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PE’s Inflection Point
Key Points:
- A more benign operating environment has commenced after several challenging years.
- A strong M&A recovery is also under way, which is self-reinforcing to PE fundamentals.
- PE-backed companies are uniquely positioned to benefit from AI adoption.
We believe the present cycle has several more years to run, leading to healthier exits and distributions to PE investors.”
What We Are Seeing
As we enter 2026, private equity is at a key inflection point as it adapts to lessons learned and rapid pace of change in the last 12 months. One lesson re-learned is how resilient the asset class can be during tumultuous times. A new dynamic is the K-shaped nature of the economic recovery, including PE’s own industry recovery.
The industry has come through a tough operating environment over the last few years, characterized by supply chain shocks, constrained capital markets, higher financing costs, and most recently, trade wars. While not completely extinguished, many of these trends have paused or reversed, and the industry can look forward to a more benign operating environment in 2026.
An M&A uptrend is now firmly in place, after troughing at a three-decade low relative to US GDP.1 Private equity accounts for more than half of all M&A activity, either as a buyer or seller, and their fortunes are closely intertwined.2 We believe the present cycle has several more years to run based on the duration of prior recoveries (Display 1), leading to healthier exits and distributions to PE investors. In the near term, US companies doubled down on cost efficiency in 2025, setting the stage for margin expansion and accretive M&A to sustain that growth in 2026 and beyond.
The financing environment is also becoming less onerous. Across leveraged finance, the average cost of funding for a PE middle market term loan has fallen by three percentage points from the prior peak, with scope to move lower in 2026 given the outlook for additional Fed Fund cuts3. All things being equal, lower interest rates provide a boost to PE internal rates of return, and we don’t expect this cycle to be any different.
Notwithstanding these positive developments, valuations are high, especially for well-performing companies, which has hindered deployment. Additionally, GPs are not generating sufficient DPI and liquidity from their 2020-2022 vintages to raise additional capital. Therefore, it is likely that the number of GPs actively making new investments will fall over the coming years.
What We Are Doing
The transformative impact of artificial intelligence is no longer confined to large-cap public companies. The benefits of AI are now cascading into mid-sized private companies, which are leveraging these tools to drive efficiency, accelerate product development, and enhance customer engagement.
In 2025, more than half of the portfolio companies that we control in our PE middle market funds have active AI initiatives, ranging from agentic customer support and automated coding to predictive maintenance and dynamic pricing. A majority believe that AI will become material to their growth thesis, even at this early stage of adoption. These technologies are rapidly reimagining workflows, reducing costs, and unlocking new domains of value creation.
As AI models become more capable in 2026, the competitive moat for tech-enabled mid-market businesses will deepen, making them attractive targets for private equity investment and exit. Not all PE-backed companies will benefit equally, however, and many will be disrupted. Non-differentiated PE platforms that do not have the depth or scale to deploy AI resources effectively, or who did not guard against existential risks in their diligence process, will end up on the short end of the K-shaped recovery.
What We Are Watching
We are watching to see how the rolling economic recovery progresses. We believe that different industries will revive at different points in time in 2026, especially with the overlay of tariff policy which may evolve into a patchwork of executive orders and exemptions. We are also looking for a broadening in capital markets activity. M&A has been powered by mega deals and IPO activity has slowed recently due to the government shutdown. Ideally, they both regain momentum in 2026 with broader participation by private companies both big and small.
Global M&A Deal Value ($B)
Global M&A Deal Value ($B)
Display 1
Featured Insights
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