Did you know that saying “this is the year for dealmaking” three times consecutively will drive the fed funds rate back near 0% and flush the market with top-tier assets?

Well, we did try in 2022, 2023, and 2024. Before we could repeat the phrase for the fourth time in 2025, we were interrupted by sweeping global tariffs that would have Reed Smoot and Willis Hawley saying “huh.”

So, what is in store for 2026? The forecast is gloomy. Private credit is feeling the pain, geopolitical instability is back on the table, and the Fed is stuck between battling a grim labor market from one front and inflation from another.

But what are private equity investors actually planning to do to deliver returns this year? Strategex conducted an online survey with 50 investors to cut through the noise. A high-level look at who is speaking through the data:

• 45 PE firms and 5 family offices
• ~40% with more than $500 million in deployable capital
• Investors ranging from the lower-middle-market to global large-cap
• Decision-makers at various seniority levels, from Senior Associates to Managing Partners
• ~70% in investing roles and ~30% in operating roles

SEE THE DETAILED UNDERLYING DATASEE THE DETAILED UNDERLYING DATA

Observation 1: Money has to flow…

Investors are hungry to deploy capital. On paper, this appetite is due to a strong pipeline of proprietary opportunities with significant upside and potential for scale. In reality, this appetite feels more forced.

80% of investors plan to deploy at least 11% of their dry powder over the next 6 months. Of this group, a little less than half plan to deploy more than a third of their arsenal – but only select investors will succeed. More than 60% of investors describe the level of competition as “extreme,” “very strong,” or “strong.”

These conditions mean there will be three types of investments getting done in 2026: 1) highly disciplined investors who have spent years and decades securing proprietary pipelines, 2) investors who are willing to take bets on tier-B and C assets, and 3) cash-flush investors who overpay for companies that have stagnated for decades.

The truth is that most investors will fall in the latter two categories, as only 28% of investors are seeing proprietary opportunities in their pipelines. To clarify, intermediated processes are still bringing top-tier opportunities to the market. In fact, our conversations with investment bankers suggest that they have been busy marketing new deals, which bodes well for sweetgreen and Cava around Wall Street. However, only 50% of investors have average indication-of-interest conversion rates higher than 40%. When every decent middle-market firm is getting triple-digit teasers and 50+ IOIs, one must bring an exceptional structure to the table to get the sellers’ interest without grossly overpaying for the deal.

Despite the increased competition, the dry powder has to be lit. And LPs are patiently waiting to see returns on their capital.

Observation 2: …but much of the money will flow without strong conviction…

A short recap so far: PE is under pressure to deploy its capital, but the competition for top-tier assets is fierce. Herein lies the deployment paradox – only 12% of investors are willing to stomach paying higher multiples compared to the same time last year. The remainder either have marginal wiggle room to push up the bid or downright have no appetite to compete on multiples. Relatedly, 64% of investors now have more conservative underwriting standards compared to last year, which further demonstrates growingly shaky conviction.

Unfortunately, sellers are still unwilling to give on their elevated valuation expectations that cling to the dealmaking glory days of 2021. In fact, investors cited bridging the gap with elevated seller expectations as one of the biggest anticipated challenges for M&A in 2026.

But undoubtedly, deals will continue to get done this year. After all, deals were getting done at peak volatility levels last year when no investor had a strong grasp on how tariffs would impact the underlying economics of the business models being underwritten.

Observation 3: …and the river may lead to a pond, not the ocean.

Where do investors expect these deals that reach the finish line against the odds to end up? In terms of how fast these deals would eventually reach their exits, around 70% of investors still seem optimistic that the industry-standard expectation of 4-7 years will hold. However, most – around 70% – do not expect multiple arbitrage to do much heavy lifting on ROIC. 40% of investors expect that multiples at the time of exit will be around the same. 30% expect the exit multiple to be lower than at entry.

This leaves a few other levers for investors to extract value: leverage, multiple expansion, and operational improvements.

Leverage is perceived as a less reliable source of returns, as 40% of investors stated that securing favorable debt financing has been difficult. With private credit starting to show more cracks by the week, investors are understandably feeling jittery. When asked what challenge keeps investors up at night the most, the uncertainty around the financing environment was tied for second, along with inflated seller expectations.

Multiple expansion is still a popular avenue of driving up exit multiples. Nearly half of investors share that their add-on activity has increased compared to last year. Two important caveats are 1) at the beginning of Q2 in 2025, the unexpectedly high tariff announcements caused a considerable halt in dealmaking, and 2) the increased appetite for add-ons may be symptomatic of the difficulties associated with landing a platform deal backed by strong, strategic conviction. While add-ons have been popular, recall that competition for quality assets continues to intensify, which may drive up asset pricing and increase post-close hurdles to generate value beyond simple consolidation into a larger legal entity.

The last lever and the hardest mandate of all is driving operational improvements. Time to roll up the sleeves and loosen the vest.

Observation 4: Investors are doubling down on operational excellence

Most investors share that, weighted across their portfolios, revenue has grown modestly. 72% of investors saw weighted revenue growth of 10% or less year-over-year. However, margin trends are mixed. 64% of investors share that operating margin performance has been either stable YoY or deteriorating to various degrees of severity. At Strategex, we have seen these trends time and time again, through both bull and bear markets. PE-backed companies are often well equipped to scale with new product launches, customer acquisition, and add-on acquisitions, which will fuel the top-line. However, there is less consistent discipline around achieving operational synergies. Even after a few years of scaling the platform through add-ons, we have seen PE-backed companies that are only held together by legal documentation. Separate ERP systems, no systemic approaches to cross-selling, and poor management of the growingly complex customer base; these operational areas can often be benched or abandoned entirely. When capital is cheap and market competition is driving up multiples, these shortcomings are harder to notice.

Now, investing in operational excellence is more critical than ever. The data suggests that investors have taken notice. 56% of PE operators are investing more heavily in onboarding seasoned operating partners and value creation resources for their portfolio holdings. This shift has two significant implications:

• Lower-middle market PE firms with limited operating resources and expertise face an uphill battle. These firms will either have to stomach more fixed costs by hiring in-house operators or spend more on external expertise, like consultants, fractional C-suite personnel, etc.
• Sector-specific investors will outperform sector-agnostic investors with otherwise similar characteristics. PE operators that have proven value-creation playbooks (beyond infusing capital to “professionalize” management functions) will be less susceptible to diligence surprises and overpaying in unfamiliar sectors, and better able to properly align incentives for management to participate in the growth.

Ultimately, investors will have to deliver to generate returns despite shrinking multiples and heightened competition for quality assets. Investors are modestly optimistic about retaining their limited partner relationships for future fundraising rounds, as 50% expect more than 70% of their partners to resubscribe. Future funding rounds are also expected to grow in size, as 58% expect their next round to be larger than their current fund. For this optimism to materialize into real dollars, operational improvement is taking center stage as the one lever on which investors can rely.

Observation 5: AI will inevitably shape the future of private equity value creation

A few years ago, AI used to generate visceral videos of Will Smith eating spaghetti. Now, tools like Claude, Perplexity, and Gemini have rapidly progressed to be more accurate, reliable, and scalable. Investors believe that unlocking AI’s potential is one of the biggest opportunities this year for value creation.

On the other hand, this optimism is matched by general uncertainty and anxiety. Investors do not yet have a firm grasp on the potential impact of AI on underwriting standards, valuation levels, and the professional labor market. On the extreme end, one investor shared concerns that AI’s impact will cause a rush for PE to exit from their software and business services holdings before AI substantially dilutes their valuations.

Despite the strong sentiments on both sides, there is still a massive gap between the potential value that investors see in AI and the actual implementation progress across their portfolios. 56% of investors report being in the nascent or early stages of adopting AI for their portfolio companies. Investor perceptions of ROI suggest that AI implementation does not take too long to yield satisfactory results. More than half of investors who have made any level of discernible progress in AI implementation report that they have seen either moderate or significant ROI thus far. Of course, this feedback has to be interpreted within the proper context – those who are seeing favorable returns make this assessment relative to the initial investment toward AI infrastructure. As the operating margin data in the preceding section suggests, profitability performance is still largely flat, if not skewed slightly to the downside.

So, is 2026 going to be the year for dealmaking? The jury is still out. That said, early signs indicate mounting pressure to get deals done despite shaky conviction and higher hurdles to delivering returns. Macroeconomic forces and monetary policy lean bearish for private investments. However, there is undoubtedly value to be captured – the path to it will need a fresh game plan and heavier emphasis on operational growth beyond the numbers of the P&L.

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