Private Equity in 2026: Navigating Dry Powder, Exits & Valuation Risks for Growth

As we move into 2026, the private equity industry is facing a key inflection point that demands substantial “housecleaning” and strategic adaptation. The first set of challenges centers around legacy portfolio dynamics. PE firms are weighed down by a backlog of unsold companies—around 12,900 U.S. companies as of end-September 2025—and average hold periods approaching seven years. These figures suggest exit rhythms have not yet fully recovered from rate shocks beginning in 2022, and they raise concerns over return on invested capital and LP dissatisfaction with distributions. [1]

Exit markets are improving but remain constrained. While noticeable exit successes—such as the IPO of Medline and the $6.5B sale of Ampere Computing—offer positive signals, traditional exit routes have shrunk compared to 2021 highs. [1] To manage this, PE firms are increasingly relying on “continuation vehicles,” internal fund structures allowing partial exits without full third-party sales. The volume of these self-transactions rose markedly to about 20% of all PE sales in 2025, and are expected to hit $107B. [2] Such structures present real benefits for liquidity but also generate scrutiny over valuation practices and conflicts of interest. [2]

On the capital side, PE firms enter 2026 with substantial dry powder—roughly $880B for U.S. PE—providing the fuel for expected uptick in deal activity. [1] However, fundraising remains bifurcated, with LPs more selective, putting pressure on GPs to demonstrate stronger DPI (distributions to paid-in capital) and better alignment with LP expectations. [3][4]

The macro environment provides mixed indicators. Interest rates, which jumped post-2022, have cost real estate in LBO structures. Recent modest rate declines and expectations of more easing in 2026 may ease financing costs. [5] Inflation, regulation, and geopolitical risk (including trade policy) remain sources of uncertainty. [3][4] Within this environment, sectors such as infrastructure (especially AI/data center infrastructure), industrials, health tech, carve-outs of non-core corporate assets, and under-owned physical assets are likely to generate the most opportunity. [4][5]

Operational execution and value creation are becoming essential differentiators. With valuations elevated, simply buying at premium multiples and applying financial leverage is less likely to generate acceptable returns. PE firms are increasingly embedding capabilities around operational transformation, talent, Gen AI use in portcos, pricing leverage, and efficiencies. [3][4][6]

Strategic risks and open questions that GPs must address in 2026:

• How to balance liquidity demands from LPs with the need to avoid fire-sales or value-destructive exits.
• How to ensure transparency and fair valuation in continuation vehicles to maintain LP trust.
• Whether interest rate declines are sufficient and durable enough to support leveraged exits and new deal investment.
• How regulation (especially in the UK/EU and possibly U.S.) will affect fund structures, tax treatment, and reporting obligations.
• Can PE firms capitalize on under-owned sectors and digital/real asset strategies while avoiding thematic overcrowding and risk concentration?