, with notable strength in markets such as South Korea (+76%) and Spain (+49%).

Two drivers are especially worth highlighting.

First, currency is no longer a tailwind for U.S. assets. A 9.4% decline in the U.S. dollar against other major currencies has been a material contributor to international returns in dollar terms. Currency moves are notoriously difficult to forecast, but they are also one of the most underappreciated sources of portfolio risk for U.S. investors. With U.S. deficits still running at crisis-like levels of around 7% of GDP, many global investors increasingly view diversifying away from the dollar as a hedge against fiscal imbalances and concerns about monetary policy credibility.

Second, international strength has not been driven solely by currency. Broader European markets have benefited from defense spending and fiscal support. In Asia, corporate governance reform and semiconductor leadership have created a foundation for returns that is not simply a derivative of U.S. technology. To add to the fundamental picture, international equities continue to trade at attractive valuations when compared to their U.S. counterparts.

 Our conclusion is not that international markets will lead for the foreseeable future. Rather, it is that global diversification is regaining its role as a practical portfolio tool. When one market becomes expensive, crowded, and concentrated, the world offers other places where capital is priced more reasonably.

AI Enters the “Show Me the Money” Phase

In prior quarters, we described AI as both transformative and vulnerable to exuberance. That duality remains the right frame. Markets can recognize a genuine technological revolution and overpay for it.

 We believe 2025 has been a turning point in the narrative. Markets are beginning to focus less on what AI could do and more on which companies will earn durable profits from it. That shift is healthy.

 The core issue is the mismatch between the amount of capital expenditures AI requires relative to the revenues it generates. According to a study conducted by The Economist, the industry has spent over $400 billion on capex while producing roughly $50 billion in revenues. That gap does not invalidate the opportunity, but it does raise the bar for valuations. If the path to monetization takes longer than investors assumed, valuations will need to adjust.

 The second issue is physical. AI is not purely software. It is power generation, grid capacity, data centers, cooling, permitting, construction timelines, and supply chains. The assumption of frictionless scaling is being challenged by power shortages and build delays, which have already punished some of the market’s former darlings. When an industry runs into real-world constraints, timelines extend, and extended timelines are a problem when expectations are priced as if delivery is imminent.

 Our approach to AI remains measured. We remain constructive on innovation, but skeptical of single-theme concentration. We do not believe portfolios should be held hostage to a single narrative, no matter how compelling. We underwrite AI as an evolution, not a guaranteed windfall. The technologies that endure are often separated from the early market winners. History is full of examples where the infrastructure proved essential, but leadership changed. Recent volatility in AI stocks is a reminder that investing is not about identifying the most important story. It is about paying a sensible price for uncertain outcomes.

Private Markets: Why we were right to wait

For the last three years, we deliberately stayed on the sidelines of many “democratized” private market offerings. The messaging suggested that private markets were a simple upgrade over public markets, offering higher returns with smoother volatility. We disagreed, not because private markets lack merit, but because the lack of pricing discipline had morphed the illiquidity premium into an illiquidity discount.

 The stress test arrived when certain private vehicles attempted to list publicly. The market demanded a haircut when Bluerock Private Real Estate listed at a 39.7% discount to stated NAV, and FS Specialty Lending traded at a 25% discount, underscoring the gap between appraised value and market reality.

To add to liquidity concerns, private equity performance has disappointed investors, with 5.8% annualized returns over the last three years versus 11.6% for the S&P 500, according to a recent MSCI study. This validates our concern about inflated valuations, which we wrote about three years ago. As for private credit, we remain cautious as discounts to NAV and the growing use of payment-in-kind structures have become more prevalent

Private Markets: Today’s Opportunity and our Q1 Fund Launch

Our skepticism was tactical, not permanent. The very dysfunction we were concerned about is now creating a supply and demand imbalance. Traditional institutions are over-allocated, distributions have dried up as funds struggle to monetize holdings, and scarcity of capital gives patient liquidity providers leverage on price and terms.

Against this backdrop, we are preparing to launch a private markets fund in Q1 2026, designed specifically to target today’s dislocations. Our focus will be on three areas:

Opportunity 1: Secondaries at a discount

Secondaries are, in our view, the cleanest expression of today’s imbalance. When LPs need liquidity, they often sell quality exposures at meaningful discounts. That can allow us to: 1) buy below stated marks, improving expected return, 2) bypass part of the J-curve, as seasoned portfolios typically have greater visibility into assets, and 3) control pacing, deploying capital when pricing is attractive rather than on a fixed fundraising calendar.

The key here is selection. A discount is not enough to warrant an investment. We are focused on high-quality managers and structures where alignment and transparency are clear.

Opportunity 2: Niche specialists in the lower-middle market

The largest private platforms have become asset-gathering machines, structurally pushed toward multi-billion-dollar deals where competition is fiercest and pricing power belongs to the seller. Our focus is different. We believe the lower-middle market offers: 1) true inefficiencies, because deal sizes are too small for mega-funds to pursue efficiently, 2) operational value creation, where outcomes can be driven by execution rather than multiple expansion, and 3) better entry discipline, because specialist managers can be selective without the pressure to deploy enormous pools of capital quickly.

Opportunity 3: Real Estate

Real estate is where price and replacement cost have meaningfully diverged. Valuations have fallen, with the overall commercial real estate market down approximately 20% since 2022 according to Green Street, while construction costs have risen 20% to 30%. This gap creates a powerful setup for patient capital to buy high-quality assets below replacement cost.

We are focused on situations where refinancing cliffs force motivated behavior. This can create opportunities to acquire assets at deep discounts, improve the capital structure, and underwrite returns based on cash flow durability rather than optimistic terminal assumptions.  

Closing Thoughts

If there is a unifying lesson from this year, it is that markets eventually reward what is sensible, even if at times what’s sensible seems unpopular. Global diversification felt unnecessary until it suddenly mattered. AI enthusiasm felt unstoppable until the market began asking for profits. Private markets felt like a free lunch until liquidity reminded everyone that price discovery is real. At Evolve, our work is not to predict the next headline. It is to build portfolios that can endure many headlines.

Thank you for your continued trust and partnership.

Razmig Der-Tavitian, CFA, CAIA
Chief Investment Officer & Managing Partner
Evolve Private Wealth

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