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Key takeaways from 2Q26:
- Deal activity shifted toward smaller transactions, as deal value declined by 35% in 2Q26 despite a modest increase in volume, reflecting tighter financing conditions and persistent valuation gaps.
- Exit activity retreated after recent strength, returning closer to the three-year quarterly average of approximately US$66b observed during the 2022–2024 rate-hiking period down from the past four quarter run rate of US$109b.
- Fundraising value increased by 54%, driven primarily by four mega-funds, while capital continued to concentrate among large and specialist managers amid LP liquidity constraints.
- PE firms expect transaction activity to improve over the next six months, with stronger capital deployment anticipated in energy, healthcare, and manufacturing.
Note: All graphs and tables refer to US data unless stated otherwise. Percentages may not sum to exactly 100% due to rounding. The numbers in prior periods per PitchBook and Dealogic get constantly updated by them, hence the information from PitchBook and Dealogic as shown in the graphs for prior years is slightly different to that shown in previous report.
Geopolitical uncertainty largely resulting from the Iran conflict and higher oil prices weighed on the overall deal environment. Inflation concerns kept borrowing costs elevated, adding additional friction for deal seekers on top of the valuation gap as investors became more opportunistic.
However, the second quarter of 2026 did not represent a market in retreat; rather, it reflected a market that has become considerably more selective. Private equity sponsors continued deploying capital, but the profile of those investments changed materially. Transaction volume remained relatively resilient while aggregate deal value declined sharply, illustrating that sponsors were still willing to invest, yet increasingly preferred smaller, easier-to-finance transactions over transformational platform acquisitions. This distinction is important because it demonstrates that capital remains available, but underwriting discipline has become the defining characteristic of today's market.
Private equity deal activity and trends
The higher volume of smaller deals is further evidenced by a resurgence of corporate carve-outs which represented 10.6% of buyouts above the recent 5-year average (8.7%). Large corporations continue reviewing portfolios to sharpen strategic focus and redeploy capital toward core operations. For private equity firms, these transactions offer attractive characteristics including established operating histories, audited financial statements and financing structures that reduce execution risk while creating opportunities for operational transformation.
Source: Dealogic
Several forces converged to create this environment. Elevated interest rates continued to increase financing costs while tighter credit conditions limited the appetite for larger leveraged buyouts. At the same time, geopolitical uncertainty and persistent valuation gaps widened the divide between buyer expectations and seller pricing. Rather than overpaying or stretching capital structures, sponsors prioritized investments where operational improvements would drive returns. According to Dealogic, there were two mega deals (value of US$5b and above) in 2Q26 compared to six in 1Q26.
Source: PitchBook
The EY PE Pulse survey (Fig.3) indicates that, going into 2H26, elevated interest rates continue to remain the biggest impediment in dealmaking. As of June, the EY-Parthenon economic team, led by Greg Daco, anticipates the Federal Reserve to remain on hold for the remainder of the year. Valuation mismatches and geopolitical considerations are also expected to remain key challenges, contributing to a more cautious transaction environment.
Source: EY PE Pulse survey 2Q 2026
Shift in sector allocation: consumer gains share as technology slows
Capital deployment also became more targeted at the sector level. Consumer businesses emerged as the largest contributor accounting for over 26% of transactions as investors gravitated toward businesses demonstrating resilient demand and clearer cash-flow visibility.
Conversely, technology investment moderated as sponsors reassessed software valuations and the disruptive implications of generative AI on existing business models. This shift should not be interpreted as declining confidence in technology, but rather as evidence that investors are distinguishing between AI beneficiaries and businesses whose long-term competitive position has become less certain.
Source: Dealogic
Advancements in AI have created avenues of investment in the strategies ancillary to AI (Fig. 4). The EY PE Pulse survey indicates that, firms are expected to increase their investments in digital infrastructure (cloud, data centers and connectivity), as well as power, utilities and energy infrastructure.
Beyond infrastructure, PE firms also anticipate growth in the capital allocation toward software companies with AI-resilient characteristics after healthcare services and industrials.
Source: EY PE Pulse survey 2Q 2026
PE exit activity and market dynamics
Following a relatively healthy exit environment since 1Q25 – with 3Q25 being an exception – exits suffered in 2Q26. Based on Fig. 5, the exit value in 2Q26 declined by ~40% and volume reduced by ~19% compared to previous quarter. While IPO volume improved (eight in 2Q26 versus four in 1Q26), the average IPO value declined by ~28%, reflecting a shift towards smaller IPO transactions, according to Dealogic.
Source: Dealogic
Traditional exits remain available for exceptional businesses, but much of the market has become increasingly selective. This has accelerated the adoption of continuation funds, minority recapitalizations, dividend recapitalizations, and other structured liquidity solutions that provide flexibility while preserving upside. Rather than waiting for a perfect exit window, leading sponsors are broadening the definition of liquidity and treating portfolio management itself as a source of competitive advantage. In the recent EY PE Pulse survey (Fig. 6), the valuation gap has emerged as a primary constraint in selling long held assets.
Source: EY PE Pulse survey 2Q 2026
Despite a healthy exit environment in previous quarters, the inventory of PE companies older than seven years has grown (Fig.7) and the recent decline in exits could further exacerbate this. Its share in the PE portfolio has increased from ~14% in 2020 to over 20% in 2026, reflecting a build-up of aging assets.
To exit older assets and generate liquidity, over 50% of the US PE Pulse survey respondents indicated that they would be willing to accept a discount of 6% or more to their original underwritten value (Fig. 8), compared with a mere 10% who would prefer to wait for their desired valuation. Global PE Pulse survey respondents expressed similar views, with 62% willing to accept a discount of 6% or more.
Source: PitchBook
Source: EY PE Pulse survey 2Q 2026
US PE fundraising environment
Fundraising remained resilient in the second quarter, but the headline strength reveals an increasingly bifurcated market. While total capital raised increased 54% (highest level since 4Q24), much of the growth was driven by a small number of mega-funds, reinforcing a trend toward capital concentration among large, established, and specialist managers.
At the same time, LP liquidity constraints, slower distributions, and governance pressures continued to limit commitments to emerging and middle-market funds. As a result, fundraising success is becoming less about the availability of capital and more about manager differentiation, demonstrated track records, and sector expertise. Until exit activity broadens and distributions improve, this "flight to quality" is likely to remain a defining characteristic of the fundraising environment. This increase was driven primarily by the close of four mega funds (with value of US$5b and above), which together raised approximately US$50b.
Source: PitchBook
In the quarter (2Q26), the top ten funds accounted for over US$71b, representing more than 61% of total capital raised.
Source: PitchBook
Specialization has also become a key differentiator in fundraising. According to PitchBook, specialist managers accounted for ~74% of capital raised in 2025 and ~71% in 2026 (as of April), well above the five-year average of 65.4% (Fig. 10). Investors are increasingly backing managers with deep sector expertise, proven track records, and established fund platforms. As a result, fundraising is becoming more concentrated, with capital flowing primarily to large-scale or highly specialized managers.
PE market outlook and sector trends
PE firms remain cautiously optimistic for the near future. Over the next six months, most PE firms expect transaction activities to improve further, with ~70% of the participants in the EY PE Pulse survey anticipating some degree of improvement in deal making and ~50% of participants expecting an increase in exit activity (Fig.11).
However, the pace of recovery will depend on improvements in financing conditions and greater alignment between buyer and seller valuation expectations. PE firms anticipate increased capital deployment into energy, healthcare, and manufacturing, driven by AI-led growth in energy demand, healthcare's resilient, non-cyclical fundamentals, and government-led reshoring and domestic manufacturing initiatives.
Looking ahead, sponsors are expected to remain disciplined rather than defensive. Deployment should continue to favor sectors with structural growth drivers (healthcare, energy, manufacturing and digital infrastructure) while underwriting standards remain focused on cash-flow durability, pricing power and operational improvement opportunities.
Source: EY PE Pulse survey 2Q 2026
Amar C. Mehta and Shrey Tripathi co-authored this article.
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