The private equity industry entered 2026 with something approaching cautious optimism. After two difficult years, deal activity had recovered in the second half of 2025. A handful of megadeals, most notably the $55 billion take-private of Electronic Arts, had bolstered headline numbers. Advisers were, in the words of Charles Hayes, co-head of private capital at Freshfields, "very positive about this year." 1
That optimism did not survive the first quarter.
Buyout activity fell 36 per cent from the previous quarter to $172 billion, according to Dealogic, an 8 per cent decline year-on-year and a return to the depressed levels of 2023 and 20241. Exit activity moved in the same direction, dropping by one-third from the fourth quarter of 20251. What is striking is not just the scale of the decline, but the fact that two distinct threats have converged simultaneously: a geopolitical shock in the Middle East, and a structural disruption to one of private equity's most important hunting grounds.
The Iran Effect
The Gulf conflict, which began in late February, has injected a level of uncertainty into global markets that dealmakers find difficult to price. Several buyout executives and advisers confirmed to the Financial Times that some firms had halted both exit processes and new investments entirely while conditions remain unclear1. "We're in one of the most turbulent periods I can remember," the head of a large European buyout group told the FT. "Things are grinding down quite quickly now in terms of activity."1
The mechanism here is not primarily one of direct exposure to the region. Rather, it is the familiar dynamic of risk aversion in concentrated markets. Private equity dealmaking depends on a particular confluence: available debt financing, willing sellers, predictable exit multiples, and a stable macroeconomic backdrop against which to model returns. The conflict has destabilised all four simultaneously. Fund managers at Schroders, M&G, and JPMorgan Asset Management have responded by rotating into government bonds, betting that the eventual growth shock will force central banks to cut rates even as near-term inflation remains elevated2. That capital is not flowing into private markets.
My view is that the chilling effect on dealmaking is likely to outlast the conflict itself. Once investment committees pause processes, restarting them requires not just stable conditions but confidence that stability will hold. That bar is currently high. Escalating threats to Iranian energy and road infrastructure would extend the disruption well beyond oil prices and into the physical architecture of global trade. A deal environment shaped by that kind of tail risk is not one in which most firms will move decisively. There is also a delayed dimension to this. The disruption to oil shipments over the past six weeks has not yet worked its way fully through to end markets. When it does, cost pressures will broaden out across manufacturing, logistics, and consumer goods, compressing margins in the portfolio companies that private equity firms are already struggling to exit.
The Software Problem
The second threat is less acute but arguably more durable. Software has been one of private equity's most fertile sectors over the past decade: high margins, recurring revenue, relatively capital-light, and with multiples that justified aggressive entry prices. That investment thesis is now under serious question.
Buyout executives have told the FT that fund investors are "completely risk off" on software, and that firms are pausing new investments until they can assess the impact of agentic AI on existing business models1. One executive at a large US buyout group was direct: "We're starting to see more clearsightedly the tsunami about to hit businesses, which is the impact of agentic AI. Plenty of people are saying we're not going to be investing until we figure this out."1
This is a rational response to a genuine valuation problem. If AI tooling can replicate significant portions of what a software business does, customer support, code generation, document processing, data analysis, then the competitive moat that justified a high entry multiple may no longer hold. Private equity does not invest in ideas; it invests in cash flows and exit values. When both become difficult to model, capital stays on the sidelines.
The more interesting question is whether this is a permanent re-rating of software as an asset class, or a transitional period before new investable categories emerge. I lean toward the latter. AI is closing off one segment of the market, but it is opening another: the infrastructure layer supporting AI deployment, compute, data platforms, enterprise integration, represents exactly the kind of capital-intensive, high-barrier-to-entry sector that has historically suited private equity well. The doctrine of creative destruction applies here. The difficulty is the timing mismatch: the pain is immediate, the opportunity is not yet legible enough for most investment committees to act on.
Where This Leaves the Industry
Private equity funds raised $86 billion globally in the first quarter of 2026, roughly flat with the same period last year, according to PitchBook, whose data also shows 2025 was the industry's weakest fundraising year since 20181. The freeze in dealmaking compounds an existing problem rather than creating a new one. The buyout sector has struggled since 2022, with firms holding companies bought during the low-rate era that they have since been unable to sell1.
What the first quarter of 2026 has done is remove the timeline on which a recovery was expected to occur. The dealmaking freeze will eventually thaw, and latent capacity in the market remains substantial, as Hayes noted1. But the structural questions that were already accumulating before February will not resolve themselves simply because the conflict does. Whether private equity can navigate a world of persistently higher rates, AI-disrupted software valuations, and geopolitical fragility at the same time is the question the industry now has to answer.