Key Takeaways
- • Selectivity is defining private equity dealmaking as higher financing costs and market uncertainty raise the bar for attractive investments, with more than $600 billion, roughly 55% of U.S. private equity dry powder, sitting in funds more than two years old according to Morgan Stanley citing PitchBook data.
- • Sponsors are tightening diligence around earnings quality, competitive positioning, and business model durability, while deal structures such as earnouts, rollover equity, and purchase price adjustments are being used to bridge valuation gaps.
- • Software deal activity has contracted sharply, with Bain & Company reporting technology deal value fell 70% from Q4 2025 to Q1 2026 and Cherry Bekaert estimating software deal value fell 65.7% year over year in Q2 2026.
- • Continuation funds are gaining prominence as an exit route, with GP-led secondary volume reaching a record $115 billion in 2025, up 53% year over year, according to Jefferies.
- • Health care, software, and asset-heavy businesses are the themes to watch in 2027, with investors expected to prioritize resilient fundamentals and defensible competitive positions.
Summary
Private equity firms retain substantial capital to deploy, but putting it to work has become more complicated. Morgan Stanley, citing PitchBook data, reports that more than $600 billion, or roughly 55% of U.S. private equity dry powder, now sits in funds more than two years old, a record high. McKinsey estimates that more than 40% of general partner dry powder has been waiting at least two years, and KPMG notes that sponsors cannot easily deploy this capital without first demonstrating an ability to return capital to investors.
Higher borrowing costs have changed the threshold for attractive deals. Transactions relying heavily on leverage now require closer scrutiny of growth assumptions, cash flow durability, and downside protection. Buyers are increasingly focused on whether private capital can materially improve a company's performance rather than relying on financial engineering. Morgan Stanley reports that from 2022 to 2025, revenue and margin growth drove roughly 80% of exit MOIC, up from 55% in the 2015-2019 period.
Valuation gaps are harder to bridge because uncertainty comes from several directions at once, including higher rates, more expensive debt, regulatory pressure, and sector-specific risks. Software illustrates the point: Bain & Company reports technology deal value dropped 70% from Q4 2025 to Q1 2026, and Cherry Bekaert estimates software deal value fell 65.7% year over year in Q2 2026, as investors reassess product durability, pricing models, and competitive positions amid AI-driven change. Where buyers and sellers disagree on future performance, earnouts, rollover equity, and purchase price adjustments may help allocate risk.
Capital remains concentrated in large transactions. Bain & Company reports 2025 global buyout deal value rose 44% to $904 billion even as buyout deal count fell 6%, and the $56.6 billion take-private of Electronic Arts set a new all-time buyout record. EY reports U.S. megadeal value fell 50% year over year in Q3 2026 as borrowing costs weighed on the largest transactions, while mid-market activity supported U.S. deal volume. With Intelligence reports the 20 largest funds accounted for $171 billion of the $312 billion closed in the first half of 2026.
Exit activity is also shifting. Bain & Company estimates roughly 33,000 sponsor-backed companies remain unsold, and PwC describes distributions to paid-in capital (DPI) as the defining fundraising metric of 2026. Continuation vehicles are an increasingly used option; according to Jefferies, GP-led secondary volume, mostly continuation vehicles, reached a record $115 billion in 2025 and accounted for approximately 14% of sponsor-backed exit volume. The article cautions that these transactions require a clear investment rationale, a well-supported valuation, and careful attention to conflicts. Looking to 2027, health care, software businesses with defensible products, and asset-heavy "halo businesses" are expected to draw attention, with Cherry Bekaert reporting energy deal value rose 80.5% in the first half of 2026, supported partly by AI infrastructure build-out.
Higher borrowing costs have changed the threshold for attractive deals. Transactions relying heavily on leverage now require closer scrutiny of growth assumptions, cash flow durability, and downside protection. Buyers are increasingly focused on whether private capital can materially improve a company's performance rather than relying on financial engineering. Morgan Stanley reports that from 2022 to 2025, revenue and margin growth drove roughly 80% of exit MOIC, up from 55% in the 2015-2019 period.
Valuation gaps are harder to bridge because uncertainty comes from several directions at once, including higher rates, more expensive debt, regulatory pressure, and sector-specific risks. Software illustrates the point: Bain & Company reports technology deal value dropped 70% from Q4 2025 to Q1 2026, and Cherry Bekaert estimates software deal value fell 65.7% year over year in Q2 2026, as investors reassess product durability, pricing models, and competitive positions amid AI-driven change. Where buyers and sellers disagree on future performance, earnouts, rollover equity, and purchase price adjustments may help allocate risk.
Capital remains concentrated in large transactions. Bain & Company reports 2025 global buyout deal value rose 44% to $904 billion even as buyout deal count fell 6%, and the $56.6 billion take-private of Electronic Arts set a new all-time buyout record. EY reports U.S. megadeal value fell 50% year over year in Q3 2026 as borrowing costs weighed on the largest transactions, while mid-market activity supported U.S. deal volume. With Intelligence reports the 20 largest funds accounted for $171 billion of the $312 billion closed in the first half of 2026.
Exit activity is also shifting. Bain & Company estimates roughly 33,000 sponsor-backed companies remain unsold, and PwC describes distributions to paid-in capital (DPI) as the defining fundraising metric of 2026. Continuation vehicles are an increasingly used option; according to Jefferies, GP-led secondary volume, mostly continuation vehicles, reached a record $115 billion in 2025 and accounted for approximately 14% of sponsor-backed exit volume. The article cautions that these transactions require a clear investment rationale, a well-supported valuation, and careful attention to conflicts. Looking to 2027, health care, software businesses with defensible products, and asset-heavy "halo businesses" are expected to draw attention, with Cherry Bekaert reporting energy deal value rose 80.5% in the first half of 2026, supported partly by AI infrastructure build-out.
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