How Private Equity Must Adapt in 2026: From Stalled Exits to Tech‐Driven Value Creation

Private equity as of late 2025 is in a phase of ‘housecleaning’. On the one hand, firms are dealing with a backlog of older investments—companies purchased during frothy valuation periods—which have yet to return capital to LPs. Roughly 12,900 U.S. companies are still held in PE portfolios as of September 2025, and average holding periods remain around seven years, indicating reluctance to sell into weak markets or accept losses.

Deal activity shows signs of recovery, but the market remains selective. Deal value in the U.S. in the first half of 2025 rose ~8 % year-over-year to about $195 billion, yet volume was flat, suggesting that large deals (e.g., carve-outs, take-privates) are driving value while mid-market activity lags.

Exit discipline is under strain. IPOs have somewhat rebounded—the third quarter of 2025 saw higher IPO proceeds than recent years—but they remain modest relative to historic norms. Firms are increasingly relying on continuation funds and secondaries to give aging assets a path to liquidity, and using dividend recaps to meet LP demands in a difficult exit environment.

Strategic differentiation is becoming critical. Firms that integrate technology and AI throughout deal origination, due diligence, operations, and exit positioning are gaining competitive advantage. LPs are no longer content with financial engineering alone; operational value and sector expertise matter increasingly.

Regulatory, tax, and investor landscape shifts add complexity and risk but also opportunity. Reforms (e.g., U.S. tax law changes, rules for retirement plan access to private markets), evolving reporting/ESG demands, and geopolitical considerations (trade, supply chain, national security) are influencing deal structures, fund design, and sector focus.

Sectorally, resilient industries—tech (especially AI/SaaS), industrials, insurance, infrastructure including digital/data-center or energy transition—are expected to lead. Sectors with exposure to tariffs, import-dependency, or regulatory vulnerability face headwinds.

Key implications for PE firms:

• Proactive asset disposition: expect higher volume of sales, mergers, sponsor-to-sponsor trades, or restructuring of old portfolio companies to clean up the carry pipeline.
• Pressure on return metrics and compensation models due to rising holding costs, low exit multiples, and interest expense; LP demands will intensify.
• Need for deeper operational capabilities as GP differentiation moves away from financial structuring to value creation via tech, ESG, supply chain resilience.
• Regulatory and tax agility as a source of competitive advantage—not only compliance cost: those who can anticipate changes (e.g. 401(k) reform, tax treatment) will be better positioned.

Open questions remain:

• Will interest rates begin to decline in 2026 or remain sticky, and how will that affect both deal financing costs and LP return expectations?
• Can IPO markets sustain the rebound, or will macro/law-risk events undermine confidence?
• How will new regulatory or tax reforms—domestic and international—reshape cross-border deal flow, fund vehicles, and LP investor types?
• Will competition from non-traditional capital (sovereign wealth funds, family offices, private credit) compress returns and change deal leadership?