Private Equity's False Start

Private equity spent 2025 building momentum for a comeback story. Global buyout deal value (excluding add-ons) increased 44% year-on-year to $904bn, with exit value performing similarly, rising 47% to $717bn.¹ Then 2026 rolled on, and the industry stumbled.

Global dealmaking across M&A, private equity and venture capital fell roughly 7% YoY in the first 5 months of the year, with trends pointing towards more risk-sensitive dealmaking and investors prioritising quality over speed of execution.² Buyout firms completed $172bn of transactions in the first quarter (64% of transactions from the previous quarter) as the Gulf conflict and sentiments about AI gave dealmakers reason to hesitate.³

A Recovery That Didn’t Stick

PwC’s mid-year data paints a similar picture. Global private capital deal volume in the first quarter of this year remained flat, yet total deal value fell 14% to $482bn.⁴ The scale of these deals has shrunk, yet the quantity has not quite compensated for this. Sponsors clearly are still keen to get in on the action; however, they are simply paying closer attention to the composition of what they are getting involved in.

The chart above captures the shape of the last five years pretty well: a sharp drop from the 2021 peak, a low point in 2023, and then a recovery in 2025 that was only just getting started before 2026 brought another round of uncertainty. At the beginning of the year, even the industry’s own analysts thought that recovery was likely to hold.

"Interest rates are moving south, if slowly, deal pipelines are well stocked."

Hugh MacArthur, Chairman of Bain & Company's Global Private Equity Practice.⁵

That optimism has turned out to be misplaced, particularly on the one factor it relied on most: interest rates. Rates did fall during the second half of 2025, but recently, the Federal Reserve reversed its course, raising rates for the first time since 2023 as oil-driven inflation linked to the Gulf conflict pushed prices higher.⁶ Meanwhile, the pipeline MacArthur described as “well stocked” is still struggling to turn into actual deals, while buyout financing has become more expensive rather than cheaper.

Why Liquidity Is The Real Culprit

The bigger issue behind 2026's slowdown isn't really a lack of interest in doing deals. It is what happens to the money after those deals are made.

Even during 2025's recovery, payoffs to limited partners remained stuck at 14% of net asset value. That was the fourth consecutive year below 15%, a level not seen since the aftermath of the 2008 financial crisis. At the same time, buyout fundraising fell 16% to $395bn in 2025, marking its fourth consecutive annual decline despite the jump in deal value.

The result is a huge backlog of investments. Private equity firms are now sitting on around 32,000 unsold portfolio companies worth a combined $3.8trn, alongside roughly $1.3trn in dry powder waiting to be invested.¹

"If I'm not seeing the money come back, I can't make new commitments to fund."

Alexander De Mol, Private Equity Consultant, Bain & Company.⁷

That is essentially the problem in a nutshell. If investors aren't getting their money back, they have less capacity to commit to new funds. If fundraising slows, firms have less fresh capital coming in. And managers that haven't recently returned much cash to investors are finding it particularly difficult to raise their next fund.

This helps explain the disconnect between 2025 and 2026. On paper, 2025 looked like a genuine recovery. But the underlying cash cycle never really recovered. Deal value can rise sharply because of a handful of enormous transactions without the wider industry actually getting its money moving again.

The Exit Door Has Shifted

With the traditional exit routes still difficult (IPO markets remain stagnant, strategic buyers are being selective, and sponsor-to-sponsor deals are running into disagreements over valuations), private equity has increasingly turned to another option: selling assets to itself.

The global secondary market, where limited partners sell their fund stakes or general partners move existing assets into new funds they continue to manage, reached $240bn in transaction volume in 2025. That was a 48% increase from the previous year and the highest total ever recorded. Around half of that activity came through GP-led continuation vehicles.⁸

What was once a fairly niche solution for funds struggling to find an exit has become much more mainstream.

For limited partners, secondaries provide a way to get some cash back when traditional exits aren't happening. For general partners, they have become more than just an emergency exit route. They also give managers a way to keep hold of their strongest investments instead of having to sell them simply because an ageing fund is approaching the end of its life.

Data centres are a clear example of where the money is moving. They are expensive, physical assets that can absorb some of the industry's excess capital, while also benefiting directly from the AI infrastructure boom. That makes them quite different from the software investments that have dominated parts of the previous PE cycle and are now facing more questions around valuations. One of the four biggest global buyout deals of 2025 was a $40bn data-centre platform.¹

The broader shift is pretty clear: capital is expected to move towards large, asset-heavy businesses such as infrastructure, logistics and data centres, and away from some of the software-heavy bets that defined the previous cycle.

What Next?

None of this suggests that private equity is about to disappear or dramatically shrink. It looks more like an industry adjusting to a much slower cash cycle. Over the next two or three years, we can expect these two likely characteristics to appear:

First, the recovery is likely to remain fairly narrow rather than broad-based. The biggest and best-capitalised managers should continue to have access to capital. Smaller and mid-sized firms without the same track record are likely to face more pressure. Some will shrink, some will merge, and some may struggle to raise their next fund at all.

Second, alternative liquidity tools are becoming a normal part of the industry. Secondary transactions have continued to grow even during periods when M&A and IPO markets were healthier, suggesting that this isn't a temporary solution. It is becoming part of how the private equity industry operates.

Continuation vehicles are a good example. They were once seen as something managers turned to when they couldn't find a conventional exit. Increasingly, they are simply another way for large sponsors to manage their best-performing assets over a longer period.

Combined, 2026 doesn't really look like the year private equity finally gets back to normal. Instead, it looks like the year the industry realised that the recovery would take longer than the numbers from 2025 suggested.

The real turning point may not come until 2027, once today's wave of secondary deals and continuation vehicles has had time to properly integrate itself into the system and more cash has made its way back to investors. Only then might limited partners feel comfortable committing significant amounts of fresh capital again.