2026 Outlook for PE

With one week to go before 2026 and as we prepare for the new year, here are a few notes on Investment Outlook and how it will affect our PE industry and market dynamics.

Generally, deal activity is likely to accelerate and the deal dam may be breaking in 2026 with strong momentum entering exiting this year.

There are also more favorable valuation dynamics. For example, the S&P 500 returned ~16% in 2025 and trades at 22x forward earnings, well above the 15 year average of 17x. This creates an interesting dynamic: historically, PE has outperformed when public valuations were at these levels. The widening gap between public and private valuations presents opportunities.

However, PE fundraising remains a challenge, with GP demand continuing to exceed LP supply particularly in the middle market. That imbalance is reinforced by a growing DPI gap/shortfall. After several years of limited realizations and much longer hold periods (expanding now to 7+ years from ~5), LPs are increasingly focused on distributions to rebalance portfolios, address liquidity needs, and support commitments to new vintages. This dynamic is pushing PE managers to accelerate value realization, often through tighter sale processes or less traditional exit paths. The resulting timing gaps and liquidity pressures are creating a cohort of motivated, and in some cases compelled, sellers.

Here are the key takeaways for 2026:

 

PE Valuations

  • Buyout valuations remain elevated but not disconnected from earnings growth, with dispersion widening across asset quality
  • Holding values appear slightly overstated at the median, with GPs increasingly willing to accept 11–20% discounts to drive liquidity
  • No clear macro catalyst for broad multiple compression, implying value creation rather than multiple expansion remains the primary return driver

Deal Environment and M&A Activity

  • Global M&A rebounding as cost of capital drops and pent-up demand releases
  • Sponsor-to-sponsor and public-to-private deals accelerating as exit markets reopen
  • Smaller and mid-market companies increasingly targeted for add-ons and consolidation
  • Complexity remains attractive entry points – complexity creates mispricing
  • IPO windows improving, supporting realizations and NAV momentum

Cost of Capital, Financing, and Capital Structure

  • Lower rates materially improving deal feasibility and equity returns
  • Credit markets reopening with better liquidity, but underwriting discipline matters more than ever
  • Leverage appetite shifting toward resilient capital structures and covenant protection
  • Private credit demand rising alongside PE volume, including mezzanine and structured solutions
  • Vintage risk from 2021–22 deals surfacing, creating refinancing and rescue opportunities

Value Creation Playbooks (Operating Alpha)

  • Operational improvement now the primary return driver, not multiple expansion
  • Capital-heavy to capital-light transformations a core value creation lever
  • Margin expansion through automation, digitalization, and AI adoption
  • Active ownership and hands-on execution increasingly differentiate top performers
  • Workforce productivity and redesign central to EBITDA growth
  • Portfolio Company Value Creation Priorities: Revenue and EBITDA growth and margin resilience are critical as valuation are increasingly tied to fundamentals. AI adoption is becoming a core operational lever. Also, pricing power, margins, and strong balance sheet durability are key differentiators for those PE firms that have true “Operating Alpha”.

AI as a Value Creation and Diligence Theme

  • AI spending driving a multi-year CapEx cycle in data centers, power, chips, and connectivity
  • Focus shifting from AI enablement to actual application within portfolio companies
  • Productivity and margin gains from AI still underpenetrated at the operating company level
  • ROI visibility on AI investments remains uneven – diligence and “Operating Alpha” capability matter
  • PE firms can arbitrage public-market hype by applying AI pragmatically in private companies

Sector and Thematic Priorities

  • Digital infrastructure, energy transition, and power generation supported by structural demand (AI)
  • Defense, infrastructure, and security benefiting from economic security priorities
  • Services businesses favored over goods for capital efficiency and pricing resilience
  • Real assets and infrastructure offer inflation linkage and long-duration cash flows
  • Select healthcare, pharma, and financials positioned to benefit from deregulation

Portfolio Construction and Risk Management

  • Quality, resilience, and downside protection prioritized
  • High-grading portfolios: better counterparties, assets, and capital structures
  • Less reliance on multiple expansion, more on operational and strategic levers
  • Increased focus on relative value across asset classes and geographies
  • Asia and Europe under-allocated with improving fundamentals

Exit Environment and Realizations

  • IPO and secondary exit pipelines improving versus 2022–24
  • Strategic buyers returning as balance sheets strengthen
  • Valuations normalizing – earnings growth at exit matters more
  • Exit differentiation driven by operational maturity, AI readiness, and margin durability

Macro Conditions with Direct PE Impact

  • Cooling inflation and easing labor markets improving cash flow predictability
  • Uneven consumer demand reinforcing need for customer segmentation and pricing discipline
  • Persistent geopolitical risk elevating security themes