Private Equity Enters 2026 With Exit Surge, Valuation Resets & Declining Dry Powder

The private equity industry is at an inflection point. Having weathered years of rate pressure, stretched valuations, and exit delays, PE firms are now entering 2026 with both opportunity and legacy challenges. A backlog of unsold assets, long hold times, and vast undeployed capital (“dry powder”) create both tension and potential.

Exit crunch easing, but fatigue remains. Exits and IPOs showed strong gains in 2025, suggesting slowing momentum is reversing. However, the number of portfolio companies still sitting unsold increased slightly, indicating many legacy investments remain trapped in uncertain value cycles. Firms bought during market froth are reluctant to accept losses or compressed returns, which is keeping hold periods high. [1]

Dry powder under pressure. While $880 billion in undirected capital remains large, the drop from $1.3 trillion evidences expanding pressure to put capital to work under more disciplined terms. Competitive pressure, rising expectations from LPs, and deployment difficulty amid elevated rates mean PE will need to be more creative in structuring deals in 2026. [1][2]

Returns and valuation reset. PE firms face a harsher valuation environment: many past acquisitions were made at high multiples, financed with costly debt post-2022. Exit prices are often lower than entry expectations, leading firms to hold until conditions improve. But waiting carries risk: opportunity cost, operational decay, and investor impatience. [1]

Strategic implications:

• Managers will have to sharpen value-creation playbooks: operations, cost discipline, and sector expertise will trump financial engineering. [2]
• Exit options will diversify: IPOs, continuation funds, secondary sales and carve-outs will be more prominent. [2]
• Fundraising will be more polarized: top quartile firms with proven exits and discipline will attract capital; middle and lower tiers may struggle. [2]
• LPs may demand more transparency on hold periods, return assumptions, and mark-downs. Legacy assets in portfolios will be under greater scrutiny. [1][2]

Open questions going into 2026: How fast will interest rates fall, and how much will that restore deal financing dynamics? Will IPO markets stay open for PE-backed companies or collapse into volatility? Which sectors will lead exits—whether AI/tech or industrials? And finally, will legacy portfolios suffer under extended holds with shrinking performance fees?