Every year brings predictions that this will be the year deal flow accelerates, distributions normalize, and the private equity engine returns to full speed. So far, that moment has remained out of reach.
2025 was private equity’s most challenging year of fundraising globally since 2018, and the average fund that closed in 2025 spent 23 months in market fundraising, up from 16 months in 2021. Average portfolio company holding periods have increased to 6.3 years (historically three to five years), and continuation funds are increasingly common.
But market conditions are shifting in three ways that suggest 2026 may be different, and we see hope in the narrowing gap between buyer and seller expectations; the rapid rise of AI as a diligence factor; and the continuing fallout from credit stress in private lending.
Trend 1: The pricing gap is finally closing
The infrastructure for a busy deal market is in place. Banks and private credit funds are ready to deploy capital. Spreads have compressed to levels that make deals viable across a broad range of assets. What’s been missing is agreement on price.
That’s starting to change.
The disconnect traces back to 2021–2022, when sponsors acquired assets at peak valuations. Many have been reluctant to exit at today’s prices – understandably so. But holding out indefinitely isn’t sustainable, and we’re now seeing a shift in posture. Sponsors who would have demanded 12 times EBITDA a year ago are increasingly accepting 10 times and moving forward.
Several forces are accelerating this shift. Limited partners (LPs) are pressing harder for distributions from funds that should have returned capital by now. Sponsors approaching their next fundraise need realizations to demonstrate performance. And while extended hold periods have become more common, they still raise questions.
When buyer and seller expectations converge at scale, the resulting activity will be significant. Sponsors, buyers, and lenders will all move at once, creating a surge in deal velocity after years of pent-up pressure.
For now, activity remains concentrated in add-ons and tuck-in acquisitions. Premium assets trade quickly; lower-quality assets linger. The sponsors who transact early – rather than waiting for a pricing environment that may not return – stand to benefit when fundraising season arrives.
Trend 2: AI has become a threshold diligence question
A year ago, AI displacement was a topic raised in investment committees – often with a shrug. Today, it’s a gating question for any technology-adjacent deal.
The shift occurred remarkably fast. For software investments in particular, AI risk has moved from being an afterthought to front of mind. Deals that would have sailed through diligence 12 months ago now prompt immediate questions: How exposed is this company to AI disruption? Is the threat imminent or years away?
The challenge is that few investors have the in-house expertise to answer these questions confidently. The talent and frameworks needed to assess AI displacement timelines are still scarce. Many firms are building this capability on the fly and acknowledge the difficulty of even obtaining a credible estimate.
Sector selection matters more than ever. Software companies face potential existential risk – core products could be rendered obsolete or commoditized. Physical industries are different. In transportation and logistics, for example, AI is more likely to drive back-office efficiencies than to disrupt the core business model. That distinction – AI as threat versus AI as margin enhancer – is becoming central to investment thesis development.
Going forward, AI diligence will be table stakes for technology investments. Firms that treat it as optional will find themselves at a disadvantage.
Trend 3: Credit stress has reshaped the lending landscape
The private credit market absorbed significant stress in 2025, as rising defaults forced lenders to take control of and restructure a growing share of deployed capital. While often viewed as resilient, that resilience has proven uneven – particularly in technology direct lending.
Many borrowers – companies past the startup phase but not yet at scale – accessed private credit during the 2021–2022 deployment cycle under aggressive terms. All-in borrowing costs frequently reached 12% to 13%, with tight covenants and restrictive prepayment protections. As growth slowed, these companies became constrained, with declining revenue and high interest burdens eroding liquidity.
Options for these companies are limited. The bank market remains largely inaccessible, and capital markets alternatives are scarce. As a result, restructuring has become the primary path, often resulting in dilution and operational disruption.
This dynamic highlights a core asymmetry in technology lending. While lenders benefit from strong yields in successful cases, underperformance can quickly erode value. With limited hard assets, recoveries are often constrained when recurring revenue declines.
Market responses reflect this pressure. Debt-to-equity conversions are increasingly common, with lenders stepping into ownership roles. Meanwhile, stronger credits are refinancing into bank or syndicated markets where possible.
Despite headwinds, the evolving credit environment has catalyzed innovation in deal structuring. Sponsors and their advisors are deploying creative capital solutions – including preferred equity tranches, PIK toggles, and earn-out mechanisms – to bridge valuation gaps. At the same time, investors are pursuing discounted debt acquisitions and providing rescue capital to viable but overlevered businesses through negotiated transactions.
Looking ahead, outcomes will depend on how these stressed assets are resolved. For law firm clients, the environment presents opportunities across restructurings, liability management, secondary trades, and new-money financings.
What this means in 2026
These three trends – pricing convergence, AI as diligence imperative, and credit market recalibration – are interconnected. Together, they point to a market in transition.
For sponsors: The case for accepting current valuations grows stronger. LPs are watching. The ability to demonstrate disciplined exits and build AI diligence capability will separate top-tier general partners (GPs) from the rest.
For lenders: The relationships cultivated during the slower years will be tested when velocity picks up. Understanding which sectors face AI disruption – and which stand to benefit – will be a meaningful differentiator.
For LPs: The pressure applied over the past several years is having its effect. Capital will start returning. The question now is selectivity: identifying which GPs exercised sound judgment and which simply deferred hard decisions.
Despite stretches in 2025 when broader market stress seemed possible, the economy has proven more resilient than many anticipated. Whether 2026 delivers a surge in activity or another year of gradual progress, the firms best positioned will be those that prepared for acceleration, invested in emerging capabilities, and maintained discipline throughout the cycle.
The dynamics are aligning. Execution will determine the outcome.
Client Alert 2026-076