Private Equity Heads Into 2026 with High Inventory, Dry Powder Pressure, Strategic Exits

The private equity industry is entering 2026 still burdened by legacy issues—namely a growing inventory of unsold assets combined with extended holding periods, which continue to erode LP confidence. According to WSJ data, U.S. PE portfolios held approximately 12,900 companies by September 2025, with hold periods remaining near seven years—far above historical norms. [1] This inventory reflects investments made under low interest rates and generous valuations; with sharper borrowing costs post-2022, many sponsors are unwilling to sell at sub-preferred returns. [1]

Though deal activity has surged for large, high-conviction transactions, overall volume is still weak. US PE deal value rose about 8% year-over-year in 1H 2025 to ~$195 billion, yet volumes remain flat or declining. [3] Global exit value through Q3 hit $832 billion, nearing 2024’s total, but exit counts are at decade lows (~2,155), suggesting fewer but larger exits dominate. [2][3]

Fundraising is contracting and increasingly concentrated among large, reputable GPs. In H1 2025, global PE funds raised ~$326 billion across 369 deals—down ~14% in value, with mega funds (>$5 billion) dropping by about 30%. [5] U.S. fundraising is roughly 40% below year-ago levels. High dry powder, aging capital, and LPs’ demand for realizations are creating pressure to deploy or distribute capital. [1][3]

Several strategic implications emerge for 2026:

• LPs will continue demanding liquidity and distributions; sponsors unable to deliver may struggle to raise new funds or will face steeper pricing for mid-market assets. The pressure will favor exit structures offering speed and certainty, including continuation vehicles, structured secondary sales, and carve-outs. [1][3]
• Valuation discipline will be critical. With public markets seen as detached from durable fundamentals, there is opportunity for public-to-private transactions where asymmetric upside exists and true cash flow value can be unlocked. [3]
• Sector rotation: under-owned industrials, infrastructure (especially AI infrastructure and energy transition), and “picks-and-shovels” assets offer potential for asymmetric returns and defensive stability amid macro uncertainty. [3][7]
• Competitive dynamics: more sponsors, including sovereign wealth funds and private credit players, are entering deal space, but supply of quality assets is limited. Thus, deal sourcing, operational transformation and integration capabilities will distinguish winners.[3]

Open questions remain:

• How fast will interest rates decline, and will valuations adjust across sectors to support broader exit activity?
• What will be the role of IPOs compared to strategic and secondary exits; will public markets reliably reopen for PE-backed firms?
• Will LP preferences shift more toward flexible, shorter-horizon funds or alternative strategies given the long tail of unliquidated assets?
• How will sponsors balance patience for valuation recovery against pressure to return capital and restart fundraising, especially in the mid-market?