Private Equity Market Update: Q1-2026
Private equity entered 2026 with improving visibility but a more demanding backdrop. Investors are increasingly focused on when liquidity will normalize; where returns will come from in a higher interest rate and more competitive environment; and how AI will reshape value creation and risk across portfolios.
We observed the following trends in the private equity market during the first quarter of 2026:
The private equity industry entered 2026 with positive momentum, as global exit activity improved in 2025. However, the broader recovery faces ongoing challenges from geopolitical tensions and AI-related concerns within the software sector specifically. While the exit environment is showing some signs of recovery, activity remains selective and concentrated in higher-quality assets, leaving many investors focused on when — and how — capital will be returned.
Investors appear to be focused on liquidity and distributions, reflecting a multi‑year backdrop of a slower exit environment and continued pressure on cash returns. This matters because it directly shapes commitment, pacing, re‑ups, and willingness to add exposure to private equity today. In today’s market, investor diligence is increasingly oriented around what is “real”: How reported valuations translate into realized outcomes, and whether performance is supported by fundamentals rather than multiple expansion.
In Q1 2026, global private equity exits totalled approximately $270 billion, a decrease from Q4 2025. Exit activity continues to typically be concentrated in larger and higher‑quality assets, with broader liquidity still developing.1
Exit volumes declined further in Q1 26, with IPO activity particularly muted amid renewed market volatility.2 Meanwhile, M&A and sponsor-to-sponsor exits remained steady.
Global Private Equity Exit Activity3
US $ Billion
There can be no assurance that any of the trends highlighted above will continue in the future.
In this environment, firms continue to emphasize diversified exposure and underwriting discipline. Sponsors are heavily scrutinizing exit assumptions in our underwriting to ensure we are adjusting expectations for the reality.
Selectivity and focus will likely underpin successful outcomes in private equity over the mid- to long term, as the industry faces increased competition and a tougher macro environment.
The current environment reflects a shift from the previous period when returns were supported by favourable market dynamics, to one where success depends more directly on execution and differentiation. Importantly, this is not a challenge to private equity’s long-term case, but rather a reaffirmation of its core strengths.
Over time, private equity has demonstrated its ability to outperform public markets, driven by active ownership, aligned incentives and a focus on operational improvement. In the current environment, when returns are typically less reliant on multiple expansion, these attributes are becoming even more important, reinforcing the role of private equity as a long-term compounding asset class.
At the same time, outcomes are becoming more dependent on manager selection and execution, with investors placing greater emphasis on sponsors that can consistently drive EBITDA growth, navigate sector-specific dynamics and translate operating performance into realized value. At the same time, the illiquidity premium — while still present — is becoming more nuanced, with greater variability across strategies and managers.
Private Equity Returns4
Average Net IRR by Vintage
There can be no assurance that any of the trends highlighted above will continue in the future.
Within this context, the mid-market continues to stand out as a key growth engine, with a clear shift toward operational value creation over traditional financial engineering. Data from operating benchmarks highlights the advantage: PE-backed mid-market companies have delivered a ~3.6 percentage point revenue growth premium over the past decade and a ~1.4 point EBITDA margin advantage in the most recent fiscal year versus non-PE peers.5 Mid-market companies present a compelling equity thesis by utilizing a buy-and-build strategy, which involves acquiring other businesses at attractive valuations. This approach enables platforms the ability to scale efficiently, unlock synergies and diversify revenue streams, which can help mitigate volatility.
Secondaries are also playing an increasingly important role within investor portfolios. They offer a complementary way to access private equity, typically with shorter duration and greater visibility on underlying assets, while providing liquidity and pricing insights in a more selective market. In an environment in which outcomes are more manager-driven, secondaries can help investors fine-tune portfolio construction and gain targeted exposure to high-quality assets.
AI is reshaping private equity deployment, underwriting and the value creation approach, thereby emerging as a defining factor for investors.
After a decade when software and technology represented a significant share of deployment, investors are recalibrating exposure amid rapid AI disruption. Technology’s share of global private equity investment declined from ~30% in 2025 to just over 10% in Q1 2026. While this pullback is likely overblown, we do expect a shift toward a more targeted focus on defensible models and clear AI integration potential, as well as some uncertainty around AI-driven disruption in software.6
AI is emerging as a defining factor in both underwriting and value creation, with investors increasingly focused on how it will impact business models, competitive positioning, and exit outcomes.
The implications are two‑sided:
- Risk: Certain sectors (particularly software) are facing accelerating disruption and shorter competitive cycles, requiring more careful diligence.
- Opportunity: AI is also enabling productivity gains, cost efficiencies and revenue enhancement, becoming a core lever within value creation strategies.
Importantly, outcomes are becoming more dependent on execution — where sponsors can translate digital and AI capabilities into measurable operating improvements.
At the sponsor level, the change is not the introduction of AI but its systemization. While many sponsors have invested in digital capabilities for years, leading sponsors are now standardizing deployment through centralized teams, shared tools and repeatable playbooks that can scale across portfolios.7 The focus is on measurable impact — embedding AI into core value drivers like pricing, sales productivity and cost optimization, with clearer linkage to EBITDA outcomes.8
The distinction in the current environment is execution: Firms that can systematically deploy AI and translate it into tangible results are increasingly separating from those still operating with fragmented or experimental approaches.
Taken together, these trends point to a maturing private equity landscape where returns are less reliant on market conditions and increasingly driven by execution. As the private equity illiquidity premium becomes more nuanced, and dispersion across managers widens, success will depend on selecting the right managers, focusing on operational value creation in the mid-market and adding secondaries exposure to actively manage private equity allocations.
Endnotes:
- Exit Activity Concentration Source: Ernst & Young, Private Equity Pulse: key takeaways from Q1-26, April 2026.
- Exit Volume Decline Source: KPMG, Q1-26 Pulse of Private Equity — Global insights, April 2026.
- Global Private Equity Exit Activity Source: Pitchbook, Q1-26 Global PE First Look, April 2026.
- Private Equity Returns Source: Cambridge Associates; as of September 2025.Buyout returns represented by the pooled returns per vintage year. Includes global buyout investment returns from 1990 to 2022. 2023-2025 vintage returns are not included due to the early stages of the investment period. Recession years include 1990, 1991, 2001, 2002, 2008, 2009, 2020; all other years in this time period are categorized as non-recession years. The Benchmark PME is represented by the MSCI World Total Return Index.
- PE-backed Mid-market Companies Source: National Center for the Middle Market, Private Equity in the Middle Market – Measuring PE’s Impact on Value Creation, Strategy and Sentiment December 2025.
- Exit Volume Decline Source: KPMG, Q1-26 Pulse of Private Equity — Global insights, April 2026.
- Digital Capabilities Investments: FTI Consulting, Four Predictions for Private Equity in 2026, January 2026.
- AI’s Measurable Impact: McKinsey & Company, Private Equity: Clearer View, Tougher Terrain, February 2026.
Important Notices:
This document is for informational purposes only and does not constitute a general solicitation, offer or invitation in any Northleaf-managed product in the United States or in any other jurisdiction and has not been prepared in connection with any such offer. 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.
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