Following strong momentum at the end of last year, private equity dealmakers entered 2026 hoping for a broader recovery that would enable sponsors to clear their exit backlog.

Yet, for the second year in a row, hopes of a deal rush ran into an early obstacle.

In 2025, it was Liberation Day tariffs. This year, the culprit is the so-called “SaaSpocalypse.” In February, fears that artificial intelligence (AI) could disrupt large swaths of the software industry reverberated through private markets.

The result is a bifurcated market, where the best assets drive strong interest at premium valuations, but others struggle to gain traction.

“The defining theme has been selectivity,” said Don Zambarano, US head of private equity at KPMG. “Firms continue to have significant capital to deploy, but they are concentrating investments in businesses with strong fundamentals, resilient earnings, and clear opportunities for value creation.”

This selectivity is clear in the numbers. North American buyout volume fell 21% year-on-year to USD 168.5bn in 1H26, while exits declined 32% to USD 174.4bn, according to Mergermarket data.

“Last year, the issue was primarily the bid-ask spread,” said Mehdi Khodadad, global co-leader of Sidley Austin’s M&A and private equity practices. “This year, the AI disruption has added another layer of uncertainty. Buyers are sitting on the fence, waiting to see who the winners and losers will be before taking risks.”

Reset

Against that backdrop, the valuation disparity that has weighed on dealmaking since interest rates began to rise persists.

“People are not getting exits due to a continuing mismatch on valuations,” said Alok Singh, CEO and co-founder of software-focused investor Bridge Growth Partners. “Hope is not necessarily reality.”

Singh points to a record overhang of technology exits. While the tech sector remained the most active for exits in 1H26, deal volume plunged 65% to USD 35.4bn, according to Mergermarket data.

Prior to 1H26, tech was also the dominant theme in GP-led secondaries, with software-related deals representing as much as a quarter of transactional activity, as Mergermarket has reported. Today, much of that transaction flow has evaporated as a valuation reset plays out across the sector.

Most starkly, buyout volume plunged 78% year-on-year to USD 10.9bn across 133 deals in 1H26, Mergermarket data shows. This decline highlights a key challenge facing sponsors in a fast-evolving market landscape: how to determine what assets are worth in the age of accelerating AI adoption. In some sectors expected to be active this year, such as healthcare IT, this has meant deals being paused until clarity emerges, as previously reported by Mergermarket.

Still, the technology slowdown is far from the existential crisis many feared earlier this year. Rather than abandoning the sector, investors in both the M&A and the GP-led secondaries markets are becoming more discerning.

“Investors are constructive on software assets if they can navigate three basic issues: current valuation, growth projection durability, and AI impact,” said Jeff Hammer, a managing director focused on secondaries in Moelis & Company’s private capital advisory group.

Assets perceived as AI beneficiaries continue to attract interest, for instance businesses involved in data infrastructure, automation, semiconductors, and technology-enabled services with strong customer relationships or defensible market positions.

“I would characterize it as a reset rather than a retreat,” added KPMG’s Zambarano.

Selectivity rules

As the AI reset moves through the market, capital is increasingly being redeployed into other areas.

Utilities and energy represented the leading buyout sector in 1H26, according to Mergermarket data, with USD 64.6bn in deal volume, nearly double the amount recorded during the same period last year. The pending USD 38.4bn take-private of AES by a consortium led by Global Infrastructure Management was the largest transaction announced during the period.

Lamar Warren, a director at IMB Partners, which invests across infrastructure, utility services and government contracting, said three trends are driving demand for construction and infrastructure projects: reshoring, post-pandemic population shifts to the Southeast and Texas, and the growth of AI and data centers.

“We see 300 to 400 deals a year in utilities and infrastructure services,” Warren said, adding that deal flow and competition for deals has increased over the past two years.

Meanwhile, corporate carve-outs also remain an area of opportunity. As public companies continue sharpening their focus on core businesses, sponsors with the operational capabilities to execute complex separations are finding attractive opportunities.

Brian Bernasek, a partner and co-head of Americas corporate private equity at Carlyle, recently told Mergermarket that the Washington, DC-headquartered sponsor expects industrials carve-outs in particular to become more prominent as corporates reassess their portfolio exposure in a challenging macroeconomic environment.

“With the trend toward reshoring, the potential for inflation, and rates likely to stay where they are or go higher, more questions are asked by boards as to whether [strategic portfolios] are in the right places,” he said.

More broadly, some market participants believe the environment will increasingly favor specialist investors. Spencer Hurst, a fintech-focused principal at Lovell Minnick, expects firms with deep sector expertise to account for much of the deal activity through the rest of the year.

Private equity firms operating with broad generalist mandates may find it harder to source opportunities and build differentiated investment theses during periods of market dislocation, he argued.

Paths to exit

While exit activity was slower, 1H26 still represents the fourth-highest first half volume tally for North America on Mergermarket record, despite a 32% year-on-year decline in volume. The largest exit was Leonard Green & Partners’ USD 29.1bn exit of wholesaler Jetro Restaurant Depot in March.

Still, while buyout activity has become more selective, the same could be said of exits, where operational improvement, technology enablement, and clear growth narratives are increasingly critical to success.

“The exit environment remains constructive, but highly selective,” said Carole Streicher, a US advisory asset management and private equity leader at KPMG.

Strategic buyers remain a particularly attractive exit route. David Lewin, a lead senior partner in the technologies group at Novacap, pointed to the Canadian firm’s sale of Eddyfi to ESAB as an example of a strategic acquirer prevailing over financial buyers due to its ability to place a higher value on the business.

While sales to strategics dropped 41% year-on-year to USD 126.7bn across 162 deals in 1H26, this makes it the fourth highest first-half volume ever, according to Mergermarket data.

Sales to sponsors are growing in prominence, with secondary buyout volume increasing 11% year-on-year to USD 45.6bn in 1H26, while deal count reached its highest level in four years.

Meanwhile, activity in GP-led secondaries continues to evolve. According to Evercore, secondaries volume hit a record USD 121bn in 1H26, with GP-led deals surpassing LP-led transactions for the first time in four years.

Increasingly, continuation vehicles (CVs) are being used as a core part of the exit toolkit by GPs across the market. “We’re seeing GPs acquire assets while seriously considering from day one whether they might ultimately be placed into a continuation vehicle,” said Yaron Zafir, head of secondaries at Asante Capital.

Sponsors have also become more comfortable discussing CVs during active sale processes. “The question often comes up: should we pivot to a CV?” Zafir added.

Buying time

With valuation gaps persisting and exits remaining challenging, many sponsors continue to focus on operational value creation.

“The macroeconomic environment is reinforcing discipline rather than dampening activity,” KPMG’s Streicher said. “Investors are increasingly looking beyond financial engineering to drive returns.”

That shift is particularly visible among assets acquired between 2019 and 2021, many of which remain in portfolios longer than expected. Across these vintages, demand is increasing for capital solutions transactions, according to Sidley’s Khodadad. These include liability-management exercises, recapitalizations, and other transactions aimed at restructuring capital stacks.

“In many situations, sponsors aren’t looking to exit,” he said. “Instead, they’re trying to optimize capital structures and buy more time to execute operational transformations. Time is a critical objective for many sponsors right now.”

Yet some investors argue that waiting for the perfect market window could prove futile.

“There are always external forces to contend with,” said Lovell Minnick’s Hurst. “If your business is offering a mission-critical solution and you feel confident in your ability to retain and grow customers, it’s hard to wait for the perfect time to come to market, since external forces will never enable it to be a perfect time.”