Building on the gradual recovery in late 2025, private equity dealmaking is regaining momentum in 2026 as sponsors adapt to an evolving market landscape. Liquidity constraints, elevated inflation, and geopolitical uncertainty continue to reshape fundraising and transaction strategies. Sponsors are responding with innovative fund structures, intensified operational value creation, and concentrated capital deployment in high-conviction sectors, while sharpening focus on portfolio optimisation and liquidity management, laying the groundwork for accelerated exit activity in the months ahead.

Fundraising

Private capital fundraising, including private equity, venture capital, private credit, and secondaries, showed pockets of improvement in 2025 and early 2026 but continued to lag the 2021–22 peak amid persistent liquidity pressures. Private equity funds alone raised approximately USD735 billion in 2025 globally, modestly above the 2023 dip but significantly below the USD1.1 trillion raised in 2021.

Industry projections for 2026 ranged from USD800 billion to USD850 billion, but actual momentum has been uneven. While average fund sizes have increased in 2026, that is because smaller funds have been eliminated from the data pool. Capital continues to concentrate among large, established managers, such as KKR’s USD23 billion North America Fund XIV (April 2026) and Bain Capital’s USD10.5 billion Asia Fund VI (May 2026). For most other GPs, fundraising remains challenging, requiring more favourable LP economics (fee concessions, co-investment rights, or both) and longer timelines (upwards of 20 months on average).

LP liquidity remains a major constraint on fundraising in 2026, as muted distributions limit LP capital availability. The decline in private equity exit volume year-on-year in Q1 2026 and longer holding periods have delayed capital returns to investors.

The secondaries market benefited from this constrained liquidity, with transaction volume hitting approximately USD240 billion in 2025 and expected to reach USD250 billion to USD300 billion in 2026.

Sponsors and investors are responding to fundraising challenges by broadening their investor base and using innovative fund structures, as follows.

• Semi-liquid and evergreen vehicles, particularly in private credit, are expanding as managers seek to broaden access and offer more versatile liquidity options.
• Managers are targeting retail and defined-contribution capital through distribution partnerships with large asset managers to broaden access to private-market products.
• GP-stakes transactions and strategic partnerships are becoming key fundraising and monetisation tools.

Fundraising trends show significant divergence. Private credit remained resilient, supported by yield demand. Venture capital and secondaries were top-performing strategies in early 2026, while traditional private equity and real asset strategies lagged.

Overall, 2026 is a transition year. Private capital fundraising is gradually stabilising but remains highly sensitive to macroeconomic conditions, exit activity, and ongoing sponsor and investor innovation.

For its part, Maryland remains active in the private capital fundraising ecosystem as both an institutional LP source and an emerging fund formation hub. The Maryland State Retirement and Pension System, with assets exceeding USD60 billion, increased its focus on small and mid-market funds with Maryland-based emerging managers in 2025, rebalancing away from mega-funds toward locally based GPs.

The Maryland Technology Development Corporation continues to fund early-stage technology and life sciences companies, with a 2026 budget of approximately USD53.1 million including USD2.7 million for seed funds as well as funding for commercialisation and company-formation programmes. Maryland startups raised USD211 million across 37 venture capital deals in Q1 2026.

The Maryland Biotechnology Investment Incentive Tax Credit provides tax credits of up to USD250,000 per investor in seed and early-stage Qualified Maryland Biotechnology Companies (QMBCs); in 2025, investors in 14 QMBCs were awarded USD6.6 million under the programme.

Fund Finance

Despite slow fundraising and smaller fund closings for mid-sized and emerging managers, fund finance lenders are looking to deploy capital. Competition between bank, insurance, and private capital has led to significant pricing pressures, yet market appetite grows:

• as the market has gotten more sophisticated, lenders have narrowed their focus;
• sponsors still have heavy bank reliance, but direct lenders market themselves on flexibility;
• historically underutilised lines are being repriced/resized at renewals;
• mid-sized and smaller banks in the US are competing more on speed and certainty of execution, especially with increasingly complex LP carve-outs; and
• European banks have traditionally been more disciplined about remaining within their core areas of focus.

As the demand for fund finance products continues to expand, sponsors continue to emphasise their need for customised solutions, not products, and lenders continue to innovate to answer the demand. Sponsors seek reliability and transparency over opportunistic, single-use lending relationships. In the syndicated market, lenders are balancing repeat member predictability against opportunities for new partners, leading to more concentrated syndicate groups with higher holds for lead banks.

Non-bank lenders are looking for side-by-side partnerships with banks as term loan tranches and insurance capital are gaining footholds in net asset value (NAV) lending, driven by demand for longer tenors and longer lending holds. Higher complexity and market changes have forced focus on documentation discipline and repeatability, and institutional lenders strive to stay active in both the syndicated and bilateral markets in order to keep apprised of these changes and trends.

The last year brought a growing presence in both continuation vehicles and evergreen structures and a new emphasis on retail access in private markets as a result of recent executive orders.

Private Credit

Private credit has evolved from a high-growth alternative into a core institutional asset class and is entering a more cyclical and complex phase. The sector remains attractive because of continued bank disintermediation and sustained investor demand for yield, but it faces rising credit stress, increased competition, and growing liquidity concerns.

The industry is approaching its first large-scale downturn test. Although reported default rates remained below 2% as of mid-2026, broader indicators suggest stress is higher. When restructurings, amendments, extensions and payment-in-kind (PIK) arrangements are considered, S&P Global estimates stressed credits are closer to 5%. The increasing use of PIK in corporate direct lending, coupled with highly publicised leveraged loan defaults in late 2025, suggests pressure is building.

Part of that pressure stems from uncertainty surrounding artificial intelligence (AI). Many traditional software and technology companies, long a mainstay of private credit portfolios, face questions about how AI-driven tools will affect their business models and pricing power. Lenders are becoming more selective and increasingly focused on downside protection and tighter underwriting.

At the same time, forces creating stress in corporate direct lending are driving growth in asset-based finance (ABF). Investors are allocating capital to structures backed by diversified pools of financial assets or tangible collateral. Unlike traditional direct lending, ABF provides greater collateral protection, more predictable cash flow, and fixed rates.

This shift has been particularly attractive to insurance companies seeking to enhance yield, improve downside protection, and better align assets with long-term liabilities. ABF has also gained traction among companies building AI-related infrastructure, as operators of data centres, fibre-optics and networks can pledge those assets as collateral. As demand for computing power and digital infrastructure continues to increase, many expect ABF to compete with direct lending as a dominant private credit segment.

PricewaterhouseCoopers (PwC) identifies that regulatory requirements, balance-sheet constraints and evolving borrower preferences are causing banks to reduce participation in certain lending markets. Private lenders have stepped into that gap with customised solutions, benefiting from stronger pricing power and wider spreads.

M&A Climate

Private equity M&A entered 2026 on firmer footing. 2025 delivered a strong but uneven recovery, with sponsor-led transactions reaching USD1.2 trillion (the second-highest ever and a 36.3% year-on-year increase), driven by large public-to-private deals and GP-led secondaries. Yet value/volume divergence remains the market’s defining feature. S&P Global shows USD194.85 billion across 850 transactions in the first four months of 2026, a 14% increase in deal value but an almost 18% decline in volume year-on-year. This disconnect reflects disciplined capital deployment amid geopolitical volatility, tariff uncertainty, and inflation risks. With dry powder at USD1.3 trillion (most raised in 2022–23 vintages and nearing deployment windows), GPs face pressure to demonstrate realised returns. The result is fewer transactions, larger cheque sizes, and focus on operational resilience over financial engineering.

Headwinds affecting dealmaking

Macroeconomic conditions and valuation pressure

Elevated inflation and financing costs require sponsors to justify transactions on business fundamentals and operational value creation. After approaching the Fed’s 2.0% target at 2.4% in January 2026, headline CPI reached 4.2% by May (the highest since April 2023), driven by a Middle East energy shock, and core inflation rose to 2.9% year-on-year in June. The Fed has held rates at 3.50%–3.75% for four consecutive meetings, caught between price pressures and recession risk, compressing leveraged returns and shifting sponsor focus toward equity-heavy structures and all-cash deals.

Ten-year Treasury yields remain near 4.5%, with longer-dated yields at or above 5%, pressuring LBO economics. Median PE multiples reached 11.8x EBITDA in 2025 (up from 11.3x), with early 2026 transactions at approximately 12.6x, reflecting sellers anchored to prior valuations and buyers reluctant to transact absent clear value-creation theses. As discussed in more detail below, the exit backlog continues to grow, driving increased reliance on dividend recapitalisations, NAV lending, and GP-led secondaries as interim liquidity solutions.

Geopolitical and cross-border risks

Global conflicts continue to inject uncertainty into dealmaking. Middle East tensions, the Russia-Ukraine war, and Venezuela leadership changes drive volatility in energy markets and inflation forecasts. Despite these headwinds, dealmakers remain cautiously optimistic as sustained instability has become the market baseline.

Bilateral trade policies and US-China competition are accelerating nearshoring and prioritising supply chain resilience. These dynamics are driving energy sector consolidation, particularly natural gas, as participants address AI-driven power demand. Although tariff policies, US-China relations and potential US-EU trade negotiations complicate the environment, M&A activity is expected to accelerate in late 2026.

Regulatory and antitrust oversight

The Department of Justice (DOJ) appears more willing to clear large transactions. Business-friendly developments, including raising the Hart-Scott-Rodino (HSR) threshold to USD133.9 million for 2026, are exempting more middle-market deals from pre-merger notification. However, DOJ leadership has signalled willingness to litigate HSR violations, including gun-jumping, and to scrutinise mergers in health care, technology, and agriculture.

State attorneys general (AGs) pose meaningful transaction risk despite federal pro-business signals. States are expanding antitrust capabilities and increasingly litigating to block deals under state consumer protection statutes. Multi-state investigations have become more common in health care, technology and retail. The 2026 midterm cycle will heighten litigation risk as state AGs in competitive races pursue high-profile enforcement.

Technology and operational disruption

AI is expanding the cyberthreat landscape faster than organisations can secure it. CrowdStrike reported an 89% year-on-year increase in AI-enabled attacks by the end of 2025, and the World Economic Forum ranks generative AI cybersecurity threats among top 2026 concerns. Although businesses have deployed an average of 36.9 AI agents, fewer than half have implemented adequate governance and a large majority have already experienced AI-related privacy incidents. Dealmakers are responding with AI-specific protections: tailored indemnities, extended survival periods, dedicated escrows, and “AI sandbagging” provisions. Investment committees now spend 30–40% of their time evaluating AI impact on targets, making AI readiness a baseline diligence expectation.

Immigration enforcement is tightening labour supply in labour-intensive industries. Brookings estimates net migration was negative for the first time in half a century. A 2025 survey found that 45% of construction firms reported project delays from labour shortages linked to immigration enforcement, and some companies are redirecting deal capital toward labour-reducing technology.

Industry sector implications

Deal activity remains constrained across multiple sectors:

• automotive deal value declined sharply due to tariff exposure, valuation gaps, and EV transition uncertainty;
• engineering and construction face margin compression from rising input costs, with labour shortages accelerating consolidation;
• manufacturing remains suppressed by labour shortages, though reshoring creates selective opportunities;
• commercial real estate faces refinancing pressure from maturing loans, driving distressed sales and loan-to-own transactions; and
• industrial real estate sees tenant hesitancy from supply chain disruptions and tariff uncertainty.

By contrast, technological advancement generates concentrated deployment opportunities across select resilient, high-conviction sectors.

• AI Infrastructure: AI infrastructure is a defining investment theme, with tens of billions flowing into data centres, semiconductors, energy infrastructure, and AI-native software. As attractive targets have been absorbed and pure-play valuations remain elevated, activity is shifting toward greenfield development, strategic partnerships, and minority investments.
• Energy & Power Infrastructure: Data centre expansion has elevated power availability as the principal infrastructure constraint. Grid interconnection timelines extending to four years have made Bring-Your-Own-Power solutions increasingly attractive, and geopolitical disruption has elevated energy security as a strategic imperative.
• Domestic Oil & Gas: Maryland occupies a distinctive position in the domestic oil and gas landscape. Maryland’s Cove Point terminal on the Chesapeake Bay is the premier active LNG export facility on the East Coast, linking domestic Appalachian shale supplies to global energy markets. This infrastructure advantage positions the region to benefit from favourable market dynamics. AI and data centre expansion are expected to lift domestic natural gas demand by 8–10%, with analysts characterising 2026 as a breakout year for gas-related deals. LNG export capacity is projected to almost double by 2030, driving upstream and infrastructure consolidation.
• Defence Contracting & Aerospace: Defence spending is increasing globally amid geopolitical instability. The space economy has become an increasingly significant component of defence and commercial capital expenditure, with satellite infrastructure serving critical communications, navigation, and defence functions.
• Health Care & Life Sciences: Maryland, home to NIH and FDA headquarters, Johns Hopkins University, and a dense concentration of research institutions and contract research organisations, remains one of the nation’s preeminent life sciences hubs. The state’s regulatory proximity and established commercialisation infrastructure position Maryland-based targets and acquirers favourably as deal activity accelerates. Q1 2026 was the strongest biopharma M&A quarter since 2020, driven by large pharma’s need to replenish pipelines ahead of patent cliffs. Activity concentrates around differentiated platforms, GLP-1 expansion, and high-growth areas including cardiometabolic, immunology, oncology, and rare disease.

Types of Deals Anticipated

Although 2025 delivered a strong but uneven recovery in deal value, structural challenges since 2022 remain largely unresolved entering the second half of 2026. Macroeconomic headwinds, tariff and supply chain uncertainty, and geopolitical shocks continue to shape transaction strategies. Discussion of potential Federal Reserve rate hikes and AI’s impact on software valuations will also dictate deal activity in the coming year.

Exits

The exit backlog remains the defining structural problem. According to Bain & Company, approximately 33,000 unsold buyout-backed companies remain in portfolios, with average holding periods now exceeding seven years. McKinsey estimates that over 16,000 have been held more than four years (52% of inventory as of 2025, the highest on record). Between 2022 and September 2025, US private equity firms generated annualised returns that were substantially lower than those of the S&P 500 (5.8% compared with 11.6%), reflecting a reversal that makes exits even more challenging.

According to Dealogic data, global buyout deployment reached USD299 billion year-to-date (YTD) as of June 2026, compared with USD327 billion over the same period in 2025, while exit value stood at USD321 billion versus USD346 billion a year earlier. Separately, S&P Global data showed that Q1 2026 global PE exit volume fell 6.25% year-on-year to 720 transactions, while aggregate Q1 exit value rose to USD311 billion, heavily distorted by the USD250 billion X.AI/SpaceX transaction, which flatters aggregates without reflecting the underlying environment. Q2 exit value fell a further 7.4%, with mega exits (over USD1 billion) accounting for over 60% of deal value. PwC estimates that funds will take approximately nine years to clear the backlog.

The challenge compounds at asset level. A deal once requiring 5% EBITDA growth for a 2.5x return over five years may now require 12% growth, as elevated multiples and financing costs raise the performance bar. Buyers are also increasingly sceptical of sellers’ revenue projections. PitchBook identifies diverging buyer/seller projections on AI disruption resilience as the primary valuation gap. High-quality assets with strong strategic value continue to attract buyers, but second tier assets, while still able to transact, often require valuation concessions or structured liquidity solutions. Notably, private equity’s historical acquisitiveness of software assets is also now creating new pressure on the exit backlog, as the valuation of these assets becomes increasingly uncertain in the era of AI.

A Q2 2026 PitchBook survey reflects that exiting portfolio companies is the number one priority for funds, yet a greater portion of respondents anticipated that conditions for exits would worsen in the second half of the year.

IPOs

PE-backed IPOs had a landmark 2025, with global IPO exit value almost doubling year-on-year to over USD320 billion, according to McKinsey. The increase was driven primarily by large IPOs above USD2.5 billion, whose value rose approximately 150% from USD98 billion in 2024 to USD246 billion in 2025, while IPO exit count increased 8% even as all other exit categories declined by count. According to Preqin, the first half of 2026 saw the highest number of PE go-public transactions in a six-month period since the end of 2021, with 16 companies raising USD10.1 billion combined. AI remains a dominant driver, with momentum in semiconductors, power, and data centre infrastructure.

Bain identifies OpenAI, Anthropic, and SpaceX (which completed the largest IPO ever at USD1.77 trillion) as defining the new scale of public listings. Companies must now be twice as large to enter the S&P 500 as they needed to be just five years ago. At the same time, AI is also a source of significant exit complexity. February 2026 saw a nearly 30% drop in public market software valuations, triggering corresponding declines in PE portfolio marks and causing technology deal value to fall 70% from Q4 2025 to Q1 2026. The IPO window, while more open than it has been in several years, remains narrow and sensitive to external shocks.

Secondaries

The secondaries market has grown from a niche liquidity alternative into a structural feature of the private equity ecosystem. In Q1 2026, institutions initiated secondary sales totalling over USD20 billion, driven partly by denominator effects pushing private allocations above targets. Private markets AUM is projected to surpass USD18 trillion by 2027 (up from USD10.8 trillion in 2022), with secondaries growing as a natural consequence.

Despite this growth, secondaries cannot alone resolve the liquidity challenge. The structural backlog is too large to absorb through secondary markets alone; their role is essential but complementary rather than curative.

Minority transactions

Minority-stake transactions have been solidified as a structural dealmaking category. In sports, ownership of multiple stakes across leagues and teams is now broadly permitted, and minority investments now account for close to half of all global sports transactions. In May 2026, KKR acquired Arctos Partners (approximately USD15 billion AUM, with stakes in over 30 teams) for approximately USD1.4 billion, solidifying the status of minority stakes as a distinct and institutionalised private equity asset class.

More broadly, the minority-stake model is evolving in response to the democratisation of private markets. Hybrid structures pairing minority stakes with long-dated distribution agreements are becoming more common, and partnerships between alternatives platforms and retirement investment providers are opening private markets to defined contribution capital and individual investors.

Add-ons

With the broader transactional landscape shaped by AI disruption and geopolitical volatility, sponsors are increasingly rotating capital toward businesses perceived as resilient against near-term disruption. Against rate uncertainty and expensive credit, add-ons continue to feature heavily as lower-risk capital deployment. Some buyers are favouring companies with physical or labour-intensive components less susceptible to automation and those with domestically oriented revenue insulated from tariff and geopolitical risk.

According to PitchBook, deal value in the software sector tumbled 65.7% year-on-year in Q2 2026, representing a 90.3% decline from its peak. By contrast, PitchBook reports that YTD energy deal value in Q2 2026 rose by 80.5% compared with the first half of 2025, as private equity races to invest in the physical infrastructure required to support AI. Unsurprisingly, AI has rapidly become one of the most important value-creation opportunities across private equity portfolios, and sponsors deploying it effectively to redesign workflows, strengthen data infrastructure, and unlock revenue streams are differentiating themselves in operations and fundraising.

The uncertainty currently slowing down dealmaking will be resolved eventually. In the meantime, as Bain frames it, top-tier performance will continue to be rewarded, and the firms best positioned for the eventual recovery are those using the current environment to build operational depth rather than simply waiting it out.

Conclusion

Private equity in 2026 reflects a market in transition. Fundraising remains challenging amid LP liquidity constraints, with capital concentrating among established managers while innovative structures expand access to new investor bases. Private credit has matured into a core institutional asset class, though rising credit stress warrants close attention. M&A activity shows disciplined deployment, with sponsors prioritising operational value creation over financial engineering in high-conviction sectors such as AI infrastructure, energy, health care, and defence. The persistent exit backlog, now exceeding 33,000 unsold portfolio companies, remains the defining structural challenge. Sponsors navigating these dynamics successfully are those investing in operational depth, deploying capital strategically, and positioning portfolios for the eventual recovery.