After two years of subdued activity, 2025 finally saw green shoots start to poke through a prolonged drought in private equity dealmaking activity. Despite the initial tariff-induced uncertainty, easing interest rates globally, narrowing valuation gaps, and a softer anti-trust regime helped the industry build on the thaw that started in the last quarter of 2024.
Globally, private equity deal value ended the year with the second highest record of deal value in the past decade at just over $2.2 trillion, only second to 2021’s $2.3 trillion and realizing 22.9% YoY growth over 2024. Additionally, venture dealmaking and M&A both closed the year with notable rebounds.
These are encouraging outcomes, providing momentum for 2026 to build on. Yet a theme explored repeatedly over the past two years remains intact: mega-deals remain the protagonist of the recovery narrative. Large take-privates, such as those of Electronic Arts, Walgreens, and Dayforce contributed meaningfully to private equity deal values. M&A activity followed a similar theme, with 54.8% of deal value through the third quarter driven by megadeals.
Bifurcation has equally, if not more, defined venture dealmaking, with dollars flowing disproportionately to AI-native startups and market leaders. As of September 2025, 38% of all US VC dollars were allocated to just 10 companies, a 75% increase from the share awarded to the top ten in 2024 and the largest proportion recorded in over a decade. More broadly, the sector is attracting more than half of all venture dollars.
Whether the industry can break through this concentration and support a broader recovery in 2026 remains uncertain. Still, there are reasons to be optimistic. Moving into the year, dealmakers are armed with all the ingredients they need to build on 2025’s momentum. There is abundant dry powder, thousands of companies poised for transactions, and well-functioning credit markets to provide leverage.
Several themes point to where opportunity is likely to emerge. Chief among them are a focus on maximizing optionality, doubling down on resilient sectors and assets supported by long-term secular trends, and capitalizing on market dislocations. From a value creation perspective, leveraging AI as a revenue growth lever will emerge as a central focus for sponsors.
With ample dry powder and ready access to private credit, take-privates and carve-outs will remain a significant source of deal flow for mega-buyout firms in 2026. In the US, public equity markets continue to be defined by sharp dispersion, with performance driven by a narrow group of AI-linked stocks.
This leaves a long tail of companies trading at discounts, creating fertile ground for private equity firms to “buy complexity,” streamline operations, and ultimately sell clearer, more focused businesses. Beyond the US, attractive valuations in international equity markets will support increased delisting activity.
Specifically, corporate governance reforms aimed at improving board independence, transparency, and capital efficiency, alongside attractive valuations and favorable financing conditions make Japan a prime target for scooping up such opportunities. The Nikkei 225, for example, traded at an average EBITDA multiple of about 9.5x, compared with roughly 16.4x for the S&P 500 throughout 2024.
Japan’s low interest rate environment also provides a supportive acquisition backdrop, with LBO financing costs typically in the 2–3% range, versus 9–10% in the US. Although the Bank of Japan recently lifted its policy rate by 0.25 percentage points to around 0.75% — the highest level in three decades — borrowing costs remain well below those of its global peers.
Additionally, rising activist pressure, alongside macroeconomic and geopolitical uncertainty, is prompting many companies to shore up balance sheets and refocus on core operations. This shift from capital-intensive models provides a pool of subsidiaries and non-core business units ripe for acquisitions, creating a steady pipeline of carve-out opportunities. These transactions are often operationally complex, offering attractive entry pricing and paths to value creation that are less reliant on multiple expansion.
As firms seek to balance resilience with flexibility in an uncertain market, the middle market is emerging as a particularly attractive pocket of opportunity. From strategic M&A to sponsor-to-sponsor sales and continuation vehicles, firms benefit from greater exit optionality.
These assets also tend to have more agile capital structures, relying less on leverage. According to JP Morgan, companies that are valued under $1B have 20% less acquisition leverage than larger companies — a particularly attractive feature against unpredictable interest rate dynamics.
Additionally, the middle market offers lower entry valuations than larger buyouts, giving sponsors room to identify standout companies and capture higher multiples at exit. Together, these characteristics equip managers with a broader set of levers to pull — a compelling advantage at a time when uncertainty puts a premium on optionality.
Middle market companies also tend to be service-oriented and domestically or regionally focused, offering insulation from international supply chain volatility. With revenues and customer demand locally anchored, investor appetite for such assets will strengthen. Further, as large multinational companies in tariff-exposed sectors face increasing pressure, smaller and mid-sized domestic players may be well positioned to capture displaced demand — particularly in industries such as pharmaceuticals.
While once episodic, geopolitical uncertainty has become a structural feature of the investment landscape, reinforced by conflicts in Ukraine and Gaza, tensions between China and Taiwan, and most recently, US military strikes on Venezuela and the capture of dictator Nicolas Maduro in early 2026.
These tensions have attracted attention to Western defense infrastructure, elevating investment to a top sovereign priority. At the 2025 NATO Summit, allies committed to raising annual defense spending from 2% to 5% of GDP by 2035 — a mandate that, combined with current global defense budgets, creates a compelling opportunity for private equity across the defense value chain and geographies.
Driven by the urgent need for next-generation warfare capabilities, Pentagon leaders are dismantling decades-old procurement processes that long deterred investment capital. The resulting defense innovation efforts and contracting reforms have unleashed venture capital into the sector, with momentum expected to accelerate in 2026 under supportive policy shifts from the Trump Administration.
For example, the top-line figure for the new US defense budget will cross $1 trillion for the first time, and Defense Innovation Unit secured a 101% funding increase for fiscal year 2026 to fast-track artificial intelligence, autonomy, quantum technologies, and other emerging capabilities to the battlefield. Additionally, the FORGED Act and the Executive Order on Modernizing Defense Acquisitions aim to expedite contracting processes, building on existing frameworks like “Other Transaction Agreements.”
In Europe, a new era of rearmament is taking shape. Since the end of the Cold War, relying on America as a backstop for security has kept defense significantly underinvested. Russia’s invasion of Ukraine and a more protectionist turn in Washington have upended that settlement. Defense budgets are now rising sharply, particularly in eastern Europe.
For example, Germany’s landmark fiscal package loosened long-standing constraints on public borrowing. The bill expanded the use of special funds to finance defense spending outside the debt break and outlined efforts to streamline notoriously slow procurement processes. Cumulatively, these dynamics, alongside institutional LPs softening their ESG policies, are poised to attract capital across the entire private equity spectrum throughout 2026 — from early-stage defense technology ventures to growth investments in component manufacturers.
AI has surfaced as the next general-purpose technology, creating massive investment opportunities across risk-return profiles. For one, the AI buildout requires massive front-loaded investment. The hyperscalers alone are estimated to invest roughly $2 trillion in data infrastructure over the next five years. Further, AI workloads now consume up to ten times more power per rack than conventional computing, with another five-to-tenfold increase expected as rack density climbs.
Private equity sponsors have targeted pick-and-shovel assets in power and digital infrastructure to capture the second derivative of the AI revolution, such as data centers, cooling technologies, and power storage providers. These investments offer exposure to AI with traditional buyout features, such as contracted cash flows and value creation initiatives with upside potential driven by strong secular demand.
However, robust investor appetite across the assets underpinning the AI power and infrastructure buildout has pushed valuations to elevated levels, raising questions around entry risk. Hyperscale data centers, for example, are now trading at multiples of roughly 25–30x EV/EBITDA multiples. As a result, sponsors may rotate away from richly valued operating assets toward secondary and tertiary data center segments and orthogonal plays — including services and enabling technologies.
While the sectors and deals that will unfold across private equity remain hard to predict, what is certain is that the ability to underwrite and execute on value creation will underpin the most successful dealmakers in 2026 and beyond. In today’s environment, managers must be able to generate resilient returns regardless of prevailing market conditions. As KKR says, this requires firms to “make their own luck.”
Investors have many levers to boost value in portfolio companies, but AI has rapidly emerged as the most consequential — particularly in software. So far, generative AI has largely been deployed to streamline operations in portfolio companies, from go-to-market and product development to customer support. Efficiency gains from these efforts can add a point or two to margin and support higher revenues at a lower cost basis. However, growth still remains the primary engine of returns. Moving into 2026, deploying AI to support the top line will come into greater focus for software PE sponsors.
Operational improvements that boost free cash flow give companies more capacity to reinvest in growth, but the larger opportunity lies in deploying AI directly into products and services to expand product functionality and unlock new pricing opportunities. Vista Equity Partners founder Robert Smith, for instance, has said that developing suites of AI agents within software platforms to automate routine tasks and deliver meaningful efficiency gains for customers represents one of the most compelling opportunities for upselling and expansion.
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