Private equity pivots: fewer deals, bigger bets amid AI jitters

By mid-2026, private equity experienced a pronounced slowdown in deal activity, with PwC reporting a 34% year-over-year drop in deal volume during the first half, even as total deal value rose nearly 10%, signaling a shift toward fewer but larger deals. This trend was mirrored in the US market, where PitchBook highlighted Q2 deal values hitting their lowest since 2020 and fundraising reaching decade lows, underscoring a broader retrenchment amid rising interest rates and diminishing cheap capital availability. Sponsors responded by pivoting toward smaller deals and add-on acquisitions, maintaining transaction volume stability despite a 10.6% decline in overall deal value, reflecting a strategic recalibration in a challenging environment.

Fundraising in 2026 has been notably weak, with global private capital on pace for roughly $1.3 trillion—the lowest since 2016—as persistent exit market difficulties continue to weigh heavily. Bain’s analysis suggests that a sustained 12-18 month period of robust exit activity is necessary before fundraising can meaningfully rebound, a scenario complicated by a 46.3% sequential drop in exit value and a growing inventory of 13,509 PE-backed companies. Despite these headwinds, dry powder remains elevated at about $1.07 trillion, indicating substantial capital remains poised for deployment once market conditions improve.

Institutional investors have grown increasingly cautious amid ongoing market uncertainty driven by higher interest rates, inflation shocks, and the disruptive potential of AI on portfolio valuations. According to an ILPA survey, nearly half of limited partners plan to reduce exposure to large-cap private equity managers, with 84% expressing reluctance to invest alongside managers heavily reliant on retail capital. As Scott Moss of Cherry Bekaert notes, sponsors are navigating uncharted waters where AI could fundamentally alter competitive dynamics during hold periods, prompting a conservative focus on deals that can be confidently priced and evaluated.

The traditional leveraged buyout model faces mounting pressure as rising interest rates and tighter capital markets erode the viability of debt-fueled acquisitions, compelling the US private equity sector to pivot toward genuine value creation rather than financial engineering. This shift is underscored by weakening institutional support, with exits increasingly dependent on a handful of large transactions while much of the portfolio remains illiquid, highlighting the urgent need for private equity firms to adapt their strategies in a more complex and uncertain investment landscape.

By mid-2026, private equity's retreat from software investments has become pronounced, fueled by growing skepticism over AI's role and the sector's valuation uncertainties. PitchBook's report highlights how rising interest rates and the drying up of cheap capital have pressured the traditional leveraged buyout model, pushing firms to pivot towards genuine value creation and more resilient industries. This shift is underscored by a 10% global decline in deal count, largely driven by the software sector's downturn, prompting general partners to adopt more flexible exit pricing strategies amid illiquid portfolios and a record overhang of technology exits.

AI-driven valuation uncertainty has bifurcated the private equity market, with firms concentrating capital on businesses exhibiting strong fundamentals, resilient earnings, and clear value creation potential. As Don Zambarano of KPMG notes, while significant capital remains available, investors are increasingly selective, favoring software assets that demonstrate clear valuation, durable growth, and positive AI impact—particularly in data infrastructure, automation, semiconductors, and technology-enabled services. This selectivity is reflected in a staggering 78% year-on-year plunge in tech buyout volume to $10.9 billion in H1 2026, alongside a 65% drop in tech exit volume to $35.4 billion.

Capital is decisively shifting towards more resilient sectors such as utilities and energy, which led buyout volume in the first half of 2026 with $64.6 billion—nearly double the prior year—highlighted by the $38.4 billion AES take-private led by Global Infrastructure Management. This trend is not confined to the US; in Asia Pacific, AI's influence extends beyond traditional tech to sectors like energy, industrials, telecoms, and real estate, with high technology attracting $169 billion, up 47% year-on-year. Moreover, healthcare, materials, and energy sectors are experiencing robust activity as firms leverage AI-driven innovation to pursue expansion, signaling a broad reshaping of deal focus and selectivity across regions.

By mid-2026, Asia-Pacific witnessed a pronounced divergence in deal activity, with private equity and M&A transactions retreating sharply—private equity deals fell 25-27% and M&A by around 22-25%—while venture capital demonstrated resilience, growing modestly by 3-5%. This slowdown, highlighted by GlobalData's Aurojyoti Bose, is attributed to longer due diligence, valuation uncertainties, and a challenging macroeconomic backdrop that has fostered greater deal discipline and selectivity among investors. Notably, regional disparities emerged: China and India posted modest growth in deal volumes (around 1-7%), contrasting with steep declines in Japan (up to 40%), South Korea, Australia, and Singapore, underscoring uneven market dynamics across APAC.

Despite the overall slowdown, the Asia-Pacific M&A landscape in 2026 displayed resilience through a strategic pivot towards quality over quantity, with announced deal value dipping slightly by 4% to $648 billion even as deal volumes rose 8%. AI emerged as a transformative force, driving a 47% surge in technology sector investments to $169 billion and influencing cross-sector deals spanning energy, healthcare, and industrials. This AI-driven momentum fueled mega deals—14 transactions exceeding $5 billion accounted for roughly a quarter of regional activity—and robust mid-market engagement, reflecting a nuanced shift in dealmaking priorities.

Cross-border M&A activity in Asia-Pacific surged impressively, rising 52% globally with Japanese and Singaporean investors leading outbound acquisitions, buoyed by corporate reforms and sustained private equity interest in Japan. Sponsor-backed deals reached over $100 billion—the strongest since 2021—with technology comprising nearly half of this value, underscoring private equity’s continued commitment despite broader market headwinds. Complementing this, equity capital markets issuance soared 52% to $221.6 billion, the highest since 2021, with technology firms accounting for 44% of proceeds, highlighting the sector’s central role in capital raising and dealmaking across the region.

By early 2026, global private equity firms including heavyweights like KKR, Blackstone, and Carlyle have sharply retreated from mainland China, making no publicly disclosed new equity investments in the first seven months of the year. This dramatic pullback contrasts starkly with the dozen deals executed as recently as 2021, underscoring how escalating geopolitical tensions and intensifying regulatory scrutiny have rendered the Chinese market increasingly inhospitable for foreign capital.

Chinese regulatory authorities have played a pivotal role in this retreat by actively blocking or delaying high-profile transactions, such as Beijing’s intervention against Meta’s $2 billion acquisition of AI start-up Manus and the stalling of CK Hutchison’s port sale to a BlackRock-led consortium. These actions, coupled with investigations by the National Development and Reform Commission that have imposed exit bans on founders and canceled foreign acquisitions, have sharply heightened compliance costs and operational risks, effectively raising the regulatory barrier for private equity activity.

The challenges extend beyond new investments, as evidenced by the absence of any publicly disclosed exits from mainland Chinese portfolio companies by major global firms in 2025. This stagnation is compounded by China’s slowing economic growth and elevated US interest rates, trapping capital in a market fraught with uncertainty and signaling a broader shift in the investment landscape that reflects deeper economic and political uncertainties about China’s future trajectory.

Despite the pronounced pullback from China, private equity firms are not retreating from Asia altogether; instead, they are reallocating capital to other markets within the region. This strategic pivot is exemplified by EQT’s record $15.6 billion Asia-Pacific fund and Blackstone’s $13.1 billion Asia-focused vehicle, highlighting a continued appetite for growth in Asia but with a clear shift away from mainland China amid mounting geopolitical risks.

By mid-2026, private equity sponsors have become markedly more selective, concentrating their capital deployment on smaller, high-quality deals within sectors demonstrating resilience amid AI-driven uncertainty. This strategic pivot is exemplified by the surge in utilities and energy buyouts, which nearly doubled year-on-year to USD 64.6 billion in 1H26, highlighted by the USD 38.4 billion take-private of AES led by Global Infrastructure Management. Sponsors are prioritizing businesses with strong fundamentals and clear value creation pathways, navigating persistent valuation gaps and a cautious market environment.

The deployment landscape is increasingly dominated by add-on acquisitions, which now comprise roughly three-quarters of all buyout activity, reflecting sponsors’ strategic emphasis on operational improvements and bolt-on growth rather than large-scale platform investments. Despite a 10.6% decline in total deal value to an estimated $461 billion in the first half of 2026, transaction volumes have remained stable as firms pursue smaller platform deals and add-ons, carefully deploying capital amid elevated dry powder levels of approximately $1.07 trillion. This cautious approach underscores sponsors’ preference for opportunities they can confidently price amid ongoing AI valuation risks and higher-for-longer interest rates.

Exit strategies are evolving to address market complexities, with continuation vehicles gaining traction as sponsors manage valuation mismatches and an AI-driven tech sector reset, helping to alleviate exit backlogs. Concurrently, IPO activity has seen a notable resurgence, rising 42.2% sequentially to $27.6 billion with the number of offerings doubling to 12, even as overall exit value declined 46.3% sequentially to $102.6 billion. Looking ahead, carve-outs and take-private transactions are expected to sustain deal flow, while liquidity solutions and private credit markets adapt to the shifting landscape, signaling a nuanced and multifaceted approach to exits in 2026.