Private equity outlook for 2026

Only two months in, and any predictions of what may happen in the rest of 2026 may be foolhardy. However, despite uncertainty and continued economic and political headwinds, it’s been a good start to the year.

Looking back at 2025, it was a mixed bag: the market consensus was that deal values improved but deal volumes remained flat. For some mid-market transactions, there was reduced appetite and a need for creative structuring.

The market is optimistic about 2026 and expects increased activity. The UK government promises regulatory reforms and a pro-growth enterprise agenda. There’s plenty of finance available and financing conditions are stabilising. Interest rates are predicted to decrease in 2026 and valuations are beginning to reset.

That said, private equity firms are being selective, moving away from growth-at-any-cost strategies towards operational value creation, deeper diligence and more disciplined risk underwriting. They want to know that a business is able to withstand whatever may happen. The UK starts in a good place as it remains the private equity capital in Europe; London remains the European leader by a long way.

Key themes to highlight

Funding

As inflation begins to ease and the Bank of England’s rate-cutting cycle begins – and is anticipated to continue – sponsors can re-engage with the market, helped by stabilising financing conditions and a backlog of capital waiting to be deployed. Funds are well placed and investors remain keen to back them.

We’re also seeing several challenger banks and alternative lenders entering the market with innovative products. Separately, the government is keen to encourage investment into funds and is considering changes to the regulatory framework to support this.

Deal flow

We’re seeing a strong deal flow, with businesses preparing ahead of expected exit processes.

There’s also optimism that IPO reforms in the UK – which will result in streamlined prospectus rules and shorter disclosure periods – may make listings more attractive, especially when combined with stamp duty incentives on new LSE listings. It’s likely that private equity-backed IPOs will continue to grow.

Buy-and-build strategies will continue to dominate mid-market activity as investors seek growth opportunities within existing portfolios and to grow their valuation and exploit opportunities. However, the average timeframe for a sponsor to hold an asset has lengthened and is now over five years.

Sector hotspots

It’s no surprise to hear that there’s continued heavy investment in the technology sector, with a premium placed on revenue-visible and AI-enabled businesses. As ever, businesses which offer an innovative product with secure revenue and the ability to weather economic headwinds remain attractive.

Energy and infrastructure are also anticipated to attract attention from private equity investors, with some predicting they will be top-three sectors through to 2030. Business services also made a strong appearance – including law firm and accountancy firm acquisitions, which appear to be gaining traction in other jurisdictions.

Valuation principles

Five years on from the “Covid deal boom”, some investments implemented under accelerated timelines were clearly overpriced when made and have not performed as anticipated. Even with reduced costs of capital, they have not performed well and therefore a valuation gap has emerged.

These gaps have driven longer processes and increased use of earn-outs, deferred consideration, larger vendor rollover percentages, ratchets and other performance-related conditions attached to sweet equity awards, creating further complexity in negotiations and deal timelines.

Conclusion

Political and policy turbulence has become the norm for the private equity industry, driven by shifting tariffs, interest-rate cycles and election-year fiscal debates. We can only reflect on the pre-November Budget commentary, the on-off nature of tariff threats and the general uncertainty of 2025, with many funds taking a ‘wait-and-see’ posture.

In today’s world, it may be that political noise is often louder than its real economic consequences, and sitting back until there’s a clear path is not a long-term plan. We therefore expect firms to re-enter the market with greater conviction, supported by stronger diligence, scenario modelling and operational planning.

Yes, there may be more modelling, underwriting and analysis to endure, but in our view the appetite to do deals this year is there.