Why Private Equity’s Dry Powder Isn’t Moving & How Continuation Vehicles Will Shape 2026

The private equity sector is now in the midst of an enforced reset. After years of buoyant M&A activity supported by low interest rates and rosy growth expectations, firms are grappling with a liquidity hangover. A substantial backlog—12,900 unsold portfolio companies in U.S. PE portfolios as of late 2025—and inflated purchase multiples have created a mismatch between current exit realities and past underwriting assumptions [1][3].

Interest rate normalization underpins much of this pain. Since 2022, the cost of debt has risen sharply, undermining leveraged buyout dynamics and making exits less attractive; lower valuations coupled with LPs’ increasing skepticism of long holding periods are jointly pressuring GPs to rethink exit strategies [1][2]. With $880 billion in U.S. dry powder and global dry powder near $2.5 trillion, much of the capital is tied up in aging funds that have yet to generate cash returns commensurate with their vintage [1][3].

Given constrained exit routes, especially through M&A and IPO channels, continuation vehicles are rising fast. In 2025 they accounted for about 20% of sales involving PE firms, marking both a tool for liquidity and a potential governance concern, especially over valuation and fairness to LPs [2].

For 2026, three strategic priorities emerge. First, operational value creation—not just financial engineering—must deliver; industrial, AI/tech, and resilient sectors will be in focus [6]. Second, portfolio aging cannot persist indefinite⁠ly without eroding LP relationships; GPs must deploy creative exit pathways and better manage expectations. Third, industry structure will favor scale and execution capability: boutique funds without specialization or operational leverage risk being squeezed or absorbed [4][5].

Open questions concern whether macroeconomic tailwinds (rate cuts, inflation easing, policy clarity) will emerge in time to unlock constrained exit windows, the degree to which regulators will tighten reporting and tax incentives may shift deal economics, and how governance practices will evolve particularly around continuation vehicles to preserve LP trust.