Despite a slowdown in deal volume, average buyout multiples are at peak levels. This isn't market-wide inflation, but a selection bias: only the highest-quality assets can attract buyers, and sellers of these assets are unwilling to accept lower prices, creating a stalemate for everything else.
Headline private equity activity stats are misleading. The perceived market recovery in 2025 was almost entirely driven by mega-deals ($2.5B+). The rest of the market has remained flat, indicating a less healthy overall ecosystem than the top-line numbers suggest.
In a major process reversal, potential buyers of software companies now conduct technical diligence first. They assess tech debt and engineering modernity upfront, often leading to price reductions to account for necessary rebuilds—a stark change from when tech was a later-stage confirmation item.
The "buy-and-build" strategy has become the dominant model in private equity, especially in the middle market. Add-ons make up a staggering 75% of deal count, though only 40% of value. This shows a fundamental shift towards using smaller, bolt-on acquisitions as the primary method for deploying capital.
Previously, PE firms could acquire multiple companies, do minimal integration, and sell the combined entity at a high multiple. Buyers now scrutinize these assets heavily, and a lack of true operational and tech integration will result in a significant price penalty. That game is over.
A massive valuation gap has opened between market segments. Intense competition for large, high-quality assets has driven mega-deal multiples to 16x EBITDA. Meanwhile, smaller deals transact at a much more stable 8-9x, highlighting two distinct markets operating under different supply-demand dynamics.
In a sign of extreme risk aversion and consolidation, the number of first-time funds raising capital has "cratered." LPs are concentrating their commitments with established mega-funds, creating an almost impossible environment for new managers to enter the market, which stifles industry growth and innovation.
The PE industry's "conveyor belt" is jammed. A lack of exits means capital isn't being returned to LPs (low DPI), preventing them from committing to new funds. This leaves old funds with aging portfolios—dubbed "zombie funds"—that are unable to generate liquidity and clear the system for new growth.
Funds raised since 2018 have dramatically underperformed on returning capital to investors (DPI). This collapse is due to deploying capital at peak 2020-2021 prices and now being unable to exit. This creates a "confidence crisis" for LPs, who question the viability of marks and the entire PE model.
Evergreen, semi-liquid funds, which doubled assets to nearly $100B last year, could be key to breaking the industry's gridlock. The constant deployment pressure from this new capital source, flowing to mega-managers, could create a "flywheel effect," buying assets from the middle market and kickstarting the transaction chain.