Global Market Strategist
Global Market Strategist
In Brief
- AI disruption is a risk and an opportunity for PE, particularly in the software sector, making manager selection increasingly important.
- Activity rebounded in 2025, supported by an improving economic backdrop and lower funding costs, providing a constructive outlook for 2026.
- Secondary market activity remains strong amid subdued distribution rates, offering attractive entry points and liquidity options for investors.
Private equity (PE) can enhance portfolio returns and take advantage of a wider opportunity set, given the higher number of private companies relative to public ones. However, public markets have outperformed in the last few years, leading some investors to question the appeal of PE in a portfolio.
Over time, we expect PE to outperform public markets. In the near term, we see support from the positive economic backdrop and declining funding costs as reasons for a continued pickup in deal flow and exit activity across both primary and secondary PE markets.
The concerns around artificial intelligence (AI) disruption playing out in public equity markets may not reverberate through PE to the same extent, even as PE managers have been active in this segment of the market. The deployment of AI presents both risks and opportunities for private equity, but overall, manager selection will remain a key determinant of the investment journey.
Activity picking up
2025 was a strong year for PE, with both investment and exit activity increasing over the prior year. After recovering from the initial “liberation day” shock, investor focus returned to the supportive backdrop of an expanding U.S. and global economy, rising corporate earnings, and the tailwind from falling funding costs. These factors helped lift the PE market in the second half of the year, particularly in the last quarter.
Globally, PE investment activity reached USD 2.2trillion, the strongest since 2021, which itself was an outlier year. Exit activity also rose significantly to USD 1.3trillion, marking a 50% increase on the prior year.
Exits were concentrated at the larger end of the market, as the increase in deal value outpaced the rise in deal count. The cost of financing for larger deals and leveraged buyouts (LBOs) remains a key driver in private equity, given that large transactions require significant borrowing. The increased capital allocated to private credit has led to more competition among lenders to fund PE deals. In 2023, nearly 60% of the new-issue spreads used to finance LBOs were in the 600-700 basis points (bps) range, but in 2025, more than half of spreads had fallen below 500bps (Exhibit 1).
Fundraising slowing down
Despite the positive outlook, fundraising has declined in the past few years. Investors favored private real assets over private financial assets, as fundraising in infrastructure increased in 2025, while private equity and credit fundraising fell. PE fundraising in 2025 totaled USD 765billion, well below the 2021 peak of USD 1.2trillion.
The rising level of exits but still weak distributions, may have dissuaded existing investors from rolling over allocations into new PE funds. Add to this the outperformance of public equities over private equity for the last three years, when looking at the median manager, the choice to diversify into other alternatives may have been easier. However, the secondary PE market has been a beneficiary of this trend.
Secondaries in first
The secondary market continues to strengthen, with USD 240billion in deal flow in 2025, a 50% increase over the prior year. The secondary market remains a vital source of liquidity as the backlog of primary exits will take time to clear.
Discounts in the secondary market widened marginally in 2025, suggesting that holders of older vintages may have been willing to sell to pursue new opportunities and were perhaps less concerned about crystallizing losses.
The ongoing improvement in exits should eventually translate into higher distribution rates as capital is returned to investors. However, while capital call rates have returned to average levels, distribution rates remain subdued. This may reflect PE funds finding more opportunities in the current market climate and catching up on delayed deployment from prior years. However, distributions have been slow to match the increase and may reflect the bottleneck of portfolio companies that need to be moved (Exhibit 2).
The low distribution rates are likely to keep secondary market activity strong, as both limited partners (LPs) and general partners (GPs) seek alternative exit routes—via strategic buyers and other private equity firms—to boost distributions back to investors.
The hard question on software
The software industry has long been attractive in private equity, thanks to the recurring revenue streams of software-as-a-service (SaaS) models, the scalability of cloud-based solutions, the low cost of adding new users, and an ongoing digital transformation that has driven increasing levels of investment in software. According to PitchBook, software represented 14% of deal value on average over the last decade but rose to 18% in 2025.1
While AI is set to disrupt traditional software business models, factors such as accountability, security, and the degree of integration will be central to determining its overall impact. Incumbent software providers and firms leveraging proprietary data may benefit from their deep integration within client organizations. Private equity funds have favored these segments of the software market; however, the rapid evolution of AI and the proliferation of new tools highlight the need for even more diligent monitoring.2
Investment implications
As AI models evolve and disruption risks arise, due diligence and manager experience will be central to assessing the impact on private equity allocations. The uncertainty is likely to create more volatility in public markets in the short term, but private equity should be viewed as a longer-term allocation, which can help dampen some of this volatility.
More broadly, with both investment and exit activity recovering, private equity could be on track for a better year. Activity in the secondary market should especially benefit, given lagging distribution rates and widening discounts, offering attractive entry points and opportunities for investors.