Executive summary
Optimism is returning to the private equity industry, but it is tempered by structural challenges that could take years to resolve.
After a prolonged period of higher interest rates, weak deal activity, and lack of distributions, many believe the worst may be over. Falling borrowing costs, a gradually reopening IPO market, and improving market sentiment suggest that 2026 could mark the beginning of a more durable recovery.
Yet the industry remains burdened by its legacy. Private equity firms are sitting on a record backlog of unsold companies worth trillions of dollars. These assets, often acquired during an era of cheap money and lofty valuations, have proven difficult to exit. Even if deal activity accelerates, working through that inventory will likely take multiple years.
Returns remain a central concern. For much of the past two decades, private equity reliably outperformed public markets, justifying long lockup periods and high fees. Now, private equity returns are lagging public benchmarks.
Although experienced allocators look at returns over longer cycles, many are concentrating their commitments with smaller groups of top-performing firms, while cutting back or exiting relationships with weaker managers.
Liquidity pressures are also shaping the outlook. Because exits slowed dramatically after 2022, investors have received far less cash back than expected. As a result, secondary sales of private equity stakes are likely to remain elevated in 2026 as large allocators seek reprieve, flexibility, and to consolidate manager rosters. Combined with increased GP-led secondaries transactions, the sector is becoming a permanent feature rather than a release valve, reshaping private equity into a more actively managed market.
Fundraising is unlikely to rebound quickly. After years of rapid growth and an explosion in the number of private equity firms, capital raising has fallen sharply, down over 30% from 2023. Even with improving conditions, 2026 will be challenging, particularly for first-time funds and mid-sized managers without strong performance records. Industry insiders increasingly expect further consolidation, as some firms shrink, merge, or quietly stop raising new funds.
Still, there are reasons for to be positive. Private equity firms have plenty of dry powder to put to work. AI is re-shaping workflows across industries and opening opportunities for investments in both disruptive technologies and the infrastructure required to support the ecosystem. Interest rates are coming down, making both acquisitions and exits more feasible. Public markets have shown greater receptivity to new listings and, if equity markets remain stable, 2026 could see a steady, if unspectacular, increase in strategic acquisitions and IPOs.
Private equity may be down, but it’s not out. We expect plenty of opportunities in 2026 for savvy investors ready to stay committed and maintain vintage year diversification. They just need the right tools, and partners, to pick the managers that can outperform through the current climate.
The next phase for private equity will look different from the last boom. Growth may be slower, returns more uneven, and competition for capital more intense, but the sector will remain a core part of a diversified private markets portfolio.
Tentative rebound emerges but more deals needed to clear backlog
We anticipate transaction volumes will remain choppy but will see a gradual uptick. Expect a year of release, not a boom.
Macro conditions will shape—but not derail—activity. Slower global growth, geopolitical fragmentation, and persistent (though moderating) interest rates will keep leverage disciplined. However, stabilizing inflation and greater certainty around monetary and trade policy could unlock deal confidence.
Growth will be spurred by a more constructive and pragmatic approach to dealmaking, re-opening equity capital markets, and sectoral tailwinds in AI (and related digital infrastructure), industrials and healthcare.
One area to watch closely is the gap between deals brought to market and deals that ultimately close. The percentage of marketed deals that closed was already trending lower in the second half of 2024, amid buyers’ continued risk-off posture, even before uncertainty crept back into the market in mid-2025.
This needs to begin trending positively for progress to be made on clearing the backlog of companies. There are more than 9,000 active PortCos across the technology, industrials and consumer sectors in North America alone and more than 63% of active PortCos have been held for more than four years.
AI deals will continue to drive value and take a greater share
Nearly one in three software deals now involves AI (29%).
AI-related transactions are expected to continue to grow their overall share of deals in 2026, with software firmly at the center and other subsectors encountering rising adoption.
Not only is AI deal activity increasing but it is also becoming more diverse. Software remains the clear leader, but the growing activity in professional services, fintech, industrial goods and IT services shows that AI is moving beyond early adopters. This shift is being reinforced by labor shortages, cost pressures and the need for productivity gains amid slower growth and higher financing costs.
We believe AI-enabled businesses are on track to account for the majority of transactions in several sectors in the coming years, reflecting both sustained enterprise demand and the strategic imperative for companies to embed automation and machine learning into core operations.
Despite this, macro risks remain. Trade tensions, geopolitical fragmentation and regulatory scrutiny contributed to subdued activity in parts of 2025, particularly within AI infrastructure. Yet, strong underlying demand remains, and as the market gradually adjusts and conditions begin to stabilize, we expect a meaningful rebound toward 2024 levels.
‘Big six’ expect improved conditions for traditional buyouts
The six largest US publicly listed managers are increasingly aligned around a constructive— but disciplined—traditional private equity buyout outlook.
As deal activity, exits and fundraising show early signs of normalization, Apollo, Ares, Blackstone, Carlyle, KKR and TPG are set to pursue selective expansion strategies. Confidence is being driven less by macro enthusiasm and more by portfolio-level performance and reopening capital markets.
The firms, which oversee a combined $635 billion in traditional private equity assets, pulled in $65 billion in buyout capital in 2025. That brought the sextet’s dry powder to over $211 billion as of Q3 2025, up from $138 billion in Q3 2020. Yet, despite the overall growth of dry powder, taken as a percentage of overall AuM, the figure dropped from 46% to 33%, suggesting slightly less firepower relative to the assets the firms control.
Collectively, the six managers realized $64 billion from their traditional private equity portfolios in 2025, and they generally have a positive outlook for exits in 2026. Realizations amounted to around 16% of invested capital on an aggregate basis, up from a low of roughly 12% in 2023, providing some respite for investors.
Blackstone has been among the most vocal about a turning point. President Jon Gray said in October that “the deal dam is breaking,” noting that the firm took three companies public in 2025 and pointing to a substantial exit pipeline that could make 2026 one of its largest issuance years. This optimism is underpinned by fundamentals, with Blackstone reporting 9% year-over-year revenue growth across its US private equity portfolio companies in Q3.
Carlyle echoes that confidence. CEO Harvey Schwartz described the current climate as “one of the best business environments we have seen in a long time,” predicting 2026 would be a strong year for deals. Carlyle also disclosed nearly $5 billion of exit transactions expected to close in the coming quarters, alongside portfolio appreciation of 4% over the past 12 months. High-profile realizations, including the Medline IPO and Orion Breweries’ listing in Japan, reinforce the sense that exit markets are reopening.
At Ares, the focus is on strategic expansion in addition to exits. CEO Michael Arougheti recently stated that the firm is open to acquiring a large private equity manager to complement its existing platform, which makes up just 4% of total AuM. He pointed to opportunities to scale and diversify the private equity franchise geographically and sectorally, particularly as DC plans gradually open to alternatives. Ares’ private equity platform delivered a 5.2% gross return over the past 12 months.
KKR, while generally positive on growth and earnings, warns investors to build resilient portfolios to guard against any reversal in current tailwinds, including fiscal spending, AI investment and household wealth. Allocators should diversify beyond traditional public markets and be ready to lean into future dislocations. The manager’s traditional private equity portfolio appreciated 10% over the past 12 months, and the firm recently acquired fast-growing Arctos Partners to add secondaries and sports investing capabilities.
TPG has reported strong operating performance and fundraising momentum. Portfolio companies across its platforms delivered roughly 17% revenue growth and 20% EBITDA growth over the past 12 months, while the firm raised $12.3 billion for private equity strategies, led by its flagship buyout funds. Management remains patient on exits, prioritizing value creation over timing, even as accrued unrealized performance fees build up.
Finally, Apollo is continuing to lean into its track record and trying to raise its largest buyout fund ever, despite CEO Marc Rowan repeatedly saying private equity is a great business, but not a growth business for the firm. Apollo Investment Fund XI is set to ramp up fundraising in early 2026, targeting $25 billion, which would make it the largest fund ever raised by the firm. Despite a couple of misfiring vintages, Apollo points to strong historical net IRRs—24% across the traditional private equity platform. Taken together, the industry’s largest players see improving conditions—but success in the next phase will hinge on selectivity, operational execution and disciplined exits rather than a broad-based rebound.
GP-led secondaries market maturing as private equity portfolios become more actively managed
Private equity secondaries are poised for accelerated normalization and structural growth in 2026, remaining the lifeblood of the industry for many market participants. Allocators and sponsors will increasingly turn to the secondary market to more actively manage portfolios, mitigate risk and enhance performance.
Investors, as sellers, can gain liquidity; and as buyers, they can gain exposure to seasoned assets while mitigating the J-curve. For sponsors, the sector will remain an important source of capital as they await the full return of traditional exits.
The sector hit a second record year in a row, with transaction volumes of $226 billion, up more than 34% year-over-year. That is still just 5% of global buyout AuM, currently around $4 trillion. We believe volumes could expand further in 2026, considering both the total growth of industry NAV and lack of distributed capital over the past three years.
No free passes as US allocators use opportunity to refresh rosters
US allocators remain broadly constructive on private equity, but enthusiasm is increasingly tempered by macro realities and structural constraints. Higher-for-longer rates, slower global growth and lingering denominator effects continue to suppress fresh commitments, even as confidence in the asset class’s long-term value proposition endures.
For many large US allocators, the issue is not conviction but capacity. Those sitting overweight and facing liquidity pressure are being forced to act with greater precision. Some are leaning on the secondary market to free up capital; others are consolidating manager rosters, forcing GPs to compete more directly for allocations across private markets. Pacing is under review, and in some cases, deliberately slowed.
An analysis of the 10 largest US investors that have adjusted their target allocations over the past 18 months highlights the scale of the challenge. These allocators have, on average, increased their targets by more than 1.5%.
However, they remain $7.4 billion over those revised levels on a net dollar basis—largely a consequence of muted distributions since 2022.
Yet constraint has bred creativity. Capital-constrained allocators are finding ways to remain nimble, selectively backing new managers and strategies that better align with today’s risk-reward trade-offs. Some smaller and mid-sized allocators, and newer entrants to private equity, less burdened by legacy portfolios, are enjoying a wider opportunity set and are often able to move more decisively.
Across the board, scrutiny has intensified. “No free passes” has become the governing principle, as Alaska Permanent Fund Corporation’s Allen Waldrop recently told trustees. That mindset is likely to define allocator behavior into 2026, with re-ups increasingly contingent on clear differentiation, disciplined portfolio construction and credible exit planning.
Co-investments remain a critical lever. As fee sensitivity persists and performance dispersion widens, allocators are placing greater value on co-investment access—both as a cost mitigant and as a means of concentrating exposure in their highest-conviction deals. For both established and emerging GPs, co-invest capacity is becoming a key differentiator.
Macro risks continue to shape portfolio construction. Allocators are wary of tariffs, geopolitical fragmentation and the swelling tide of retail capital entering private markets—forces that are pushing many investors down-market and overseas in search of less crowded opportunities. At the same time, heightened attention is being paid to exit optionality, reinforcing a preference for middle and lower-middle-market managers with sector-specific expertise and operational depth.
After AI and tech dominance in 2025, allocators are now taking stock. Many are reassessing tech concentration and pivoting toward diversification, both geographically and by strategy. This reassessment is opening doors for new managers at precisely the moment incumbents face tougher requalification hurdles. A review of allocations from 2024–2025 found healthcare and business services interest spike, while hardware and equipment and industrial goods saw a downturn.
Mid-sized investors are carving out private equity allocations or increasing pacing
Minnesota State Board of Investments: Sets its first private equity target and expands CIO authority
Minnesota State Board of Investments: Accelerates private equity pacing and shows appetite for new managers
Minnesota State Board of Investments: Carves out new private equity target
Measured allocator appetite across non-US regions
Harvey Ball Definitions (Appetite-Based)
- Selective or opportunistic appetite ◔
- Steady appetite ◑
- Strong appetite ◕
- Very strong appetite ⬤
United Kingdom ◑
Nordics (Denmark, Sweden, Finland, Norway ex-SWF) ◑
DACH ◔
Southern Europe (Spain, Italy) ◑
Mexico ◕
Chile ◑
Israel ◕
GCC ◕
Australia ◕
New commitments to remain subdued with focus on realizations
Traditional private equity fundraising is set to remain constrained as investors push for distributions and some of the largest allocators continue to have limited capacity to commit new capital. Until we see a meaningful reacceleration in distributions, fundraising momentum is likely to remain stalled for many.
Fundraising in 2025 marked a second year of decline. A sustained recovery will likely require several consecutive quarters of elevated M&A and exit activity. Until then, allocator selectivity will remain high and capital deployment uneven.
Expect more aggressive private equity takeovers. The tough fundraising environment and preference for top-performing managers are fueling industry consolidation. Large blue-chip firms with product offerings spanning alternative asset classes will remain relatively insulated from the tougher fundraising environment as they can also rely on income from other strategies. These large firms can look to acquire buyout shops, which may be more receptive to sensible bids in the current cash-constrained climate.
Within the middle market, we expect more divergence in fortunes. Managers that can demonstrate realizations, and cash distributions, in addition to outperformance, will stand the best chance of successfully raising fresh capital. A small group of coveted managers will continue to defy the market and raise oversubscribed funds.
As the market evolves and shows its dynamism, managers with demonstrably strong portfolio companies will also have access to tools such as secondaries, NAV lending and GP stake sales, if needed.
Conversely, managers with weaker portfolios and lower distribution levels will increasingly risk falling into zombie fund territory, unable to raise fresh capital and struggling to retain top talent.
The net effect of these trends, combined with a rise in continuation fund transactions, is that the industry could, in the near future, see a smaller cohort of firms with larger portfolios on average.
Top-tier first-time funds will continue to defy tough market
Notably, emerging managers took an average of just 13 months to raise their debut funds, with several completing so-called “one-and-done” final closes. Joe O’Mara and Ralph Choufani’s Aspirity Partners was one such example, raising €875 million ($1 billion) in six months, including a significant anchor investment from Yale University.
With private equity becoming an increasingly concentrated market at the top, deal sizes in buyout funds have increased, leaving an opening for startup managers targeting the lower middle market.
Half of the first-time funds closed in 2025 focused on the lower middle market or the SME segment, and with investors migrating down-market to capture alpha and diversify exit paths, we expect this trend to continue in 2026.
Similarly, with allocators keen to invest in thematic specialist funds—such as healthcare, life sciences and defense—we anticipate a sustained flow of new launches led by partner-level sector specialists at brand name shops.
Spotlight on European healthcare emerging managers
Nine of the 28 new private equity firms set up in Europe in 2025 were either healthcare specialists or have some exposure to healthcare.
The sector is buoyed by stable demand, defensive cashflows and fragmented markets but also comes with significant risks, including regulatory uncertainty, labor shortages, and political and public scrutiny over ‘healthcare for profit,’ among others.
London was the hotbed of activity, with eight of the nine launches setting up in the UK capital.
While these firms still need to raise capital themselves, and will likely have varying degrees of success, they could bring fresh ideas for allocators while broadening access to capital for smaller companies. Notable launches include:
Ren Life Sciences
Sigla Capital
Atlas Health Capital
Battle for $3 trillion in private wealth assets to escalate as public-private partnerships re-shape landscape
The battle for private wealth assets is expected to escalate in 2026 as managers jostle for a slice of the fastest-growing investor segment in private markets.
Global wealth investors could add $3 trillion of private markets investments between 2024 and 2030, Boston Consulting Group estimates. On top of this, regulatory easing is opening private markets to individual retirement accounts, which could add a further $900 billion from US 401(k)s alone, according to Cambridge Associates.
While private equity ‘40 Act vehicles have not taken off as much as their private credit counterparts (the top 10 funds combined managed less than $60 billion in March 2025), we are seeing signs of growth as more fund managers look to tap the wealth channel for new assets.
The products and technology to distribute to these new channels, while still new and evolving, are now sufficient to facilitate large inflows. Blue-chip firms, which have invested heavily in distribution capabilities, will increasingly expect monetization from the channel.
We tracked 17 key evergreen products coming to market in 2025. An interesting development has been the proliferation of joint ventures between private market specialists and traditional asset management firms with large retirement solutions businesses, and we expect more of these to be announced in 2026.
Many of the products that have been launched take a broad approach to private markets, investing across asset classes, often utilizing secondaries to construct a diversified portfolio. The new wave of partnerships also seeks to provide hybrid products, blending public and private assets and targeting a mix of both institutional and retail audiences.
Another interesting dynamic is growing concern from institutional investors around the rise of retail access to private equity. There is fear that managers may become over-extended as they expand product bases, that large inflows could add competition for deals and impact performance, and of the headline risk from potential liquidity mismatches, particularly in the retirement channel. There could be an opportunity for mid-sized managers to exploit this discontent, provided they can show differentiated returns.
Institutional participation to spur sustained growth of private capital in sports
Deeper institutional participation, expanding deal types and rising capital flows are set to contribute toward sustained growth in private equity sports investing in 2026. Allocators should proceed cautiously as valuations mature and competition intensifies.
We have tracked rising interest in sports funds from both institutional and wealth channels, which now have more structures and strategies available to them. This is driven by positive forecasts for the industry— revenue from sports teams and ancillary services is projected to grow from around $500 billion in 2025 to over $860 billion in 2033, according to Houlihan Lokey’s Sports Market Update – Fall 2024.
In a sign of confidence in the sector, CalPERS invested almost $1.8 billion across two funds in 2025: Ares Sports Media and Entertainment Finance Fund II and Sixth Street’s Sports and Live Entertainment Fund, which provide flexible capital across the sports ecosystem.
Wealth participation is also set to increase as several vehicles ramp up distribution. Ares launched a semi-liquid vehicle for its sports investing strategy, while wealth intermediaries iCapital and CAIS have set up funds in partnership with Arctos Partners and Eldridge Industries.
While overall transaction volume was subdued in 2025, the total value of deals hit an eight-year high, according to S&P Global Market Intelligence research. We expect transaction volumes to pick up again in 2026 as several blue-chip firms, and newcomers, wrap up fundraising on new vehicles.
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As the market matures, allocators must prudently balance opportunities with risks. Private investments in sports comes with many of the same inherent risks as other private market asset classes, such as illiquidity, valuation, execution, operational, and market risk.
There are also risks unique to the industry, including brand equity, high operating costs, on-field/on-court performance, reputational risks and ongoing regulatory changes.
There is also a danger that fans could resist private ownership if it prioritizes profit over tradition, community or on-field success. This can lead to backlash, boycotts or reputational damage that directly affects financial performance.
