Private equity entered 2026 anticipating a rebound in deal activity, but a midyear report from PwC indicates a market increasingly divided between firms that can demonstrate tangible cash returns and those relying on unrealized valuations. The report, released in July, highlights that limited partners (LPs) are now focusing on distributions to paid-in capital (DPI) as the primary performance metric, rejecting paper marks as insufficient proof of value.
For financial advisors evaluating private market allocations for clients, the report's key insight is that managers with strong DPI are raising new funds quickly, while those without face extended fundraising timelines, reduced targets, and heightened scrutiny from investment committees. PwC describes this as a structural shift in capital allocation, not a temporary downturn, which has implications for retail investors accessing private equity through interval funds, evergreen vehicles, or model portfolios. The underlying funds backing these structures vary significantly in cash returned versus reported valuations.
Exit routes remain largely constrained, with IPO windows narrow, strategic buyers selective, and pricing disagreements stalling sponsor-to-sponsor sales. As traditional exits dwindle, continuation vehicles and GP-led secondaries have become default methods for returning cash to investors, though LPs grow increasingly wary of potential conflicts of interest. Advisors fielding questions about liquidity timelines in private market allocations should expect this bottleneck to persist through the second half of the year, according to the report.
Artificial intelligence is creating a dual impact across portfolios. Technology, historically private equity's strongest sector, is becoming more complex as AI undermines the economics of legacy software holdings, narrowing exit options for sponsors with older assets. The report cites private credit managers discussing a "SaaS-pocalypse," where AI-native competitors erode recurring-revenue models that underpin software valuations. Conversely, sponsors using AI to enhance operations within portfolio companies gain an edge in fundraising and exit negotiations. Healthcare remains the most resilient sector for deployment, with take-privates and roll-up strategies continuing steadily.
"The firms winning today aren't waiting for markets to normalize. They're creating their own exit opportunities through value creation, operational transformation and AI enablement," said Josh Smigel, a partner in PwC's US deals practice. The report describes the slowdown as selective rather than uniform, with managers boasting strong DPI, credible operating improvements, and demonstrated AI use still attracting capital and buyers. Those relying solely on rising valuations face a far less forgiving investor base, a divide PwC calls structural rather than cyclical.
This bifurcation echoes trends seen in recent industry reports, such as the Bain Midyear Report, which noted a "triple shock" derailing private equity recovery with 33,000 companies languishing. Additionally, advisors are pivoting from private credit to venture capital and private equity, seeking higher returns amid liquidity concerns. The PwC report underscores that the current environment favors firms that can demonstrate realized performance, a shift that may reshape capital flows in the private markets.
