Private equity outlook (UK): What can we expect in 2026?

2025 marked a turning point for UK private equity. As inflation eased and the Bank of England’s rate-cutting cycle took hold, sponsors began to re-engage with the market, buoyed by stabilising financing conditions and a backlog of capital waiting to be deployed. Looking ahead to 2026, industry participants anticipate a further uptick in deal activity, particularly in the mid-market, but caution remains essential as competition intensifies and regulatory scrutiny grows.

Key themes for 2026

1. Financing conditions and deployment pressure

Interest rates are expected to stabilise at current levels, with debt markets showing signs of normalisation. Leveraged finance availability is improving, but lenders remain selective, favouring resilient cashflows and conservative structures.

Dry powder remains at near-record levels globally, with buyout funds holding over a trillion dollars in uncommitted capital. This creates significant deployment pressure, especially in the mid-market, where sponsors are seeking platforms with clear value creation levers.

In the past year, many sponsors shifted their focus inward, prioritising operational improvements and bolt-on acquisitions over new platform investments. This internal emphasis is expected to persist, even as improving market conditions and abundant dry powder may drive a gradual increase in new platform activity. The discipline around operational value creation and add-on strategies remains a defining feature of the current environment.

2. Exit backlog and liquidity solutions

The exit backlog continues to drive secondary buyout and continuation fund activity. Sponsors are increasingly turning to creative solutions such as continuation vehicles, partial sell-downs, and NAV financing, to provide liquidity and extend hold periods for assets requiring more time to mature.

Alongside secondary and continuation fund activity, there is growing anticipation around the reopening of capital markets. A pipeline of potential IPOs is building, which could provide sponsors with alternative exit routes for assets that may not be ideally suited to secondary or trade sales. The timing of these exits will depend on broader market conditions, but the prospect of renewed IPO activity is a notable development for 2026.

3. Regulatory and policy developments

Mansion House Reforms

The UK government’s Mansion House Reforms aim to unlock pension fund capital for private equity investment, with the Mansion House Accord targeting up to £50 billion in direct contribution pension investment in private assets by 2030. 

While this could broaden the LP base and support fundraising, progress will depend on scheme consolidation, trustee buy-in and overcoming operational barriers. Practical implementation and fiduciary considerations will ultimately determine the pace of adoption.

FCA scrutiny

Regulatory focus on asset valuations, fee structures, and investor communications is intensifying. Sponsors should expect continued scrutiny from the Financial Conduct Authority (FCA), with robust governance and transparent reporting essential to maintain LP confidence.

Alternative Business Structures (ABS)

While the UK’s ABS regime has permitted external investment in legal services for over a decade, only recently have private equity sponsors begun to pursue significant platform-building in the sector. This shift reflects growing confidence in scalable business models, improved regulatory clarity, and a recognition of the sector’s defensive characteristics. Sponsors should remain mindful of ongoing regulatory scrutiny and the importance of cultural integration as investor interest continues to build.

Cross-border considerations

Cross-border dealmaking remains complex post-Brexit, with regulatory divergence between the UK and EU affecting transaction structuring, tax, employment, and data compliance. Sponsors should anticipate further changes in cross-border rules and ensure robust diligence and structuring to mitigate execution risk.

Fundraising and LP dynamics

Fundraising remains challenging. Distribution rates to LPs fell from an average of 25% of NAV during 2013–2021 to just 12% over 2022–2024, significantly slowing capital recycling. Many LPs remain overallocated to private equity, creating continued pressure on new commitments.

While some established managers have faced challenges in securing commitments, the market has also seen new entrants successfully raise significant capital in compressed timeframes. This suggests that, despite overall caution, there is still meaningful appetite from LPs to invest in private equity, albeit with a more selective and discerning approach to manager selection.

Sponsors are responding with:

• Continuation funds and NAV financing to provide liquidity and extend hold periods.
• Hybrid structures combining GP-led secondaries with co-investment rights.
• Broader investor bases, including private wealth channels and evergreen vehicles.
• Increased focus on distribution discipline, with partial exits and recapitalisations to demonstrate liquidity.

Another emerging trend is the increasing professionalisation of high-net-worth and family office investment in private equity. Where previously some family capital was deployed on a more ad hoc basis, there is now a move toward formalising investment vehicles and bringing in experienced professionals to lead these efforts. This evolution is creating a more credible and structured alternative exit option for sponsors, further diversifying the landscape of potential buyers.

4. Technology and AI: Practical implementation

Technology remains a key value driver, but the focus is shifting from hype to practical implementation. 

AI in deal processes is increasingly important, with sponsors using AI for targeted deal sourcing, contract review, and portfolio analytics. Early adopters report meaningful time savings in document review and pattern recognition. 

Cyber risk continues to rank among the top concerns for boards and investors. Due diligence routinely includes cyber resilience assessments and businesses offering cybersecurity solutions attract strong interest. 

Operational improvement through automation and data analytics (i.e. digitalisation) is another core theme, especially in sectors with legacy systems. Sponsors are focusing on cloud migration, data infrastructure, and digital customer engagement.

5. Professional services: Investment momentum and integration challenges

Private equity investment in professional services including law firms, accountancy practices, and consultancies, is likely to continue momentum in 2026, with deal volumes projected to remain robust. 

Key drivers include predictable revenue streams and low cyclicality, offering defensive characteristics. The relatively fragmented market creates opportunities for buy-and-build strategies, but success hinges on cultural integration and talent retention, aligning incentives, governance, and partner economics. 

There is also potential scope for digital transformation, improving efficiency and client service. Client-centric innovation and operational excellence will differentiate platforms, while independence and conflicts require thoughtful management.

6. Public-to-Private transactions: Trends and execution

Public-to-private deals will remain a defining feature of the UK market in 2026. Sponsors that succeed will focus on early board and cornerstone-holder engagement, deliver credible financing under current debt market norms, and tailor execution to the target’s stakeholder dynamics. AIM-listed businesses should remain attractive, with selective interest in larger FTSE 250 names where strategic fit and structure align. Certainty, speed, and stakeholder value will be critical in securing board and shareholder support in most public-to-private transactions.

7. The peak-valuation question

Assets acquired at elevated valuations in 2020 and 2021 are approaching the end of their investment horizon. Many were underwritten on optimistic growth assumptions and financed at lower interest rates, with the subsequent macro environment challenging these base cases.

Sponsors facing this challenge are considering:

• Continuation vehicles to extend hold periods and avoid crystallising losses.
• Operational improvements, including bolt-on acquisitions and cost optimisation, to bridge valuation gaps.
• Selective secondary sales to funds with longer investment horizons, accepting modest write-downs to provide LP liquidity.
• Public market exits for resilient assets where IPO conditions and comparables support attractive valuations.
• Use of deferred consideration mechanics, such as earn-outs or vendor loan notes, to bridge valuation gaps and align interests between buyers and sellers in uncertain markets.

Outlook for 2026: Challenges and opportunities

2026 offers cautious optimism with clear opportunities for well-prepared sponsors.

Success will depend on prudent underwriting and realistic growth assumptions, technology adoption to drive efficiency and resilience, and strategic consolidation with buy-and-build strategies that emphasise cultural integration, governance alignment and talent retention. 

Active portfolio management will also be important to navigate valuation challenges, alongside proactive engagement with evolving regulatory requirements and policy developments. 

Sponsors who combine financial discipline with operational expertise, maintain strong LP relationships, and demonstrate flexibility will be best positioned to thrive as market conditions evolve.