2026 Market Outlook
2025 was an active year for the firm. Our focus on high-quality private companies and assets, disciplined underwriting, conservative use of leverage and active long-term value creation enabled our portfolios to generate stable income and build shareholder value despite an unpredictable operating environment and a slower-than-anticipated recovery in mid-market M&A volume.
Unpredictable global trade policy was a defining macroeconomic feature of 2025. For many mid-market businesses, local and regional operating footprints, more proximate customer relationships and shorter supply chains were key drivers of resilient performance. Mid-market infrastructure, by its nature, tends to be regional in the essential services it provides. Within private equity and private credit, emphasis on service-based businesses generating recurring revenue from local catchment areas further insulated our portfolios.
Geopolitical tensions remain elevated, but we see signs of more constructive economic and capital market dynamics in 2026. We remain focused on targeting mid-market investments that feature sustainable long-term growth prospects, prudent balance sheets and resilient business models with predictable cash flows. We continue to collaborate with investors on private markets investment solutions that provide exposure to the value creation opportunities not captured by the listed markets.
2026 Outlook
Despite ongoing turbulence in foreign and trade policy, we expect M&A transaction volumes, liquidity and investor confidence to improve across the mid-market during 2026 – absent a further escalation in geopolitical risk. Importantly, investors continue to value the defining features of private markets, including longterm growth potential, diversification, predictable cash flows and lower volatility relative to public markets. As a recent data point, the Ontario Teachers’ Pension Plan (OTPP) annual investor sentiment report indicates that 81% of investors expect 2026 to be favorable for private markets.¹
Against this backdrop, private equity enters the year with positive momentum in terms of exit activity, interest rates and liquidity, which bodes well for increased distributions to investors from existing portfolio assets. Assuming a measured pace of recovery in M&A activity throughout the year, we believe mid-market buyout and secondary strategies remain particularly attractive, with operational value creation, flexible exit options and disciplined underwriting as key differentiators.
Across private credit, the mid-market continues to offer compelling relative value, combining attractive cash yields, strong lender protections, conservative capital structures and historically lower loss rates relative to public credit. For investors, these factors serve to reinforce the role of direct corporate lending and asset-based specialty finance as complementary allocations within diversified credit portfolios.
We continue to believe there are strong long-term tailwinds for mid-market infrastructure, driven by secular trends (energy transition, digital transformation and urbanization) and the pressing need to expand, refurbish and maintain existing infrastructure. Contracted infrastructure assets often provide a positive index to inflation, and we continue to focus predominantly on single purpose companies and assets, operating in one local jurisdiction, with private revenue counterparties and limited exposure to cross-border issues.
Private Equity
Private equity enters 2026 on firmer footing, with M&A markets gradually reopening for mid-market companies, valuation expectations becoming more aligned, and liquidity beginning to return to the system. However, we anticipate that this will take time to play out, with the recovery in transaction volume (which has been down 40% since the 2023 peak)² likely to be measured and uneven rather than rapid and sustained.
Mid-market companies will likely be advantaged by the multiple exit options available and the significant dry powder held by largecap private equity fund managers, sovereign wealth funds and trade buyers. Similarly, secondaries are anticipated to feature prominently as a liquidity and portfolio management tool. We expect secondary transaction volume to remain high, building from record levels in 2025 (see figure below) and extending the current target-rich environment for mid-market secondaries programs.
LP-led portfolio transactions continue to account for more than 50% of secondary market deal volume and offer attractive return potential from well-priced, diversified holdings with growth potential. With pressure on fund sponsors to deliver faster liquidity following a prolonged period of constrained exits, continuation vehicles, partial exits and other structured solutions will also be important sources of near-term liquidity, particularly for high-quality assets with clear equity stories, strong cash generation, and durable earnings profiles. Venture and growth secondaries valuations have stabilized in 2025 as liquidity pressures have created motivated sellers, and public markets have begun to reopen. We believe managers with deep GP relationships, differentiated visibility into underlying portfolio company performance, and a disciplined, selective investment approach are best positioned to capitalize on this opportunity set. More generally, the lower/core mid-market (companies with enterprise value ranging from $100 million to $1.5 billion) remains attractive as a source of long-term value creation. Entry valuations tend to be lower, competition is less intense, and opportunities for operational value creation are more tangible. As cost inflation and interest rates stabilize, our portfolio companies will generate value through margin improvement, working capital optimization, disciplined pricing strategies and selective investment for growth, rather than being entirely reliant on leverage or multiple expansion. AI adoption is also beginning to influence competitive differentiation at the portfolio company level, primarily through investments being made to capture incremental productivity and efficiency gains. The ability to assess AI readiness during diligence, understand implementation costs and risks, and support practical deployment of AI tools and training will become an increasingly important component of both value creation and downside protection across the mid-market.
Figure 1: Secondary Market Transaction Volume Over Time
($Billions)
Source: 2025 Secondary Market Highlights, Evercore Private Capital Advisory, January 2026.
Private Credit
Private credit starts the year with cautious optimism. Easing interest rates and rising market confidence support a gradual recovery in M&A and LBO activity, which will, in turn, drive both refinancings of existing loans and increased demand for new platform financings. Economic growth is expected to remain modest, and relative value remains most attractive in lower/core mid-market direct lending, Europe, and asset-based specialty finance.
Spreads have compressed across the market, though base rates remain above long-term averages and floating-rate private credit retains a meaningful yield premium relative to public fixed income. However, current market risk factors continue to require rigorous credit selection and structuring discipline, elevating the importance of underwriting focus, active portfolio construction and ongoing risk management.
As financing costs ease, borrower activity is shifting toward M&A and LBO activity, with private credit continuing to play a central role in capital structure solutions for sponsors and borrowers. This aligns with sponsor expectations, with two-thirds of private equity dealmakers expecting higher transaction volumes in 2026.³ From the lenders’ perspective, a sustained increase in deal activity should help support stabilization (or a potentially widening) of credit spreads.
Within direct lending, we believe the most compelling opportunities continue to be found in the lower/core mid-market (borrowers with ~<$75 million of EBITDA), where competition is less intense, structures remain more conservative, and long-term relationships remain highly valued. In contrast, competitive pressures in the upper mid-market have intensified, with this segment increasingly converging with the broadly syndicated market and accepting higher leverage levels, tighter pricing and looser credit terms (~85% of deals in the broadly syndicated loan market are covenant-lite) in return for the ability to put large amounts of both institutional and retail capital to work.
Europe remains a particularly attractive market, supported by fragmented capital markets, demand for bespoke and multicurrency financing solutions, and a more concentrated supply of private credit capital. Asset-based specialty finance is compelling as a differentiator, typically offering strong collateral coverage, lower correlation with traditional corporate credit and robust downside protection, particularly in niche areas, such as music royalties and legal finance that require significant asset specialization and bespoke structuring.
While the second half of 2025 saw several high-profile corporate bankruptcies, these events were largely idiosyncratic and concentrated in non-sponsored, more cyclical sectors and within the broadly syndicated loan segment. In our view, these events have not signaled broader system stress within the private credit market.
Overall, borrower performance across the market has remained resilient, with defaults remaining broadly in line with longterm averages. However, we are seeing weakness in select sectors, most notably in healthcare services and certain consumer-facing industries, which has led to an uptick in market loss rates. This reinforces the importance of sector selection, sponsor quality (as the first source of support capital for stressed borrowers) and portfolio diversification. Return dispersion across private credit lender portfolios is expected to increase in 2026, reinforcing the benefit of partnering with managers who have remained disciplined and stayed true to their investment processes and underwriting standards even during the most favourable parts of the cycle.
Figure 2: Private Credit Provides an Attractive Return Premium
Direct Lending Source: Cliffwater LLC. All Rights Reserved. Reproduced with permission. Broadly Syndicated Loans and High Yield Source: Pitchbook.
Data through December 31, 2025. Quarterly figures calculated as a 3-month average.
Infrastructure
Infrastructure continues to serve as the backbone of modern economies, essential for powering the energy transition, enabling digital connectivity and supporting increased urbanization. Secular tailwinds, including electrification and digitization, are driving strong demand for private capital investment across a wide variety of sectors, with approximately $5 trillion of annual demand projected by 2040, well ahead of currently projected supply.⁴ We see compelling opportunities as these trends accelerate – and increasingly intersect. The convergence of renewable power and digital infrastructure is a prime example; co-located wind farms and data centers directly address the challenges of rising energy prices and grid congestion, while capitalizing on the demand for sustainable digital footprints. At the same time, we recommend closely monitoring legislative developments in the US (such as the OBBB), both for new opportunities and value creation initiatives in existing portfolios.
Figure 3: Infrastructure Investment at Current Trends and Need
Source: Global Infrastructure Outlook, Global Infrastructure Hub.
As at December 31, 2025. There can be no assurance that any of the trends highlighted above will continue in the future.
The emergence of new contracted revenue frameworks for essential services, such as perimeter security, captive laundry and waste management, is creating new infrastructure asset types that we believe offer traditional infrastructure risk-return profiles. These contracted revenue models are particularly attractive in the current environment, as they may offer both steady cash flows and a degree of inflation protection, reinforcing the stability and resiliency of these investments.
Given the long-term demand for infrastructure capital, we expect 2026 to be an active year for new investments, with the North American mid-market offering significant relative value. Overall, North American infrastructure investment is projected to contribute more than 30% of projected global AUM growth by 2030.⁵ Much of that capital is projected to congregate at the large end of the market. In 2025, close to 50% of the ~US$300 billion raised went to the 10 largest infrastructure funds.⁶ These dynamics are reinforcing the benefits of a disciplined focus on mid-market opportunities, given the potential for bilateral deal sourcing, less intense competitive pressure and the broad inventory of smaller opportunities available (approximately 85% of completed infrastructure transactions can be classified as mid-market ). With multiple value creation and growth levers available to mid-market infrastructure owners, the significant dry powder at the large end of the market is expanding the number of exit options for smaller assets that have been grown, consolidated, professionalized and de-risked.
Endnotes:
- Source: OTTP, Global Investor Sentiment 2026 (As of December 2025).
- Pitchbook, Annal Global PE First Look. Data as of December 31, 2025. Representing the Global PE deal activity decline from 2021 to 2023
- Source: KPMG, KPMG 2025 Year-End M&A Study (As of December 2025).
- Source: G20 Global Infrastructure Outlook.
- Source: Preqin, Infrastructure in 2026 (As of December 2025).
- Source: Infrastructure Investor, Fundraising in 2025 Smashes All Records (As of January 2026).
Important Notices:
All $ figures in USD unless otherwise noted.
These materials do not constitute an offer to sell or a solicitation of an offer to buy interests in any Northleaf fund. No offer or solicitation in the Northleaf funds can be made prior to the delivery of the fund’s private placement memorandum, governing agreements and associated documentation. Before making an investment decision with respect to any fund, potential investors are advised to read carefully the fund’s private placement memorandum, governing agreements and related subscription documents, and to consult with their tax, legal and financial advisors.
The information contained in this year-end update is confidential and intended solely for the recipient hereof. The views and opinions expressed herein do not constitute investment or any other advice, are subject to change, and may not be validated by actual events. There can be no assurance that any of the trends highlighted above will continue in the future, Certain of the information set forth herein was gathered from various third-party sources which Northleaf believes to be accurate, but has not been able to independently verify. No representation, express or implied, is given regarding the accuracy of the information contained herein. As such, any opinions should not be construed as absolute statements and are subject to change without notice to you. You are receiving this year-end update because you are an investor with Northleaf. If you are not the intended recipient, please destroy all copies. Any distribution, printing or other use by anyone other than the intended recipient is prohibited.
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