What’s Ahead for Private Equity: A More Selective Approach to Dealmaking

Private equity firms retain substantial capital to deploy, but Foley & Lardner LLP reports that putting it to work has become more complicated. Citing PitchBook data, Morgan Stanley 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 capital without first demonstrating an ability to return capital to investors. Higher financing costs, persistent valuation gaps, and uncertainty around AI and other disruptions are raising the bar for attractive investments, making selectivity a defining feature of dealmaking.

Higher borrowing costs leave sponsors less room for error, particularly for transactions relying heavily on leverage. Buyers are increasingly focused on whether private capital can materially improve performance through operational improvement and defensible margins rather than 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. Software illustrates the point: Bain & Company reports technology deal value fell 70% from Q4 2025 to Q1 2026, and Cherry Bekaert estimates software deal value fell 65.7% year over year in Q2 2026, as AI-related disruption forces investors to scrutinize product durability, pricing models, and customer relationships. Earnouts, rollover equity, and purchase price adjustments may help allocate risk where buyers and sellers disagree on future performance.

Capital concentration persists at the top of the market. Bain & Company reports 2025 global buyout deal value rose 44% to $904 billion even as deal count fell 6%, with the $56.6 billion take-private of Electronic Arts setting an 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 deal volume. With Intelligence reports the 20 largest funds accounted for $171 billion of the $312 billion closed in the first half of 2026.

Exits are becoming more complex. Bain & Company estimates roughly 33,000 sponsor-backed companies remain unsold, and PwC describes distributions to paid-in capital as the defining fundraising metric of 2026. Continuation vehicles remain an important option; according to Jefferies, GP-led secondary volume, mostly continuation vehicles, reached a record $115 billion in 2025, up 53% year over year. These transactions require a clear investment rationale, a well-supported valuation, and a transparent process. Looking to 2027, Foley & Lardner LLP identifies health care, software businesses with defensible products, and asset-heavy "halo businesses" as themes to watch, citing Cherry Bekaert's report that energy deal value rose 80.5% in H1 2026 year over year.