What is the current state of the private equity market? 

The end of 2025 was extremely busy, especially in the middle and lower-middle market. 2025 ended strongly for deal volume and value, and we expected that momentum to continue into 2026. January was busy, with deals flowing over from Q4, but since then the deal volume has not matched expectations.

For the past few years, people have been predicting that private equity would return to powerhouse levels. With many funds sitting on assets and others holding large amounts of undeployed capital, it looked like 2026 would release a flurry of deal activity. Macro factors, including tariff uncertainty following last year’s trade policy changes and the Middle East conflict this year, have tempered that momentum. Still, the underlying fundamentals remain intact: The volume of undeployed capital continues to grow, and the structural pressure to transact has not gone away.

Cross-border deals are receiving much less focus, continuing a widely seen direction that was noted, for example, in Deloitte’s 2026 M&A Trends Survey. Generally, funds are steering clear of businesses that have international trade or tariff exposure. They are looking more toward business services and countercyclical or less cyclical areas that have less exposure. 

We expect to see an uptick once some of these macro factors are resolved, but right now investors are clearly taking a “risk-off” approach to the market.

How is the credit market operating?

Two competing aspects shape the market. Over the last couple of years, private credit funds have raised large amounts of capital that they are keen to deploy. On the flip side, lenders are largely risk averse and underwriting deals very conservatively. Revenues, particularly from businesses exposed to international trade and tariffs, are very hard to predict with any certainty. 

People are sitting on capital that they really need to deploy into the credit markets, but they are being highly selective. It’s a balance between the competition that exists for quality deals and trying to figure out the right pricing arrangements, given new higher risk levels in the markets. 

Given these challenging market conditions, what decisions are clients facing? 

Frequently we see private equity funds that have deployed most of their capital but have yet to sell any of their assets in order to return capital back to their investors. So, they want to raise more funds to deploy. However, investors are wary of providing more capital when they haven’t yet seen a return from the last fundraise. 

There is a constant push-pull right now between fundraising and exits. The fundamental issue facing a lot of clients is: Should they sell assets that are marked at a loss or at minimum profit, to get them off their balance sheet? And is that going to hurt or help with their future fundraising efforts? 

How is Reed Smith helping clients to resolve some of these issues?

For us as advisors, reputation and experience are more important than ever. When we represent a fund that is selling a business, we look at the various buyers who are interested in the asset, and often we see a wide range of valuations. Early-stage indications of value can diverge materially from final pricing, which makes careful evaluation of each bidder’s credibility and track record essential. We can provide clients with our experience in terms of dealing with various buyers.

Given current market conditions and the gap that can exist between expectations and achievable pricing, a significant part of our advisory role is helping clients test their assumptions against comparable deal data.

Are you seeing a more creative approach to how deals are being structured? 

In the front half of 2025, we saw a lot of deferred purchases, earnouts, and things that were designed to protect against adjustments with tariffs, government cuts, and other things that could impact the business. Those fell away as things got busy in the back end of the year. A lot of those are starting to come back now. Earn-outs are becoming much more prevalent, to protect against downside risk in the future. 

Which sectors are driving private equity activity? 

Industrial services continue to be very active, particularly around essential infrastructure and maintenance businesses that generate stable, recurring revenue. We’ve also seen an uptick in health care activity, even as the sector faces heightened regulatory scrutiny, particularly around highly leveraged transactions and accelerating consolidation among health care providers. 

The AI boom is driving value through a lot of tech companies as funds look for platforms that can integrate AI capabilities or benefit from the shift toward automation. Anything to do with data centers continues to be extremely hot, given the extensive infrastructure that AI requires. Conversely, technology businesses that are vulnerable to AI disruption, such as SaaS providers, have seen significant valuation declines as the market reassesses their long-term positioning.

The current geopolitical uncertainty is generating strong interest in defense and cybersecurity, sectors that benefit from rising government spending and heightened awareness of digital threats. 

And although the food, beverage, and consumer industries took a real hit over the Covid period, that area is recovering. We’re seeing particular interest in fast-casual dining, where funds see an opportunity to acquire at reasonable valuations and drive operational improvements, as consumer spending rebounds.

How have recent antitrust developments in the U.S. affected funds? 

Funds had been preparing for the change in antitrust rules that went into effect earlier this year. That change made the antitrust process significantly more burdensome and expensive. We had been working with funds to get prepared, which was extremely detailed and time-consuming work. That regulation was eventually overturned. Going back to the old filing system has been a significant relief to many funds.

How have European markets performed so far this year? 

The U.S. continues to drive the market, but within Europe, the UK has held up better than some might have initially expected – particularly in technology, financial, and business services deals. Technology-driven transformations are driving the UK market. France continues to see a high level of mid-market activity, mainly in the energy transition, health care, infrastructure, and technology sectors.

In Germany, we’re seeing opportunities around family-owned businesses without succession plans. The lack of agreed succession within large numbers of family-owned businesses remains a recurring concern within the SME sector, known as the Mittelstand, which makes up the vast majority of businesses in the country. The Nordic markets are generating a significant volume of technology and health care deals. While deal volumes are below their peak, there are positive recovery signs in the Nordic region. 

Similar to in the United States, we’re still seeing activity in Europe; it’s just very sector-specific.

How should funds best position themselves for the next 12 months? 

The fundamentals remain the same: Invest the time, invest the capital, work hard on the assets, be very involved operationally, find synergies, and manage costs. 

However, the funds that are finding success in this environment are also being disciplined with entry valuation, rigorous underwriting, and the quality of the asset, often favoring platform and add-on strategies where standalone multiples remain stretched. They are using earn-outs and deferred consideration creatively to bridge bid-ask gaps. And they are concentrating on sectors with strong tailwinds, such as business services, data infrastructure, health care, and defense, where revenue is less dependent on the broader macro cycle.

The focus has moved from short-term to longer term holds, as it takes time to turn businesses around in the current market. Funds that are seeing success tend to be highly operationally focused and are looking six or seven years down the line.