Bain's Private Equity Midyear Report 2026: Executive Summary

[MUSIC] Ainin Company has just released its mid-year private equity report. You may recall that at the start of the year, we saw signs of a recovery for a small subset of investors, and no clear signs that the rest of the industry would follow suit. By now, the narrative of a K-shaped recovery has hardened into conventional wisdom. The key thing to remember at this juncture of the year is that private equity is not in a crisis. Rather, it's stuck. And the issue is not capital, it's confidence. The first half of 2026 was another fall start. Deals are slow, exits are weak, fundraising is tough. The market's open for great assets that aren't correlated with a lot of the macro-atram that we'll discuss that's going on in the world, but it's closed or discounted for everything else. So let's talk about the first half of 2026 and what happened. I'm Jim McArthur, chairman of Baines Global Private Equity Practice, and this is Dry Powder. [MUSIC] Every January, I have the optimism that we're going to have a great year because I'm told by intermediaries and GPs that deal-making is on the rise, that we're going to see a lot more exits, and that it's going to be wonderful. And in February, it's kind of like Groundhog Day, and I've used that term in many, many instances during the course of the first half of the year. The recovery of the private equity markets, particularly by-out, has been deferred again. Three big shocks hit early. One, of course, is the AI software disruption, the so-called SaaS populums that we're all continuing to deal with. The second is a roiling of the private credit markets, in part related to SaaS and part not related to SaaS. And the third is the Iran War and the oil price risk, and the shocks throughout the global economy that that is cost. So those three factors have made deals relatively selective, but not frozen. A-plus assets are still trading in the market. Those that I call the proof assets, their macro-proof, recession-proof, their everything-proof, their quote-unquote perfect. Those are still trading and trading at high prices. Everything else is facing much wider bid-ask spreads, and that makes doing deals difficult. If you like NDAs, as a data point on when deals are getting done and how many deals might get done, deal activity would basically be projected to be flat year over year through July, 2026 with 2025. Software really is the issue that became a red zone in the first half of the year, public software evaluations fell nearly 30% in early 2026, as people became concerned about AI disruption of the SaaS business model. PE software marks fell about 8% in the first quarter, as a reaction to that, and tech deal value plummeted about 70% from Q4 2025 to Q1 2026. The Q2 data will be out very soon, or not optimistic that it's going to get a lot better in Q2. The strangest thing about all of this uncertainty around the software business, when this is not just pure software, which is the biggest area of investing in the private markets. This is healthcare IT, Fintech, tech-enabled business services. These are all kinds of sectors that all added together are probably half of the global buyout market and a big chunk of the private credit market and a big chunk of the continuation vehicles markets. And so they're all stock because of this uncertainty. And the intriguing thing about it is that at least to date, I don't see a single objective data point that says anybody has cause for concern. Earnings are up, revenue growth is up, companies are not going bankrupt, left, right, and centers. So where's the fire? Is the first question you want to ask? And maybe there is a fire, but if there's selective fires in certain places, and the forest is basically safe, then we shouldn't be in the situation that we're in. And so how long it takes the market to realize that the fires will be contained and localized, and the whole forest is not going to burn down is really the defining question around when we get back to business in the single largest area of buyouts and related private asset classes. The whole industry's numbers are going to swing over this question. The amount of deal-making, the amount of exits, liquidity going back to LPs, all of that is going to swing based upon what people believe is going to happen with technology and software in particular. Private credit markets have similarly been stressed, but I'd like to stress myself that the private credit markets are not broken. Only 10% of ill-puzzle peas, if you survey them, which we do, see widespread private credit problems. That means 90% of LPs have confidence as they look over their private credit portfolios that the market is still good. There are going to be problems in any market, and private credit is no exception. But overall, this is not an endemic issue, and direct lending, by the way, still has dry powder of about 300 billion to deploy. So there's plenty of money there to be put to work supporting deals that get done. It's just that we need to get the deal flywheel going again in order to profitably deploy that credit. So if you're looking at the first half of 2026 and you're looking for the good news, where is the good news? The debt markets are still open for business. They're nervous about software, obviously. Dry powder is still there, both in credit and certainly in equity. We have $1.3 trillion of dry powder for buyouts that are out there in the marketplace waiting to be deployed. LPs are not abandoning private equity. It's been their best performing asset class over the long haul, and they still believe it will return money and return money at good rates in the future. Top managers can still raise money in this marketplace where it's challenging to do so, and great companies are still clearing at good prices. So the market is not closed. It's just very unforgiving right now. Now let's talk about some more of the challenging news in the market for the first half of 2026. The exit market remains the real bottleneck. Distributions as a percent of nav are coming off a four-year record low stretch, and it looks like it's moving into a fifth year. So we're really looking at a capital cycle of about seven to eight years, which no LPs spreadsheet has a model for. And if that extends into a fifth year, which again is unprecedented, this has never happened before, that creates a really long wait for cash for LPs, and it creates a crisis of confidence because when you think about it, the count of global portfolio companies and buyouts is now 32,000. And of those 32,000 companies, which is an unprecedented number, by the way, 40% of them were bought prior to the pandemic. So that means 40% of those 32,000 companies were held prior to the unprecedented inflation, prior to the unprecedentedly rapid interest rate spike, prior to the tariff environment, prior to the shooting wars. So 40% of all of the companies being held in GP portfolios around the world have been through a tremendous amount of macro disruption over the last seven or eight years. And it's fair to wonder with DPI being low, what are they worth today? Not only are you simply waiting for cash that you expected to get back to in order to deploy if you're an LP, but you don't really know how those GPs that you've been partnering with are performing if you haven't had the cash back and you don't end up with returns are going to look like. So it's a question of both cash and return that is really the issue around exits and that causes a confidence problem in many GP partnerships, which make it difficult to continue to support them going into the future. So LPs want liquidity. They don't want markdowns. They've told us that very directly when we talk to LPs, they tend to lose confidence if exits are more than a 5% below the last mark. But if we look at the market and what's actually traded about 70% of biode assets are exiting above their next to final mark. So the market is behaving in line with what LPs would like to see, but there's just not enough of it to get the liquidity fly real really moving at pace. This creates a real bifurcation in the fundraising market. Big winners are still winning. If your DPI is high and your IRR is high, you can raise any amount of money you want. That's been proven. But for the average DPI, it is a tremendous grind. Now some LPs are being forced to reassess what they're thinking in terms of private equity allocation, about one in five are reducing their allocations to private equity due to this liquidity pressure or return expectations going forward and remember those two things are linked. But that of course means 80% of LPs are not reducing their allocations are keeping them the same or they're actually increasing them. And as we know, fundraising is a lagging indicator. It takes about 12 to 18 months of better exits and more liquidity before the overall fundraising picture really improves. So expect this bifurcation to continue into 2027. If your numbers look great on the DPI and IRR front, you're going to be able to raise no problem. If you've got these challenging issues that most of the market does, where we don't have good DPI, we're running on the 7 to 8 year cycle or more. And therefore the IRRs are unknown, it's going to be very challenging to raise and about 30% of all bioGPs have not raised since before the pandemic. So this does affect a very substantial part of the market. So beyond returning capital, what do GPs need to do now? Number one, reunderite old assets. What is it worth today? Number two, refresh those value creation plans and get going to get the EBITDA up so you can exit at the mark or the best mark you can possibly get. Focus the resources on your winners. Stop trying to save every deal. This is very difficult to do in an era where LP scrutinize every single company that has a loss compared to the mark or how any type of capital impairment whatsoever. It is not a natural motion for the GPs to actually save every deal. But the reality is is that many deals are not going to be salvageable at their current marks and they may not be salvageable without capital impairment. So getting on with it is going to be important. It's also important to remember that portfolio company counts and roughly doubled during the last decade. That means GPs on average are dealing with twice as many companies as they did 10 years ago. And that simply strains the GPs organization even more having to handle so many assets and try to get them to a certain point where they can be attractive exit targets. So it's very important to focus on where the value is in a GP portfolio. There is a lot more value turning a 3x deal into a 5x deal than there is trying to take a 1x deal and make it a 1.5x deal. So taking those scarce resources and really focusing them on where you can create the most value for your LP partners and stakeholders is a critical action step that most GPs need to take right now. So what's the second half 2026 outlook? I often say that my crystal balls as cloudy as anybody else's and this is no exception. So let me give you an upside case, a base case and a downside case. The upside case is that confidence actually improves, oil prices stabilize, the AI winners become clearer and the exit markets reopen. The base case would be it's a slow grind. Good assets continue to trade, weaker assets continue to wait. The downside case is that oil causes an inflation flare up. The private credit markets show endemic stress and software remains frozen as uncertainty reigns. Where are we in these three cases? I don't know, I tend to be a glass half full kind of guy. So I'm in between the base case and the upside case. I'd like to think that certain things get solved. The confidence does improve that the oil markets will stabilize that some of the AI winners become clearer that people understand that not all SaaS businesses are going away and that by the fourth quarter at least we begin to see the exit market get velocity that will point toward a much better 2027 and a much better future. But we'll see what happens. The reality of private equity is that it is probably one of the most resilient industries in the world. Like we have been through so much over the multiple decades that the buyout world has existed and people have predicted the demise of private equity many, many times and they've been wrong every single time. This is an innovative entrepreneurial industry and I believe in the long run they will figure it out. But this is one of the more challenging times that the industry has faced precisely because there is no definable crisis to navigate. There are macro issues but we're not in the deepest recession for 75 years and we're not in asset bubbles that are cratering that need to be dealt with. If there are specific problems it's easier to see and deal with them. So as I said at the beginning the first half of 2026 was not a private equity crisis. It's a confidence crisis. The winners from here will be the firms that control what they can. Better operational value creation, cleaner exits and sharper capital allocation in new deals. If you'd like to access the full mid-year private equity report, click on the link in the episode notes. I'm also hosting a live webinar in July 8th where I'll discuss the reports findings with the managing director of Baines Macro Trans Group Karen Harris. You can register via the link in the episode notes. I'm Hugh MacArthur. Thank you for listening.