Private equity remains stuck in the pits: third year of waiting for recovery

"This trend reflects the profound uncertainty generated by the acceleration of artificial intelligence, which is calling into question the valuation models and fundamentals of many technology companies, making private equity investors particularly cautious about committing capital to a rapidly transforming sector," notes Sergio Iardella, Senior Partner and Head of Private Equity Italia at Bain & Company.

The result is a silent reallocation towards businesses with physical or labour-intensive components, which are considered more defensive than automation and less exposed to geopolitical volatility.

The problem, which has now become structural, remains liquidity. Distributions to institutional investors have remained at low levels for four consecutive years, while the average capital cycle has lengthened to seven years, well above historical averages. Assets acquired in 2021 or earlier now face an exceptionally complex cycle (inflation, rising rates, trade turmoil, accelerating AI), which makes portfolio valuations difficult to read and communicate to investors.

One positive fact exists: more than 75% of assets are still sold above the last quarterly mark (updated accounting valuation of assets made at the end of the quarter), confirming the intrinsic resilience of the sector. But the timing and structures of exit transactions have become more elaborate, and investors now exercise much more rigorous due diligence, even on continuation vehicles.

'Fundraising is typically the last cog in the capital cycle to start: it takes 12-18 months of exits and sustained distributions before there is a significant increase in new allocations. Although significant deals were completed in the first half of 2026, overall fundraising remains weak,' notes Iardella.

On the fundraising front, the numbers confirm a now structural contraction. Global private capital fundraising in 2026 is estimated at$1.3 trillion, down from the $1.4 trillion recorded in both 2023 and 2024, and a far cry from the peak of $1.9 trillion reached in 2021. One in five investors are reducing their buyout exposure, driven by liquidity pressures or more conservative long-term return expectations, according to an April 2026 ILPA survey. The remaining 80 per cent are maintaining or increasing their allocations, a sign that confidence in the asset class has not waned, but that institutional investors' expectation of returns is likely to be stretched to the limit.

The real indicator of the shift in the balance of power is another: the majority of investors now claim to have greater negotiating power than twelve months ago, translating into increasingly favourable terms on commissions and co-investment rights wrested from general partners at the time of raising. The market remains bifurcated, however: those with solid track records, as evidenced by notable first-half closings, from KKR North America Fund XIV to Bain Capital Asia Fund VI, still manage to attract capital quickly and significantly. For the vast majority of players, however, raising capital remains an uphill road, destined to remain so until the exit cycle gets back on track.

Waiting for ideal conditions is no longer a strategy, according to Bain analysts. The rules of the game have changed structurally, with the threshold of Ebitda growth rising to 12%, up from 5% in the past, to generate competitive returns.

"In a market that continues to postpone recovery, general partners cannot afford to wait for ideal conditions. They must act on what they control. The rules of the game have changed structurally: today, an investment requires Ebitda growth of 12% - no more than 5% - to generate competitive returns, and this means that operational value creation has become non-negotiable. Artificial intelligence is not an option to be evaluated in due course: it is already the main competitive battleground for portfolio companies, and general partners who do not put it at the centre of their strategy are already losing ground. But beware: the temptation to chase struggling deals wastes valuable resources. It is necessary to focus on the assets with the greatest potential, to update the value creation plan when conditions change, and to have the courage to make selective choices. Those who can control these variables today will be in the best position to lead the market when the fog clears,' Iardella concludes.