Industry Trends
The rise of lower middle market private equity
Private equity has grown into a major global asset class, but future outperformance is unlikely to come from mega funds at the top end of the market. Instead, the lower middle market offers a stronger path to differentiated returns due to its structural characteristics and the nature of value creation.
Three features define this segment. First, fragmentation: many B2B services, niche manufacturing, distribution, and consumer sectors lack scaled national players, enabling buy and build strategies that unlock value through integration, procurement savings, cross selling, and fixed cost leverage. Second, founder ownership and succession: many businesses are still run by first or second-generation owners, especially aging baby boomers in the U.S. and soon in Asia, creating a steady pipeline of transition ready companies, often outside fully intermediated processes. Third, information asymmetry: these firms often have weak reporting and governance but are profitable; investors who can rapidly build a clear operational picture gain a rare underwriting edge.
Returns in this segment rely on three disciplines. Owner alignment via structured rollovers and performance incentives supports smoother transitions. Capital structure discipline, using lower initial leverage (around two to three times EBITDA) manages volatility and preserves flexibility. Operational value creation, rather than multiple expansion, drives return through pricing, procurement, professionalized management, and modernized operations.
Demographic trends, higher interest rates, and enabling technologies all reinforce the attractiveness of this space. While risks around execution and management depth remain, disciplined, specialized firms with strong sourcing and operational rigor are best positioned to outperform.
Source: Forbes
Private markets at an inflection point
Private equity is in an unusual phase: portfolio companies continue to perform but exits and distributions have slowed even as public markets post strong gains. Rather than asking whether PE is “working,” Carlyle AlpInvest frames today’s market as an adjustment to cyclical frictions and structural shifts. Cyclically, higher financing costs and valuation uncertainty have delayed realizations, with GPs hesitant to sell below levels that reflect operating performance. After a late-2025 pickup, momentum softened as Middle East war related energy disruptions and concerns about AI-driven software disintermediation complicated underwriting and triggered repricing. In Q1 2026, LBO volume was $126 billion, down 21% quarter-over-quarter and 3.5% year-over-year; deal count fell 9% to 434.
Structurally, more capital is chasing fewer liquidity avenues than pre-2022. Despite recent drawdowns, nearly $2 trillion of dry powder remains across buyout, growth, and venture, and dispersion across managers is widening. Many GPs struggle to evidence a differentiated, repeatable strategy; funds without an edge are being left behind. For LPs, this argues for more concentrated GP relationships, for managers, heightened emphasis on consistency, transparency, and execution.
Liquidity constraints are catalysing innovation. Capital management and tools such as secondaries, continuation vehicles, mid-life co-investments, and portfolio financing are becoming core to the model. Thoughtful use of these levers, without misaligning interests, can enhance IRR and deployment.
Technology, especially AI, is emerging as the next axis of differentiation in sourcing, decision-making, LP service, and portfolio value creation. Scale and data advantage will matter more. Through this adjustment, timeless principles, disciplined underwriting, clear strategy, and alignment; remain central.
Source: Carlyle
How insurance is scaling private capital
Private capital backed insurers have built a self-reinforcing “virtuous flywheel” that aligns liability origination, differentiated asset management, flexible capital structures, and technology enabled efficiency to drive growth and returns. From 2008 to 2025, this model scaled rapidly: assets reached about $1.4 trillion in 2025, supported by more than $100 billion of capital across onshore/offshore platforms and sidecars. Growth concentrated among a few very large carriers. Many doubled assets since 2020, while smaller platforms (<$30 billion) also expanded, often retaining around 75% of liabilities domestically versus roughly 40% for the largest carriers. Larger carriers extended liability durations and now allocate ~25% to long dated assets (versus ~8-14% industry), aided by capital light structures and third-party capital.
The next chapter is more challenging: rising cost of funds, narrowing spreads, and intensified competition are squeezing economics. US individual annuity sales remained strong (> $450 billion in 2025), but distribution costs rose from ~1.18% (2022) to ~1.35% (2024), and investment margins tightened. Productivity has stalled and few sidecars achieved scale, though firms deploying digital and AI across underwriting, claims, and asset allocation are realizing 20-30% productivity gains.
Performance will hinge on disciplined choices across the flywheel. On liabilities: expand into more complex lines (long-term care, variable annuities, universal life), deepen reinsurance partnerships, pursue selective DC channels, and consider consolidating subscale sidecars; certain long duration P&C liabilities (e.g., workers’ compensation) offer fit. On assets and capital: integrate asset management, diversify funding (including smaller institutions and HNW), refine on/off balance sheet structures, and explore liquidity via tradable sidecar interests and secondary markets to enhance resilience. On cost efficiency: apply advanced analytics and automation across core operations with standardized processes and clear accountability
Source: McKinsey & Company
Global family offices boost direct investments
Family offices are increasingly bypassing traditional private equity funds to make direct investments in companies and real assets such as real estate. In 2025, direct investments by family offices surged 123.3% year over year to $12.9 billion across 158 transactions, the highest annual total since at least 2021, according to S&P Global Market Intelligence. These direct deals include whole company acquisitions, minority stakes, asset purchases and funding rounds where a family office or family trust participates, excluding commitments via PE or VC funds.
This shift is driven by a desire for greater control, lower fees and more attractive valuations. As family offices grow in size and sophistication, they are also collaborating with one another to access larger deals instead of relying on smaller private funds.
Geographically, North America (US and Canada) attracted the most capital in 2025, with $6.5 billion, or 50.4% of total deal value, followed by Europe at $5.3 billion and Asia-Pacific at $1 billion. North America’s appeal stemmed from its perceived safety amid geopolitical tensions in Europe and the Middle East. However, North American family offices are now reassessing US exposure due to market volatility and dollar weakness and are reallocating toward APAC (excluding China) and Europe. The region hosts about 7,800 family offices as of 2025.
By sector, materials led with $4.8 billion across five deals (37.4% of total), highlighted by BW Gestao de Investimentos’ $4.5 billion acquisition of Verallia Société Anonyme. Mining, especially rare minerals, is emerging as a key focus area.
Source: S&P Global
Real estate recovery takes shape
Morgan Stanley Investment Management expects the global real estate market to inflect in 2026, with recovering valuations and transaction activity after two years of declines and a stagnant 2025. The macro backdrop is constructive but divergent, favoring a diversified, granular approach across regions and asset types. MSREI sees opportunities in the U.S. (supported by demographics and productivity), Japan (reflation and corporate reforms), and Europe (stimulus and defense spending). Slower new construction and instances where replacement cost exceeds purchase price should constrain future supply and extend the next cycle phase. Lower cost of capital, reduced prices, and tighter supply, along with motivated sellers and better debt availability, are supporting recovery even as geopolitical risks keep markets volatile. Selectivity and active asset management to drive net operating income growth are critical.
Capital markets are aiding the rebound: confidence is improving, financing is more accessible on better terms, institutions are raising more capital, and more investors see a cyclical trough. Buyers can acquire assets at 20%-25% below peak values, often below replacement cost.
Sector views: Industrial is reshaped by supply chain shifts; U.S. supply is set to decline, with demand favoring automated, electrified logistics. Residential for-rent benefits from affordability constraints and limited supply; student housing is attractive, though regulatory risk persists. Office recovery is uneven; Class A is strong but faces capex, ESG, job-growth and AI-demand uncertainties. Retail is resilient on limited new supply. Hospitality’s long-term outlook is supported by millennial travel. Healthcare is mixed: senior housing and medical office are strong; life science faces near-term headwinds. Self-storage softened but may recover as housing improves. Net lease offers stable income with tenant diligence. Data centers remain in high demand, expanding beyond the U.S.
Source: Morgan Stanley
The Rise of Evergreen Funds
Evergreen (semiliquid) funds are becoming a major gateway for investors to access private markets such as private credit, private equity, real estate, and infrastructure. Unlike traditional closed-end funds with fixed lives, evergreen funds raise capital continuously, invest indefinitely, and offer periodic, but limited liquidity. Structures include interval and tender offer funds, unlisted BDCs, and unlisted REITs.
Assets in US evergreen funds exceeded $530 billion by end 2025 and are projected to reach $1.1 trillion by 2029, with direct lending funds dominating and their AUM more than tripling since 2022 to over $236 billion. Performance dispersion is wide. Key risks and due diligence points include liquidity management, valuation methodologies for illiquid assets, deal flow, and deployment capabilities. Fees are high: net expense ratios average over 3%, with management fees around 1.3% of NAV and wide dispersion. Morningstar’s Medalist Ratings (Gold, Silver, Bronze) are expanding to more evergreen strategies, helping advisors assess fund quality as retail-private market partnerships grow.
Source: Morning Star
Quarter Review
Private Equity Deal Value Down 26%
Global private equity deal activity slowed sharply in April, even as year‑to‑date values remained higher than a year earlier, according to S&P Global Market Intelligence.
April 2026 PE deal value totalled $24.96 billion, a 25.7% decline from $33.58 billion in April 2025. Deal volume also fell significantly, to 158 transactions from 240. Despite this monthly slowdown, the first four months of 2026 saw aggregate deal value reach $194.85 billion, up 14.02% from $170.89 billion in the same period of 2025. However, the number of deals dropped to 850 from 1,031, indicating fewer but larger transactions.
Ten deals of at least $1 billion were announced in April, including three in healthcare. The largest transaction was Bernhard Capital Partners Management LP and Stonepeak Partners LP’s $6 billion acquisition of electric utilities company Cleco Group LLC. In healthcare, the biggest deal was Thomas H. Lee Partners LP’s $1.8 billion purchase of a majority stake in clinical research organization Celerion Holdings Inc. from H.I.G. Capital LLC, expected to close later this year. A proposed £5 billion takeover of carbon energy solutions company DCC PLC by Energy Capital Partners LLC and Kohlberg Kravis Roberts & Co. LP would have been April’s largest deal, but DCC rejected the offer on April 29.
By sector, technology, media and telecommunications (TMT) was the most active, with 33 PE deals totalling $4.81 billion. Within TMT, application software recorded eight deals, down 52.9% from 17 a year earlier; IT consulting saw five deals, and internet services and infrastructure had four.
Source: SP Global
Themes shaping private markets in Q2 2026
Investors have faced a volatile year marked by geopolitical tensions, shifting economic regimes and structural changes in energy, technology and demographics. The conflict in Iran and the wider Middle East has heightened uncertainty, especially in energy markets, underscoring how quickly traditional asset allocations can be disrupted. For long term wealth investors, resilience now means building portfolios that can sustain returns through ongoing shocks and structural transitions, not just preserving capital in the short term.
Private markets are structurally geared toward long term value creation and currently offer cyclical opportunities after years of subdued fundraising, investment and exits. This has created inefficiencies and attractive entry points, particularly in less crowded segments. In private equity, capital remains concentrated in large funds, leaving small and mid-market buyouts undercapitalised, inefficient and trading at 20-40% valuation discounts versus large cap deals and even more versus public markets. These smaller companies typically use less leverage and have historically outperformed large cap funds over the long run.
Beyond buyouts, continuation vehicles are now a structural feature, while asset-based finance, commercial real estate debt, infrastructure debt and insurance linked securities offer diversified, often defensive income with structural protections and low correlation to economic cycles. Infrastructure benefits from long term drivers such as energy transition, electrification and data centre growth, with valuations reset to more attractive levels. Real estate appears at an inflection point after significant repricing, with stabilising or rising prices in some areas, strong supply constraints and improving rental dynamics. Performance is increasingly polarized between high-quality, future-proofed assets and commoditised properties, with sectors like logistics, residential, self-storage and hospitality particularly appealing.
Source: Schroders
Market Sentiments
Prolonged exit pressures in Southeast Asia PE
Bain & Company’s Southeast Asia Private Equity Report 2026 shows the region’s PE market remained subdued in 2025. Deal value fell about 10% year on year to roughly $14 billion across 84 transactions, with activity concentrated in a few large growth and buyout deals. Government linked investors increasingly partnered with global and regional funds on high value transactions, reinforcing capital concentration.
While capital is available, deployment has become highly selective. Investors are targeting high quality assets with strong management, clear competitive advantages, and defined exit paths. Exit challenges remain a major constraint: exit value dropped 32%, trade sales stayed the main route, and IPOs showed only early signs of recovery. Longer holding periods are creating more aging assets, making secondary deals a more important liquidity option.
Operational value creation is now the primary return driver, with funds emphasizing EBITDA growth via cost optimization, pricing, and commercial excellence rather than multiple expansion. AI is gaining traction in diligence and portfolio management, over 70% of investors use it, though benefits are still early and focused on productivity. Sector focus is shifting to structural growth themes: digital and AI infrastructure (notably data centres), healthcare (deal value up ~60% over five years), manufacturing and industrials benefiting from China+1 shifts, and fintech and localized, value driven consumer plays. Singapore remained the regional hub with $7 billion in deals; Malaysia saw the strongest growth at $5.3 billion. Exit activity stayed muted, with Singapore recording four exits and Vietnam none, underscoring persistent liquidity challenges and a greater reliance on revenue growth and operational improvement for returns. Read full report here.
Source: Bain & Company
Why private credit still matters
Private credit assets under management have grown about 14% annually over the past decade, supported by relatively consistent returns, healthy distributions and low volatility, with limited realized credit losses. Despite rapid expansion, private credit still represents only about 9% of total corporate borrowing and has largely taken share from other risky credit rather than creating a new credit boom. Bank and nonbank lending to private credit BDCs, at an estimated $410–$540 billion, is modest relative to the roughly $14 trillion U.S. banking system, suggesting systemic risk fears are overstated.
The environment is shifting from broad beta exposure to one that rewards disciplined selection and diversification. Dispersion is rising, and “micro” credit cycles are expected to widen performance gaps across issuers and managers through 2026. Manager weaknesses tend to cluster around poor risk management, higher equity exposure, vulnerability to software/AI disruption, and rising non‑accruals and dividend cuts. At the index level, non‑accruals remain modest, indicating concentrated rather than systemic stress.
AI-related disruption is a key risk, particularly given private credit’s heavy exposure to software and business services; outcomes will depend on borrower quality and business models. The base case of resilient, albeit slower, economic growth into 2026 supports credit fundamentals, with EBITDA growth positive for most borrower sizes.
Elevated redemption activity appears driven more by sentiment and profit‑taking than deteriorating fundamentals. Gating should be viewed as a structural liquidity tool, not automatically as distress. Investors are encouraged to prioritize managers with diversified sector exposure, seniority in capital structures, restructuring expertise and robust liquidity management, within a diversified portfolio framework.
Source: J.P. Morgan
