Key Points

• Private equity activity is improving, but the recovery remains selective.
• The current outlook is shaped by the following three key factors:
  • A large backlog of unsold companies that may support future transaction activity.
  • Improving deal and exit activity, although the rebound remains concentrated.
  • The AI boom and advanced manufacturing, which are expanding the opportunity set in parts of the physical economy.

A Selective Recovery

Private equity is entering a more nuanced phase: Activity is improving, but the recovery remains selective. In short, for investors, the key question is not simply whether private equity is back.

It is what kind of private equity exposure they own. The current outlook is shaped by three main factors:

1. The large backlog of unsold companies, which is creating pressure on transactions.
2. The AI boom and advanced manufacturing, which are expanding the opportunity set into parts of the physical economy.
3. Improving deal activity, although the need for selectivity remains. We believe that it is essential to partner with managers who can navigate these elements through their skill, selectivity and experience improving businesses.

A Backlog Waiting to Move

Private equity is often described in financial terms, but the basic model is straightforward: buy businesses, improve them and eventually sell them. Over the past few years, that last step has proven difficult.

Higher interest rates have increased financing costs. Buyers have become more selective. Sellers have often been slow to adjust to lower valuations. Exit markets remain uneven.

That has created a large backlog of businesses that are ready to be sold. Private equity funds are holding an estimated 32,000 unsold companies worth $3.8 trillion, while distributions to investors as a share of net asset value have remained below 15% for four consecutive years.¹

This backlog is a challenge, but it is also a source of potential future activity. Sponsors need to return capital to investors and deploy new capital. Buyers have dry powder to facilitate deals. And many companies have been held long enough for owners to be increasingly motivated to find a path to liquidity.

The market does not need perfect conditions to improve. It simply needs enough stability for pricing expectations to reset and for buyers and sellers to agree on value. If that happens, the same backlog that has weighed on the industry could help fuel the next wave of private equity transactions.

For investors, the opportunity is not simply more deal volume. It is the potential for a more disciplined transaction environment, where capital is deployed into businesses with clearer cash flows, more realistic valuations and a greater need for operational improvement.

While Deal Activity Is Improving, the Need for Selectivity Remains

Despite continued pressure from the backlog of PE-owned companies awaiting an exit, there are signs that transaction markets are beginning to improve. Global buyout deal value rose 44% in 2025 to $904 billion, while global buyout-backed exit value increased 47%, to $717 billion.²

But this rebound has not been broad-based. Large transactions have dominated the dealmaking landscape, while activity below the megadeal level has remained uneven. For example, there were 13 megadeals of more than $10 billion that accounted for $274 billion, or roughly 30% of global buyout value (see below).

The rebound is meaningful, but it remains concentrated in the largest transactions.

In this kind of market, quality matters. Businesses with durable cash flows, clearer financing paths and identifiable operating improvements may be more likely to transact. Assets that still rely on the old playbook of cheap leverage and rising multiples may take longer to move.

That is why manager selection remains important. Private equity outcomes can vary widely by manager. Results reflect the quality of the businesses acquired, the price paid, the capital structure used and the operational improvements delivered after acquisition.

AI Is Powering the Fourth Industrial Revolution

AI is often discussed as a software story. But every industrial revolution has needed a physical backbone. Steam power required factories and railroads. Mass production required assembly lines. The computing era required semiconductors and networks.

Today’s AI era needs chips, power, cooling and automation, which all require advanced manufacturing and specialized services. AI is not only changing what software can do—it is accelerating a broader reindustrialization cycle in which physical assets and operating expertise matter again.

The data are starting to show this. U.S. industrial production for semiconductor and other electronic component manufacturing reached 188.0 in May 2026 (see below), with the index set to 2017 = 100. In plain English, output is now roughly 88% above the 2017 baseline.

Of course, AI alone did not cause this increase. But it does show that advanced manufacturing and electronics are becoming a larger part of the economic story.

For private equity, the opportunity is not simply to invest behind the word “AI.” The opportunity is to own and improve the businesses that help make the Fourth Industrial Revolution possible: component manufacturers, automation providers, industrial services, logistics networks, power systems and mission-critical equipment.

This represents a long-term trend. These are the companies where value is created in the details: production planning, procurement, pricing, automation, predictive maintenance and working-capital discipline. In other words, AI may be the catalyst, but operations determine the outcome—and selectivity still matters.

Bottom Line

Private equity is entering a more selective cycle. Higher financing costs are placing greater emphasis on business improvement as a source of returns, while the Fourth Industrial Revolution is expanding opportunities across U.S. industrials, advanced manufacturing and mission-critical services.

For investors, the next cycle may favor managers that can buy well, own durable businesses and improve how those businesses operate. The goal is not simply to access private markets. It is to own what comes next—and invest wisely.

Read More in our Alts Quarterly Q3 2026.

END NOTES

1. Bain & Company, Global Private Equity Report 2026, February 22, 2026.

2. Bain & Company, Global Private Equity Report 2026.

A WORD ABOUT RISK

As an asset class, private credit comprises a large variety of different debt instruments. While each has its own risk and return profile, private credit assets generally have increased risk of default, due to their typical opportunistic focus on companies with limited funding options, in comparison with their public equivalents. Because private credit usually involves lending to below-investment-grade or non-rated issuers, yield on private credit assets is increased in return for taking on increased risk.

Investments in real estate-related instruments may be affected by economic, legal or environmental factors that affect property values, rents or occupancies of real estate.

Infrastructure companies may be subject to a variety of factors that may adversely affect their business, including high interest costs, high leverage, regulation costs, economic slowdowns, surplus capacity, increased competition, lack of fuel availability and energy conservation policies.

Alternative investments often are speculative and include a high degree of risk. Investors could lose all or a substantial amount of their investment. High-yield bonds are subject to interest-rate risk. When interest rates rise, bond prices fall; generally, the longer a bond’s maturity, the more sensitive it is to this risk. Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision.

Investment opportunities related to artificial intelligence and emerging technologies involve significant risks including rapid technological change, regulatory uncertainty, market speculation, and the possibility that anticipated technological advances may not materialize as expected. AI-focused investments may be highly volatile and speculative in nature. Forecasts regarding AI adoption, data center demand, electricity consumption, and related infrastructure development are inherently uncertain and may not develop as anticipated.

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Key Terms and Index Definitions

Annualized Net Return is the geometric mean of the returns with respect to one year. It represents periodic returns rescaled to a period of one year.

Bloomberg Global Aggregate Index is a market-capitalization-weighted index comprising globally traded investment-grade bonds. The index includes government securities, mortgage-backed securities, asset-backed securities and corporate securities to simulate the universe of bonds in the market. The maturities of the bonds in the index are more than one year.

Bloomberg U.S. Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market.

Capitalization Rate (Cap Rate) is a real estate return metric used to estimate a property’s value based on its income potential. It is calculated by dividing the property’s net operating income by the present-day value of the property as indicated by prevailing market rates.

Cliffwater Direct Lending Index (CDLI) seeks to measure the unlevered, gross-of-fee performance of U.S. middle-market corporate loans, as represented by the asset-weighted performance of the underlying assets of business development companies (BDCs), including both exchange-traded and unlisted BDCs, subject to certain eligibility requirements.

Direct Lending Yield is represented by current yield, calculated as the most recent quarter’s interest payments divided by average assets over the quarter.

Dry Powder refers to committed but uninvested capital that private fund managers have available for future investment opportunities.

Enterprise Value to Earnings Before Interest, Taxes, Depreciation and Amortization (EV/EBITDA) is a valuation metric that compares a company’s total enterprise value to its EBITDA and is commonly used to assess relative valuation across companies and transactions.

FTSE EPRA Nareit Developed Real Estate Index is an unmanaged market-capitalization-weighted total-return index that consists of publicly traded equity REITs and listed property companies from developed markets.

Green Street Commercial Property Price Index (CPPI) is a time-series index published by Green Street, which tracks the value of U.S. commercial real estate properties. The index is based on transaction prices and appraisals of institutional-quality properties across major sectors, including office, industrial, retail and multifamily. It is widely used as a benchmark for changes in commercial property values over time.

ICE BofA U.S. High Yield Index tracks the performance of USD-denominated below-investment-grade corporate debt publicly issued in the U.S. domestic market.

Industrial Production: Manufacturing: Durable Goods: Semiconductor and Other Electronic Component Index measures the real output of all relevant establishments located in the United States, regardless of their ownership, but not those located in U.S. territories. The Federal Reserve’s monthly index of industrial production and the related capacity indexes and capacity utilization rates cover manufacturing, mining, and electric and gas utilities.

MSCI World Index is a free-float-adjusted market-capitalization-weighted index that is designed to measure the equity market performance of developed markets.

NCREIF Property Index (NPI) is a quarterly, unleveraged composite total return for private commercial real estate properties held for investment purposes only. All properties in the NPI have been acquired, at least in part, on behalf of tax-exempt institutional investors and held in a fiduciary environment.

Net Asset Value (NAV): The per share value of a mutual fund, found by subtracting the fund’s liabilities from its assets and dividing by the number of shares outstanding.

NFI-ODCE Index is an index of investment returns (gross of fees) of the largest private real estate funds pursuing a core investment strategy, which is typically characterized by low risk, low leverage (less than 40%), and stable properties diversified across the U.S.

Preqin Infrastructure Index captures in an index the return earned by investors on average in their private infrastructure portfolios, based on the actual amount of money invested in private capital partnerships. Each data point is individually calculated from the pool of closed-end funds for which comprehensive performance data is held, as of both the start and end of the quarter.

Preqin Private Equity Index captures in an index the return earned by investors on average in their private equity portfolios, based on the actual amount of money invested in private capital partnerships. Each data point is individually calculated from the pool of closed-end funds for which comprehensive performance data is held, as of both the start and end of the quarter.

Preqin Real Estate Index captures in an index the return earned by investors on average in their private real estate portfolios, based on the actual amount of money invested in private capital partnerships. Each data point is individually calculated from the pool of closed-end funds for which comprehensive performance data is held, as of both the start and end of the quarter.

Recapitalization is the process of changing the mix of debt and equity in an investment’s capital structure to optimize financing. In private equity, this may involve exchanging debt for equity or vice versa, such as selling shares to pay down debt. In real estate, recapitalization often means bringing in new investors to adjust the debt-equity balance. The main goals are to improve financial structure, manage debt, restructure ownership, or enhance underperforming assets.

Secondary Pricing refers to the price at which existing interests in private funds are bought and sold in the secondary market, often expressed as a percentage of the underlying fund’s net asset value (NAV).

S&P 500 Index is a market-cap-weighted equity index of 500 widely held, large-capitalization U.S. companies.

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