Industry Trends
Private equity turns downmarket in hunt for returns
Private equity firms are increasingly targeting the lower middle market (LMM), driving up competition for smaller company buyouts that were once less contested and more attractively priced. Limited partners are redirecting capital from large buyout funds toward LMM strategies as sluggish exits, high borrowing costs, and challenging conditions for larger deals persist. Investors view companies with under roughly $50 million in earnings as offering greater potential for operational improvement and less sensitivity to public market volatility.
A range of managers are raising sizable LMM focused funds. Levine Leichtman Capital Partners is seeking $1.7 billion, with slightly below-market management fees (1.85% stepping down to 1.65%), reflecting competition for both capital and deals. Monogram Capital Partners closed an oversubscribed $350 million fund, while Gridiron Capital targets $2.5 billion for Fund VI. Platinum Equity’s Small Cap Fund II closed at $2.3 billion, Siguler Guff has raised $1.7 billion toward a $2.2 billion target, and STG Partners is aiming for $850 million for its second LMM fund.
Large buyout firms such as KKR, Genstar Capital, and New Mountain Capital are also moving down market, pursuing smaller platforms and add-on heavy strategies to keep capital deployed. As a result, more LMM deals are now fully marketed and attract multiple bidders, including for add-ons. Entry valuations have risen, narrowing the discount to larger deals, while lenders still provide leverage for strong credits but with tighter underwriting.
Despite increased competition and converging strategies, often centred on buy and build, margin expansion, and roll ups, the LMM remains attractive due to its resilience, domestic focus, and ongoing consolidation opportunities.
Source: Middle Market
How venture capital is evolving in 2026
In 2025, AI shifted from hype to core infrastructure and became the dominant force in venture capital. AI companies captured 65% of all venture deal value, with $339.4 billion invested, heavily concentrated in a few mega rounds like OpenAI’s $40 billion and Anthropic’s $30 billion. The market took on a barbell shape: intense activity at seed and early stages, massive late-stage financings, and a quieter, more disciplined middle. Category leaders with differentiated AI capabilities set valuation benchmarks, while many others saw only modest valuation gains. AI native startups such as Cursor, Lovable, StackBlitz, and Emergent validated monetization by surpassing $10 million ARR within 18 months.
Despite improving performance, fundraising for venture funds remained challenging. LPs, still cautious after 2021, focused on established managers, driving a flight to quality and capital concentration. Funds over $500 million now control more than half of venture dry powder, backing larger, high conviction bets in capital intensive areas like AI infrastructure and deep tech.
Liquidity rebounded, with exit value nearly doubling to $297.6 billion and 48 IPOs, including 17 unicorns. However, many major private companies stayed private, as secondary markets surged to $94.9 billion, offering alternative liquidity. M&A was mostly earlier stage and strategic, with notable deals like SpaceX-xAI and Google-Wiz.
Venture capital has become a central engine of global value creation, especially in AI. As 2026 unfolds, the market is more selective but stabilizing, defined by access, discipline, and concentrated capital allocation.
Source: Forbes
Shifts in private real estate
Global real estate is shifting from a returns cycle driven by falling cap rates and rising valuations to one defined by execution quality, capital structure discipline, and platform scale. In 2025, global deal value rose 12% to $873 billion, driven by larger deal sizes rather than more transactions, signalling capital concentration in targeted opportunities. Specialty property reached 14% of volume, with data centre deals up 37%, supported by rising demand and evolving debt markets. Office deal volume grew 17%, led by a strong “flight to quality” in Class A assets, where US volumes rose 34% amid hybrid work and return to office mandates.
Returns turned modestly positive in 2025, led by debt (4.8%) and core‑plus (1.5%), with opportunistic strategies at 1.2%. A $2.1 trillion US loan maturity “wall” has largely been pushed forward via extensions and restructurings, reflecting equity impairment. LPs are increasingly favouring Western Europe and Asia-Pacific (ex‑China).
AI, especially agentic and generative AI, is becoming a competitive moat, transforming maintenance, leasing, asset management, and construction by automating workflows and freeing humans for judgment intensive decisions. Capital is flowing to specific subsegments (data centres, Class A offices, multifamily, senior housing) and to regions with favourable fundamentals.
Consolidation is reshaping the GP landscape, favouring large, diversified platforms and highly specialized niche managers, while those in the middle struggle. The line between real estate and infrastructure is blurring, particularly in data centres, logistics, and student housing, with infrastructure allocations still below targets, offering further deployment potential.
Source: McKinsey & Company
Quarter Review
Private markets outlook: Q2 2026
The heightened geopolitical risk, notably the Iran conflict and oil-price volatility, reinforces the need for resilient, diversified portfolios with selective private markets exposure. The focus is on structurally protected segments: smaller and mid market strategies, operational value creation, diversified credit, and essential service assets. Over 80% of growth in continuation investments is structural, not cyclical.
In private equity, fundraising, dealmaking and exits have slowed from post pandemic peaks due to tighter financial conditions and valuation resets, but activity began to recover in late 2025. Continuation vehicles are becoming a mainstream tool for ongoing value creation. Venture and growth capital show sharp divergence: late-stage valuations (Series D+) have reached new records, making selectivity critical.
Real estate appears at an inflection point after a prolonged price discovery phase. Early signs of recovery include modest capital growth, higher transaction volumes and a rebound in fundraising, though repricing varies widely by sector and region. Living and operational segments (rental housing, student accommodation, healthcare) show strong fundamentals, inflation pass through and lower economic sensitivity.
In credit, asset backed finance offers diversified collateral pools, structural protections and floating rate coupons, providing income, low duration and downside mitigation. Infrastructure debt remains a source of stable, defensive income backed by essential assets. Infrastructure equity benefits from structural tailwinds from the energy transition and AI, though near term dynamics are complex amid higher construction and financing costs and grid bottlenecks.
Overall, a diversified multi private markets portfolio has historically delivered more resilient, less volatile returns than a traditional 60/40 mix, supporting better compounding over time.
Source: Schroders
Global PE exit volumes fall in Q1
Global private equity exit volume declined 6.25% year over year in Q1, with total exits falling to 720 from 768. Trade sales dropped to 566 from 603 and secondary buyouts to 141 from 153, while IPO exits inched up to 13 from 12. Despite fewer deals, aggregate exit value surged to $311.18 billion, largely due to a single $250 billion transaction: SpaceX’s acquisition of X.AI LLC.
Macroeconomic headwinds, shifting tariffs and ongoing supply chain risks have complicated valuations and dampened exit activity. Closed deal volumes continue to fall, signalling weak buyer confidence. On the buy side, investors struggle to find enough high-quality targets; on the sell side, holding periods have stretched beyond five years, up from 4-4.6 years in 2017-19. This forces sellers to seek even higher exit prices to meet return targets and support future fundraising, yet they remain reluctant to accept lower valuations despite pressure to return capital.
IPO markets remain largely constrained, with only a gradual recovery so far and expectations for stronger activity later. In Q1, strategic sales totalled $270.81 billion (heavily skewed by the SpaceX-X.AI deal), secondary buyouts $39.06 billion, and IPO exits $1.32 billion. First-quarter exit value was about half of full-year 2025’s $629.59 billion.
IT led sector activity with 198 exits, followed by industrials (123) and healthcare (87). Exits are more resilient in AI adjacent and digital infrastructure businesses, and small to midmarket buyouts benefit from broader buyer pools and more flexible financing. The second largest Q1 exit was the $10.61 billion sale of InPost SA by a consortium including PPF Group and Advent.
Source: SP Global
Market Sentiments
GP outlook for private equity in 2026
The private equity industry relies heavily on historical performance data, but there is less visibility into what GPs are currently seeing and planning. To address this, Bain & Company and Stepstone surveyed 103 investment and investor relations professionals in North America and Europe from December 2025 to January 2026 about their expectations for 2026.
GPs largely believe purchase price multiples have plateaued at high levels, with 79% expecting them to remain roughly where they are. This limit returns from multiple expansion and increases pressure on value creation. The main reason deals failed to close in 2025 was disagreement on valuation, as the buyer-seller gap, though narrowing since the 2022 interest rate shock, remains the top deal-breaker over diligence or macro risks.
Around 75% of GPs underwrote their latest flagship deal assuming stable margins or up to 300 bps of margin expansion, though achieving these post close remains challenging. Exit activity is expected to stay strong in 2026, following the second-best year for exits on record.
Continuation vehicles (CVs) are now a mainstream liquidity tool, used not only to return capital to LPs but also to refinance assets and fund buy-and-build M&A. At the same time, management fee pressure is rising, especially for larger funds, and fee discounts are more common. Co-investment, typically fee-free, is widespread and materially erodes fee revenue, with a median of $0.33 of co-investment per $1 of fund commitment.
Generative AI is delivering the most value in due diligence and deal sourcing, mainly via efficiency and cost savings. However, 39% of GPs do not expect AI to have a material financial impact on portfolio companies in 2026, and some foresee near-term drag, reflecting uncertain payoffs.
Source: Bain & Company
Private credit: Beyond the headlines
Private credit has historically offered differentiated income, potential outperformance versus public markets, and attractive yields with lower volatility. While some now question its outlook, citing performance dispersion, AI disruption in software heavy portfolios, and spread compression in direct lending- asset-backed finance (ABF) stands out as a compelling segment.
ABF consists of loans secured by underlying assets such as equipment leases, auto loans, and residential mortgages. These assets generate predictable payment streams that service the debt independently of any single company’s financial health. Collateral pools are diversified across many borrowers and tangible or contractual assets with observable market values. Unlike typical corporate loans, often repaid in a lump sum at maturity and increasingly “covenant lite”, ABF structures usually return principal throughout the life of the investment; a finance lease may return about 75% of principal within three years, creating a different risk trajectory.
ABF strategies can target high single digit returns, often 200-250 basis points above comparable public securitized products, with some segments offering more. They also diversify away from pure corporate credit exposure, adding sensitivity to consumer behaviour, real asset values, and contractual cash flows.
Post global financial crisis regulation has pushed banks to retreat from asset intensive lending, creating a roughly USD 7 trillion global ABF market where private capital is only ~5% today. Growing demand from borrowers and insurers, plus the rise of evergreen and open ended ABF vehicles, supports further private capital penetration. However, ABF is complex, requires specialized expertise, and involves risks; it may not be suitable for all investors.
Source: J.P. Morgan
Sector Update
Structural shifts in European private credit
The European private credit market has shown headline default rates of about 2% in 2025, like syndicated loans, but this masks significant underlying stress. Since 2017, around 150 European LBO-backed companies, representing roughly $38 billion of financing, have experienced “credit events” (mainly debt-for-equity swaps, with only four bankruptcies). In these situations, lenders often take partial or full ownership in exchange for reducing debt, crystallizing losses for original shareholders but potentially stabilizing the business.
Stress is concentrated rather than systemic. The most affected deals are 2017-2018 and 2021 vintages, which have faced COVID, inflation, higher rates, geopolitical shocks, and tariffs. Future 2023-2025 vintages are expected to see more stress, given heavy deployment, tighter spreads, and possibly slower rate cuts.
Cyclical sectors such as consumer, retail, industrials, and manufacturing, account for over half of credit events. Smaller companies are particularly vulnerable: those with EBITDA below €20 million represent nearly half of events, and those below €75 million over 80%. Even supposedly non-cyclical areas like IT services have shown more cyclicality than expected when clients delay projects.
Looking ahead, credit events should remain elevated. While the macro backdrop is constructive, outcomes will diverge by sector and inflation sensitivity. Refinancing has helped so far, but more stressed borrowers may increasingly “hand over the keys.” For investors, manager selection is critical: assess experience through cycles, pipeline quality, credit event and loss history, underwriting discipline, and workout capabilities. Excessive equitizations can shift portfolios from fixed income toward equity-like risk, complicating returns and liquidity.
Source: Goldman Sachs
Infrastructure outlook 2026
Infrastructure has shifted from a discretionary driver of growth to a strategic, mission critical asset class at the core of national security, technological leadership, and economic resilience. Global infrastructure needs are projected to exceed $106 trillion by 2040, far beyond what governments or corporations can fund alone, creating a massive role for private capital.
The 2026 outlook is shaped by three reinforcing structural forces:
- Hyper‑competitive geopolitics: The era of benign globalization has given way to strategic rivalry, with infrastructure on the front lines of conflict and policy shifts. More frequent geopolitical and policy shocks require investors to integrate macro, policy, and operational analysis, stress testing portfolios for tariffs, sanctions, supply chain risks, and inflation exposure.
- Technological transformation: Rapid, energy intensive digitalization makes infrastructure, especially power and digital networks, central to competitiveness. Investors must “play offense” by delivering integrated solutions across power, compute, connectivity, and capital, using scale and coordination (e.g., fiber portfolios and executive summits) as structural advantages.
- Economic regime change: Higher inflation, structurally higher interest rates, and elevated sovereign debt mark a new regime where past beta driven public market returns are unlikely to repeat. In this environment, private infrastructure offers attractive risk adjusted returns and long duration, collateral backed cash flows, positioning it as a strategic core allocation rather than a niche.
While complexity and capital intensity have risen, disciplined investors who combine macro insight, operational excellence, and prudent underwriting can both enable the next generation of infrastructure and generate compelling returns.
Source: KKR
Infrastructure outlook 2026
Infrastructure has shifted from a discretionary driver of growth to a strategic, mission critical asset class at the core of national security, technological leadership, and economic resilience. Global infrastructure needs are projected to exceed $106 trillion by 2040, far beyond what governments or corporations can fund alone, creating a massive role for private capital.
The 2026 outlook is shaped by three reinforcing structural forces:
- Hyper‑competitive geopolitics: The era of benign globalization has given way to strategic rivalry, with infrastructure on the front lines of conflict and policy shifts. More frequent geopolitical and policy shocks require investors to integrate macro, policy, and operational analysis, stress testing portfolios for tariffs, sanctions, supply chain risks, and inflation exposure.
- Technological transformation: Rapid, energy intensive digitalization makes infrastructure, especially power and digital networks, central to competitiveness. Investors must “play offense” by delivering integrated solutions across power, compute, connectivity, and capital, using scale and coordination (e.g., fiber portfolios and executive summits) as structural advantages.
- Economic regime change: Higher inflation, structurally higher interest rates, and elevated sovereign debt mark a new regime where past beta driven public market returns are unlikely to repeat. In this environment, private infrastructure offers attractive risk adjusted returns and long duration, collateral backed cash flows, positioning it as a strategic core allocation rather than a niche.
While complexity and capital intensity have risen, disciplined investors who combine macro insight, operational excellence, and prudent underwriting can both enable the next generation of infrastructure and generate compelling returns.
Source: KKR
Artificial Intelligence Scope/Trends
How AI is redefining risk in private credit
Private credit has surged to $2.4 trillion in assets and could reach $4.5 trillion by 2030, largely by financing PE backed mid-market companies with floating rate loans. A disproportionate share of that exposure is in software: roughly 40% of all PE backed loans, with some software risk obscured under other industry labels. Apollo has already halved its software exposure, and CEO Marc Rowan has criticized managers with heavy concentration in a sector now vulnerable to AI.
AI threatens many borrowers whose business models rely on repetitive knowledge work sold by the hour, without proprietary data and with powerful customers who can quickly demand lower prices. High risk areas include IT managed services, routine software development and QA, marketing agencies, basic analytics, HR and recruiting, paralegal work, contract review, and tier one customer support. The stress path runs from margin compression to falling EBITDA, rising leverage, covenant pressure, amendments, liquidity strain, and “extend-and-pretend” behaviour.
UBS’s tail risk scenario envisions private credit defaults reaching 15%, versus current 3%-5% and Moody’s base-case 2.5% by year-end. Software loan distress is already visible, with $25 billion trading below 80 cents on the dollar and EBITDA multiples down from 30x to 16x.
A second risk comes from widespread use of similar AI models in underwriting. If everyone relies on the same data and features, risks can synchronize. Experts urge treating model risk like concentration risk and regulators warn that opaque private credit stress could spill into the banking system. LPs and borrowers should proactively stress test against rapid AI-driven repricing.
Source: Forbes
