Retrospective
The year 2025 remained marked by caution, driven by economic uncertainty, continuing geopolitical tensions, and trade wars but the overarching trend is one of gradual stabilization.
It was an uneven year, reflecting the push and pull of competing forces. Early optimism gave way to caution as tariff concerns and interest rate uncertainty weighed on sentiment. By midyear conditions began to stabilize and private equity activity surged in Q3 2025, with deal value reaching a record US$310b. That rebound aligned with an improving macro environment with inflation moderated across most G20 economies and expectations for rate cuts in 2026 firming.
Exit markets gained traction in late 2025 as both strategic acquirers and corporate buyers returned. According to Preqin, private equity exit values reached 69% year over year in the first half of 2025, with exit counts up 18%.
Mid-market deals remained the core of private equity activity. Large-scale buyouts were less common, but add-on acquisitions and smaller platform transactions continued. The popularity of continuation funds increased as an alternative to an exit, while secondary transactions remained in high demand.
Forward
We would hope that the PE industry enters 2026 with renewed confidence and momentum. After navigating years of macro uncertainty and structural shifts, PE firms have emerged even more innovative, stronger and more resilient. While risks are still legion as geopolitical and regulatory dynamics remain, the industry is on the front foot.
According to Preqin, private markets are projected to grow from approximately $13tn today to more than $20tn by 2030, reaffirming the sector’s long-term appeal.
Resilient balance sheets, improving financing conditions and a surge in large deals position private equity for continued momentum. Strategic buyers are re-entering the market, and sponsors are becoming more flexible on valuations, laying the groundwork for a more balanced transaction landscape.
The PE industry will need to monitor and address many challenges though. It is uncertain, for now, whether or for how long the hangover from the exuberant dealmaking of 2021/2022 will last. The exit backlog of sponsor-owned companies is bigger in value, count, and as a share of total portfolio companies than at any point in the past two decades. Selling these assets, especially when the marks are likely to remain elevated on many sponsors’ books (given high entry multiples in 2021 and the increasing role of GP-led secondaries, which often bring exits below marks), will require more than just hopes that the market will improve. Refinancing those portfolio companies in an uncertain, higher-rate, and more discerning lending environment will also prove challenging.
Market Dynamics
Deal Activity
If inflation moderates and interest rates stabilise in 2026, deal activity is expected to rebound, particularly in sectors like technology, healthcare, and energy transition. However, competition for high-quality assets will remain intense, and valuations may stay elevated.
Deal Value
While deal volumes may rise, average deal sizes could remain moderate as PE firms focus on mid-market transactions, where competition is less intense and value creation opportunities are greater.
Exits and Returns
After years of dislocation, the exit environment appears to be stabilizing but remains uneven. Exit activity (via IPOs, secondary buyouts or trade sales) has been subdued. The PE industry has been holding assets longer than anticipated. With more than 30,000 PE-backed companies globally, pressure from LPs for liquidity continues to intensify. PE firms may continue to need to hold assets longer and pursue creative exit strategies. Returns could be pressured by higher financing costs, but operational value creation and bolt-on acquisitions will be key levers.
The IPO market is expected to be more receptive in 2026, and trade buyers may return as strategic acquirers.
Secondary buyouts (sales to other PE firms), Secondaries, and GP-led continuation funds will play an increasingly prominent role in providing alternative exit pathways. The secondaries market is both expanding and maturing, with more investors using it as a liquidity source and a tool for regular portfolio management.
Continuation funds offer flexibility for GPs to continue managing high performing assets and an alternative exit path if a more traditional exit is not available. The strong demand from LPs is driven by the prospect of reduced risks and more predictable returns, faster liquidity (shorter holding periods) and lower fees compared to traditional buyouts. There is, however, potential for conflicts of interest such as around the valuation of the assets in question. The original fund may want a higher valuation to maximise returns, while the continuation fund might prefer a lower valuation to ensure future gains. Despite this, the growth in continuation funds is predicted to continue.
Roughly a fifth of all PE sales in 2025 involved groups raising money from new investors to acquire businesses from their older funds, up from 12-13 per cent the previous year according to statistics published by Raymond James. Final figures for 2025 show that there were c.$105bn in such sales. 2026 is expected to break records again.
Fundraising and Dry Powder
Despite a challenging fundraising environment over the last few years, PE firms are expected to adapt by focusing on differentiated strategies and sector specialisation. In 2026, fundraising is likely to recover as institutional investors seek higher returns compared to public markets.
However the industry’s record levels of “dry powder” (uninvested capital) may put pressure on firms to deploy capital efficiently. The fundraising outlook is optimistic and many of our clients have recently closed record funds.
Fundraising timelines lengthened again in 2025, reflecting a cautious investor base. Preqin reports that the median time to close a private equity fund is now 22 months, compared to roughly 16 months in 2020. Despite this, the number of funds in market has grown substantially, up more than 240% since 2020, suggesting that long-term appetite remains strong. While not returning immediately to 2021 levels, the pace of fund closes should improve as LP confidence returns.
Economic Outlook & Risks
As the famous quote from the Great Gatsby goes, “And so we beat on, boats against the current, borne back ceaselessly into the past.” This represents the desire for private equity to move forward but at the same time continuing to be shackled by some of the historic risk factors that have held the industry back.
As anticipated, global fragmentation and geo-political crises have led to a “slowbalisation” and this has been felt by international corporates who strive to preserve a global mindset. As nations compete, this global fragmentation will become all the more apparent. A topical example is the proliferation of new domestic data protection regimes with sovereign states, recognising their data as a valuable commodity and protecting it with rules and laws, many of which feature data localisation obligations and complex scrutiny to enable transfers of personal data to be lawful. Moreover, if the free flow of data is curtailed, the technology that enables digital transformation, like cloud computing, artificial intelligence, distributed ledger technology and blockchain, could be hamstrung.
Longer-term, global localism as it’s been called, makes a powerful case for digitalisation. Whereas the global village was once bound only by the trade in physical goods, now digitalisation will connect politically fragmented elements of corporate empires. But digitalisation will bring challenges of its own. How do you raise tax revenues efficiently when greater volumes of commerce are enacted virtually rather than across physical borders?
Countries and companies are seeking greater security and self-sufficiency in their supply chains, particularly in the aftermath of the COVID-19 pandemic, and ongoing dislocation created by the Ukraine war and the Gaza war. That fragmentation could see corporates adopt a more local focus in their investment decisions.
Inflation has fallen back to target levels and interest rates are expected to come down. However the impact of Trump, the trade wars and punitive tariffs has put sand in gears of global trade flows. Then there is the perennial potential for policy missteps with governments trying to navigate to lower national debt levels by raising tax levels too far or too quickly. One can look at recent UK budgets and the impact of NI increases which has disproportionately affected SMEs and mid market portfolio company balance sheets.
Trends for 2026
Sector focus
Tech and cybersecurity related services businesses remain resilient and favourable targets. Their limited exposure to tariff volatility, the intensifying race to lead in AI and a declining rate environment continue to support investments in SaaS, cloud and AI-native platforms.
Interest in industrials and energy continues to build, driven by a stable demand, strong domestic exposure and AI growth. These sectors, once viewed as traditional, are now central to digital infrastructure strategies. Data centers are a critical part of this equation, with private equity deal teams treating grid access, on-site generation and long-duration storage as foundational to AI capacity builds. Power procurement is emerging as a key value-creation lever.
Interest in professional services firms and knowledge based businesses including corporate finance, accountancy and law firms persists as PE firms see the opportunity to streamline and improve efficiencies, particularly utilising digitalisation.
Deal structures
Valuation gaps remain an obstacle. For much of the past two and a half years, valuation mismatches have represented the greatest obstacle to dealmaking. Sellers are optimistic, while buyers remain cautious due to geopolitical and economic risks. Private equity funds struggle with high prices and an overcrowded market, despite having substantial available capital. General Partners face pressure from investors to put the money to work with a sense of urgency.
Private equity firms are increasingly deploying creative structures such as earnouts, tariff-related material adverse change (MAC) clauses, and other contingent mechanisms to mitigate risk and progress deals in uncertain environments. Continuation vehicles, creative structures and dual-track strategies will remain vital tools in 2026.
Earnouts are now used in 39% of M&A transactions involving small and mid-sized companies in Europe, and 42% of M&A advisors reported an increase in the use of the mechanisms in recent transactions, according to a report by Dealsuite. Historically, earnouts have been seen as buyer-friendly and uncompetitive, particularly in auction processes. However, more sellers are willing to accept them, since both parties acknowledge uncontrollable contingent risks. As tariffs remain one of the main uncertainties facing businesses worldwide buyers typically prefer earnouts based on EBITDA, as it guides the company to maximize revenue.
Private credit: high yield to investment grade and beyond
Debt funds, which specialise in providing loans rather than equity capital, are becoming increasingly popular in the private equity market. By offering alternative financing solutions, they play a crucial role in situations where traditional banks provide less credit. Their flexibility makes debt funds attractive for leveraged buyouts and other complex transactions, particularly in a challenging financial environment. What sets these funds apart is that they operate under a different regulatory framework than large banks, allowing them to act more competitive. This enables them to lend under more competitive terms and take on greater risks. In 2026, debt funds are expected to further strengthen their position.
The lines between banks and private lenders are also blurring, with banks increasingly lending to private credit funds. This shift reflects a broader rebalancing. Borrowers are prioritizing speed, certainty and customization over conventional financing routes. As supply and demand dynamics evolve, private credit offers a flexible, proactive alternative across borrower segments and significant growth opportunities for private equity.
Competition law and investment screening
Merger control is shifting towards stricter scrutiny of smaller transactions that would typically fall below notification thresholds. This stems from government concerns over private equity strategies such as buy-and-build, where multiple smaller companies within a market segment are acquired, potentially leading to market power concentration.
An increasing number of countries are tightening their scrutiny of Foreign Direct Investments and related national security risks. This applies particularly to acquisitions primarily in sectors involving highly sensitive technology, such as biotechnology, AI, sensor and navigation technology, and nuclear applications or where there are public sector clients or involvement.
The filing process needs to be built into the transaction process and identified early. The expansion of these categories increases reporting obligations and may hinder private equity investments in these sectors.
AI, Technology and Data
Digital transformation within private equity firms will accelerate, with greater use of data analytics, AI, and automation to source deals, conduct due diligence, and manage portfolios.
AI-driven business models and technologies are an attractive element in acquisitions. Additionally, among our PE clients, we observe the use of AI tools, such as ChatGPT, for an initial analysis of targets, quickly providing a first impression of the company, the sector, and relevant risks and regulations. AI also plays a growing role in the due diligence process by, for example, identifying change of control provisions more quickly and efficiently summarising documents. This increases accuracy and reduces the costs of due diligence. Legal oversight remains essential not only to verify the accuracy of AI-generated results but, more importantly, to provide interpretation within the context of the relevant transaction and current regulations.
In the EU, data protection authorities (DPAs) are increasingly sophisticated in their approach to AI, scrutinising the full lifecycle of AI systems, from data collection and training to deployment and deletion. However, there are notable differences in enforcement and interpretation across Member States. For example, the use of biometric technology in football stadiums for public safety purposes has been approved in Denmark but rejected in France.
Cybersecurity regulation
Cyber threats continue. Protecting technology assets, data, and the supporting digital infrastructure is not a luxury. Investment in cyber security should remain a top priority.
In many jurisdictions, cybersecurity requirements for businesses and their products and services are increasing significantly. In the EU, the NIS2 Directive imposes cybersecurity obligations on companies in critical sectors such as energy, transport, financial markets, healthcare, and digital infrastructure. Additionally, the Digital Operational Resilience Act (DORA) introduces significant obligations for financial entities, while the Cyber Resilience Act (CRA) sets new requirements for providers of connected hardware and software products.
For M&A transactions, a thorough compliance check is essential, both legally and technically. The stricter regulations entail potentially high fines for non-compliance, while EU product liability rules have been amended in favour of buyers.
Environmental, Social, and Governance (ESG) headwinds
Within the private equity sector, ESG is facing significant shifts and headwinds, influenced by political, regulatory, and market dynamics. Despite the strong growth and institutionalisation of ESG within funds over the last decade, this may be losing steam in some areas. ESG terminology and focus has become contentious and in certain cases misaligned, leading some firms to rebrand or refine their sustainability efforts.
In the EU, GPs are still leading the way with high levels of awareness and commitment to sustainability, driven by high expectations by institutional investors and regulators. The EU's regulatory framework, first the Sustainable Finance Disclosure Regulation (SFDR), EU Taxonomy and now the Corporate Sustainability Reporting Directive (CSRD), has pushed GPs to adopt ever more rigorous ESG standards for both themselves and their portfolios. However, the extensive regulatory demands are creating challenges, particularly for smaller portfolio companies struggling with data collection and compliance burdens.
Conclusion
Private equity enters 2026 with renewed momentum. Signs of a potential decline in inflation, an easing of financing conditions and interest rates, the ability to leverage AI, the growth of debt funds and other alternative finance providers and the substantial amount of available committed capital within the sector provide a basis for optimism about increased deal activity, particularly in sectors such as high-tech industrials, technology, cybersecurity, and healthcare. On the other hand, valuation gaps, geopolitical tensions, global fragmentation (slowbalisation) and domestic economic uncertainties may remain significant obstacles to further growth and investment.
To succeed, private equity firms will need to continue to adapt to changing market conditions. Strategies such as GP-led continuation funds and secondaries will remain essential to easing pressure on exits as well as employing creative deal structures. Continued improvement in M&A and IPO markets should generate higher distributions to LPs, fuelling fundraising activity.
With a clear focus on risk management and value creation, 2026 presents both challenges and opportunities, positioning the sector well to navigate this dynamic landscape.
