M&A Market Perspective: 2026 Outlook

Not long ago, we stood on the doorstep of 2025 with optimistic expectations. Deal activity as re-emerging, exits were showing early signs of life, and easing inflation and rate pressures suggested a long-awaited M&A resurgence. By midyear, however, the narrative had shifted. Policy uncertainty, stalled exits, and fragile investor confidence slowed momentum. All the right ingredients were present, but uncertainty proved paralyzing and reshaped the story.

As we reflect on 2025, however, the ending reads much closer to the story many had hoped for. Deal activity finished strong, exit trajectories improved, and private equity once again demonstrated its ability to navigate ambiguity. The takeaway from 2025 is not that uncertainty disappeared, but that sponsors learned how to move forward despite it. That lesson shapes our predictions for 2026.

How Deals Get Done in 2026

Deal activity entering 2026 is not being driven by a single catalyst, it’s being carried forward by momentum and a set of steady tailwinds. Rate cuts have eased financing pressure, bid–ask spreads have narrowed, and investor confidence has improved. At the same time, record levels of dry powder remain available for deployment, even as fundraising commitments have declined in recent years. But even with a positive backdrop, confidence entering 2026 remains measured as macroeconomic and geopolitical uncertainty persist.

In 2025, sponsors relied heavily on continuation funds, add-ons, and secondary solutions to keep capital moving amid constrained exit conditions. In 2026, we expect that mix to shift. As traditional exit paths reopen and pricing confidence improves, continuation fund usage should level off from 2025’s record highs, reserved for assets with additional value creation potential late in the fund life.

Over the past several years, add-ons offered sponsors a lower-risk way to deploy capital, leveraging existing credit facilities and focusing on incremental value creation, while waiting for a healthier exit environment. Heading into 2026, the trade-off between risk and opportunity looks different.

With improved risk appetite, lower interest rates, and tighter loan spreads, financing larger, standalone transactions is becoming more accessible. As a biproduct, add-ons, while still a core investment tool, are likely to represent a smaller share of total deal activity as platform LBOs regain momentum. That said, make no mistake, the small initial platform, buy-and-build strategy will remain a core thesis for middle-market sponsors.

We also anticipate a re-engagement of strategic buyers. As corporate balance sheets strengthen, tariff challenges resolve, and management teams refocus on long-term growth initiatives, strategics are expected to be a prominent and preferred exit path for sponsors in 2026. This is expected to be most evident in the middle market, where assets are more digestible, integration risk is lower, and valuation expectations have reset.

Sponsor-to-sponsor deals – often involving larger, more mature assets – are also expected to regain prominence in 2026 as pricing expectations realign and buyers gain clearer visibility into future value creation. With a sizeable inventory of PE-owned companies and improved access to financing, these deals provide a pragmatic path to liquidity while allowing assets to continue scaling, even in the absence of a fully normalized exit environment. The result is a deal environment in which transaction structure is increasingly driven by sponsor strategy rather than constrained by market conditions.

Interest Rates Ease, But Credit Leverage Hasn’t Allowed

While interest rates have eased, leverage has not returned to prior-cycle peaks. Debt multiples in new LBOs remain below 2022 levels, requiring sponsors to commit more equity and place greater emphasis on operational execution rather than financial engineering. For the middle market, this remains a relative advantage. Smaller deal sizes and simpler capital structures allow platform activity to increase without signaling a return to leverage-heavy dealmaking, reinforcing a healthier and more sustainable deal environment in 2026. As we noted above, the small-platform buy-and-build thesis isn’t going away anytime soon.

A Two-Speed Exit Market Takes Shape

One dynamic emerging from late-2025 data is a growing divergence in how sponsors manage exits across their portfolios. Historically, early exits were often associated with distressed or underperforming assets. Today, the opposite is increasingly true. As sponsors move deeper into post-2020 vintages, many are accelerating exits of their highest-quality assets earlier in the hold period to generate liquidity, demonstrate realizations, and support upcoming fundraising efforts.

At the same time, older and more challenged assets are proving harder to exit and are being held longer, extending portfolio-level fund life even as median exit hold periods compress. Extended holding periods are weighing on returns by depressing IRRs, delaying distributions to LPs, and increasing operational strain on sponsors, with the weakest portfolios at risk of becoming long-lived “zombie” funds. The result is a two-speed market: select assets are moving faster, while much of the backlog remains parked.

This dynamic helps explain why exit activity can improve without immediately relieving the industry’s growing backlog of aging assets.

Fundraising: A Longer Road Back

If 2025 proved anything, it’s that the middle market knows how to adapt. Should 2026 deliver improving conditions, we expect increased exit activity, more platform deals, a normalization in median fund life, and continued momentum in dealmaking. If it doesn’t, sponsors will again adjust, leaning more into add-ons, selective exits, and flexible capital solutions until confidence is restored and traditional paths reopen.