Hope for a recovery in the private equity sector was once again dashed in the first half of 2026.
This is according to Bain & Company’s Private Equity Midyear Report 2026.
The ‘Groundhog Day’ dynamic: recovery remains elusive
The sector has been stuck in a stalemate for some time: each year, recovery seems just out of reach. A year ago, the private equity market appeared poised for a rebound, but rising interest rates and other market disruptions prevented it.
In 2026, initial optimism was also short-lived. Three new shocks followed in rapid succession: the AI-driven ‘SaaSpocalypse’ in the software industry, tensions in private credit, and the war in Iran with its resulting oil price surges. The outcome? A sharp and broad decline in deal activity.
The 2026 market: optimism stifled by uncertainty
The first half of 2026 saw a broad and sharp decline in deal activity. Not only are fewer companies being acquired, but exits are also lagging, and fundraising is struggling to gain momentum. This puts pressure on private equity’s classic flywheel: buy, improve, sell, and use the proceeds to raise new capital. The data shows that deal activity in the first half of the year has significantly decreased.
Uncertainty has led to wider bid-ask spreads, caution among investment committees, and a stall in exit momentum. While select transactions – particularly those involving top-tier assets – still succeed, they often do so at high prices.
Not much needed to trigger a new wave of deals
Frustratingly, there is fundamentally nothing wrong with the financial markets. Stocks continue to rise due to (sometimes hesitant) AI euphoria, and companies like SpaceX, OpenAI, and Anthropic are preparing for IPOs worth trillions of dollars.
The global economy is still growing, and there is plenty of ‘dry powder’ available for deals. Even the debt markets are functioning, despite the turmoil in private credit.
Yet, private equity remains stuck. The pressure to buy and sell companies is mounting, and it wouldn’t take much to unleash a wave of new deals in the second half of the year. However, a sustainable recovery will likely depend on finding a market equilibrium that lasts longer than a few quarters.
Technology: between hope and fear
The technology market finds itself in a precarious position. Uncertainty over company valuations has led to a 70 percent drop in deal value in the software sector compared to the fourth quarter of 2025.
An analysis by MSCI shows that the valuation of software companies in private equity portfolios fell by over 8 percent in the first quarter – far less than the correction in public markets, but still significant. In Europe, the decline was 4.2 percent, considerably less than in the US (8.9 percent).
Private equity funds focused on technology are adapting to a new reality. They must learn to navigate the disruptive power of AI – both its risks and opportunities. Funds that raised capital with the promise of investing in software must better assess how AI affects the value of these companies. The race is now on to learn as much as possible from existing investments and apply that knowledge to future deals, particularly for companies trading at a discount compared to their pre-‘SaaS panic’ valuations in February.
Rotation toward less vulnerable sectors
Other funds are redirecting their capital and investment resources toward companies that appear less sensitive to short-term AI disruption and global volatility. Buyers are showing more interest in businesses with physical or labor-intensive components that are less susceptible to automation, as well as companies with domestically focused revenue streams that are shielded from geopolitical disruptions.
Exits: stalled liquidity
Just as with investments, exit activity in the first quarter has yet to gain the desired traction. Despite the optimism at the end of 2025, little progress has been made in addressing the liquidity bottleneck that has slowed the capital cycle for years.
The numbers don’t lie: the sector is emerging from a four-year period with record-low distributions as a percentage of net asset value (NAV), and a growing number of companies are stuck in portfolios. The implicit capital cycle is now seven years – well above historical norms.
Focus on what you can control: operational excellence
Amid all this uncertainty, there is only one way out: focus on what you can control. That means improving the performance of portfolio companies. Bain emphasizes four key principles:
1. 12 Is the new 5
Long before the disruptions of early 2026 hit the private equity sector, rising interest rates and shifting market dynamics had already drastically altered deal math. A deal that, a decade ago, required only 5 percent EBITDA growth to achieve a target return of 2.5x over five years now needs 12 percent growth.
The implication is clear: to deliver the same or better performance, a greater focus on value creation and specialized capabilities is required to execute swiftly.
2. Embrace AI
For private equity, AI is quickly becoming one of the most significant opportunities for value creation within portfolios. Not acting is now a strategic choice, not a neutral decision. The companies seeing the greatest impact are not just using AI as a cost-saving tool but are also redesigning workflows, strengthening data foundations, and adjusting business models to transform the economics of the business.
AI not only accelerates product development but also improves sales, customer acquisition, pricing, and unlocks new revenue streams. Funds are also applying AI-driven data, analytics, and workflows internally to work smarter, faster, and more efficiently.
3. Avoid the middle phase
The middle phase of the holding period is often where value creation is lost. The longer a company is held, the greater the risk that the original value creation plan (VCP) loses its power or that market conditions change. In a time when duration risk must be actively managed, it is crucial to take a disciplined approach to renewing the VCP, aligned with the unique circumstances of a portfolio company.
Sponsors must not only improve performance now but also demonstrate clear growth potential for the next owner. However, the demands on leadership have never been higher. Resetting performance midway through the holding period is rarely straightforward. Many management teams are already exhausted after years of operating in disruptive conditions, while extended holding periods have led some management incentive plans to have little remaining value. Renegotiating a company and launching a new VCP requires not only a credible strategy but also the talent and organizational energy to execute it.
4. Focus on the winners
For some companies, additional holding time provides an opportunity to accumulate incremental improvements or, if possible, create a new growth vector or transformation. For others? It might be time to let go. The truth is that the capabilities of PE firms are limited, and the number of active portfolio companies has nearly doubled over the past decade.
GPs are always reluctant to give up on a deal. But not every squeaky wheel needs (or should be) greased. There is more value to be realized in optimizing the winners than in evenly distributing resources.
Conclusion: top performance is rewarded
In a challenging market like this, top performance will continue to be rewarded. The uncertainty slowing deal activity will eventually fade. But the opportunity lies in determining where you can win and doubling down to make it happen.
