Private Equity in 2026: Navigating Valuation Gaps, Leverage & Exit Pressures

Portfolio Backlog and Hold Periods

Private equity firms continue to lean on long holding periods, with data showing about 12,900 U.S.-based portfolio companies remaining unsold as of September 2025—slightly up from 2024 levels. [1][2] The average holding period is near seven years, significantly above pre-COVID levels, reflecting challenges in exit timing caused by the return of high interest rates. [2][5][7]

Valuation Pressures and Exit Barriers

Valuations for both holdings and exit transactions are elevated, particularly for high-quality companies. [5] Median exit and holding multiples hit highs in Q2 2025, but those statistics are skewed toward the best-performing assets, masking overvaluation in many portfolio companies. [5] The requirement for buyers to accept discounted valuations looms large, especially where sellers acquired assets at boom-era valuations powered by cheap debt. [2][5]

Leverage, Credit Headwinds, and Capital Structure Strains

Leverage levels (measured as net debt to EBITDA) in younger vintages from 2020–2024 have been compressed by rising rates, with many falling into zones where interest coverage ratios are marginal at best. [6] The resulting squeeze in “headroom” (i.e., buffer for distributions, dividend recapitalizations, bolt-on acquisitions) is tightening rapidly. [5][6] Private credit borrowers face similar issues—about 15% are not generating enough EBITDA to cover interest payments—while larger risks emerge at loan maturities and in sectors with weakening fundamentals. [5]

Dry Powder, Exit Opportunities, and Sector Dynamics

Undeployed PE capital has declined from its 2024 peak but remains substantial ($880B), suggesting firms have capital waiting in the wings should exit conditions improve. [1] Exit activity has seen notable successes: Medline’s IPO was the largest since 2021, and Ampere Computing sold for $6.5B, helping restore some optimism. [1][8] High-growth technology—and especially AI—and biotech are expected to dominate deal pipelines in 2026, offering a lifeline for PE firms able to pivot toward strong growth narratives. [1][5]

Strategic Implications

PE firms must confront the following strategic imperatives:

• Be prepared to write down values where necessary and accept exit proceeds below acquisition multiples.
• Emphasize operational value creation—cost controls, margin expansion, technology adoption—over financial engineering reliant on leverage and multiple arbitrage.
• Refine selection: focus on high-quality, growth-oriented assets; strengthen underwriting discipline, especially in sectors sensitive to credit cycles and regulation.
• Manage maturity and liquidity risks: navigate covenant and debt-service pressures, particularly for investments made in highly leveraged vintages.
• Engage limited partners proactively, managing expectations around returns, hold periods, and distributions; explore alternatives such as GP-stake sales and secondary transactions to boost liquidity. [8][4]

Open Questions

• What will be the path of interest rates through 2026 and how much pressure will it continue to place on leverage and exit valuations?
• How resilient are growth sectors like AI, biotech, infrastructure, particularly under macroeconomic stress or regulatory scrutiny?
• Will IPO markets remain open enough to absorb large exit candidates, or will PE-to-PE and strategic buyers dominate exits?
• How will LPs respond if returns disappoint and distributions lag expectations—will this lead to contraction of allocations or more scrutiny of GP performance?
• What role will macro risks—such as inflation, geopolitical tensions, supply chain disruption—play in shaping exit pipelines and valuation regimes?