Private Equity Faces Pressure in 2026: Legacy Assets, Exits & Tightening Rules

Private equity entered 2026 with a backlog that threatens both liquidity and investor confidence. Despite encouraging momentum in deal activity and exit markets during 2025, firms continue to be weighed down by a large number of unsold portfolio companies, extended holding periods, and pressures from long-ago overpaid acquisitions under generous valuations during lower rate regimes. The traditional buy-fix-sell model is under stress as firms are unwilling to dilute performance or realized returns by selling at less than hoped but must ultimately clear inventory to satisfy LPs and maintain fundraising flow [1].

Dry powder has decreased meaningfully from its peak, indicating that firms are beginning to deploy committed capital, albeit under challenging conditions. Yet this undeployed capital is aging, which creates its own tension: LPs expect both distribution and returns, and longstanding capital that remains unused intensifies governance and reputational risk [2].

Deal value metrics have improved—with U.S. deal value up ~8% year over year in H1 2025, and exit activity globally up ~40%—but deal volume remains flat or even declining. This suggests selective investment and a bifurcated PE environment: firms with sector expertise, operational capability, and alignment with investor expectations are winning, while many others struggle to compete and to raise capital [2][3].

Over the horizon, regulatory and tax challenges loom. Proposed reforms to carried interest taxation could stretch holding-period requirements, reducing after-tax returns for GPs and complicating compensation dynamics [4]. Additionally, LPs are more deeply scrutinizing GP track records, fee structures, and alignment of interest. The sale of minority GP stakes is rising as a strategic lever, both to raise cash and reward/retain partners amid limited exits [4].