Private equity's highflying bet on the artificial intelligence build-out obscures risk and echoes past market bubbles, according to attendees at this week's Greenwich Economic Forum.

While AI investments are propelling major stock indexes to record levels, panelists warned the rally obscures a broader economic fragility and creates severe technology obsolescence risks along with portfolio concentration risks.

Firms and fund investors, they said, are likely facing a higher risk than they realize from AI concentration. This includes from overlapping exposure across strategies, what Jay Madia, who moderated an institutional investors panel, described as "just one big bet on the AI build-out."

The AI concentration risks compound the industry's challenges. These include a mounting investment backlog and fears that private equity will no longer outperform public markets as higher interest rates stress-test private equity's operational model.

"The glory days of private equity are probably behind us," David Graham, American Family Mutual Insurance chief investment officer, said on a Wednesday panel.

Graham spoke of taking a more nuanced approach to private equity within portfolio construction and treating private equity more like small-cap public equity by setting lower baseline target allocations.

Other Wall Street power brokers who gathered on Connecticut's Gold Coast for the annual conference emphasized the impact of higher interest rates in constraining deal activity and cash returns to fund investors.

Private equity's decision to wait for better times -- and higher prices -- to sell investments proved "not so painful if you're the private-equity firm still holding the 2% [management fee]; kind of painful if you're expecting the distribution to be able to do other things," said Nithin Johnson, managing director at Arcbridge Capital, the investment adviser to his family's family office, and a former managing director of Nasdaq-listed Brazilian asset manager Patria Investments.

The U.S. private equity-backed company backlog reached 13,619 as of Sept. 30, though the backlog's growth rate slowed as exit activity continued to improve, according to research firm PitchBook.

Dealmakers expressed hope at the Federal Reserve's interest-rate cuts, starting in 2024. But, Fed officials changed course in September, unanimously approving the first rate hike in three years and penciling in another increase, potentially in December.

Panelists at the Greenwich forum said Fed communications have contradicted its own balance sheet actions and led to flawed portfolio assumptions.

"Obviously, we've been whipsawed by Fed policy and direction," said Anne Walsh, chief investment officer at Guggenheim Partners Investment Management.

Higher rates are forcing private equity -- long accustomed to cheap debt and multiple expansion at exit -- to focus on operational improvements to generate returns, some panelists said.

Mark Burgess, chairman of the investment committee at Australian Retirement Trust, one of Australia's largest pension funds, called this higher-rate environment "the decade of skill."

Burgess said he recommends investors periodically document on paper what their portfolio actually holds and compare portfolio exposures over time to spot creeping concentration risks.

The visual comparison, he said, helps spot how much hidden concentration risk has crept into the mix over time.

"Private equity is still a great asset class, but you now want skilled people," Burgess said, "because these products are a little more challenged than they were during the 40-year tailwinds that supported my career."