Stable rates and strong demand to boost private dealmaking

Dealmaking and lending activities in private markets are poised for growth in 2026. Stabilizing interest rates and lower volatility are helping to end the drought in key deal markets, while the growing demand for capital to fund AI‑related projects is creating new opportunities. We expect this momentum to continue, delivering robust acquisition and exit activities for private equity (PE), alongside elevated levels of origination and lending for private credit as issuers seek new financing.

Exit doors reopen for private equity

The period of aggressive central bank rate hikes between 2022 and 2024 weighed heavily on the initial public offering (IPO) market, which is a vital mechanism for private equity investors to realize returns. Mergers and acquisitions (M&A) also slowed dramatically, affecting both private equity and private credit. Both markets have now begun to recover.

The revival of IPO activity is particularly important for private equity and venture capital, as a significant backlog of “IPO ready” firms that previously delayed going public during the high‑rate, volatile equity markets of 2022–2024 are now gradually coming to market. This is providing private equity and venture capital firms with much‑needed exit options after a period in which exits were limited and liquidity for their limited partners was constrained.

With more companies deciding to list publicly, private equity managers can eventually realize returns and either recycle capital into new investments or distribute proceeds to their investors. This increased IPO activity, combined with a friendlier regulatory environment and improved investor liquidity, has led to greater competition for deals and higher levels of oversubscription in rounds for high‑performing private companies.

More benign market conditions have also helped to revive M&A activity. Further support for M&As is expected to come from a more supportive regulatory environment as the Federal Trade Commission appears to be moving away from the restrictive, intervention‑first stance of the prior administration in favor of a more transaction‑friendly approach. The improved M&A environment is beneficial for private equity and venture capital managers, as it creates an additional exit path and potential competition for high‑quality assets.

M&A and AI fuel private credit demand

Heightened M&A activity is also driving activity in private credit. As deal volumes increase, companies and sponsors need to issue debt to complete transactions, and private credit providers are major purchasers of this debt—even more so as traditional banks have pulled back from this market in recent years. With significant private equity “dry powder"¹ waiting to be deployed, the need for these private credit solutions is likely to rise as sponsors resume acquisitions.

Additionally, the need for capital to finance technology infrastructure, including projects related to AI such as data centers and utilities, is contributing to the supply of new opportunities for private credit investors. As issuers pursue expansion and technological capabilities, private credit providers are increasingly being called upon to fund the physical and digital backbone necessary for growth.

In addition to traditional lending, there are opportunities in distressed private credit, rescue capital, and bespoke capital solutions. In particular, tailored capital solutions—such as preferred equity, mezzanine debt, and structured financing—are increasingly sought after by issuers to address complex capital needs, recapitalize balance sheets, or support strategic transactions. These segments offer attractive risk‑adjusted return potential for investors able to perform rigorous due diligence and structure deals to manage downside risk.

Like other markets, private markets come with idiosyncratic risks, as shown in the recent high‑profile collapses of auto parts supplier First Brands and car dealership Tricolor. Overall, however, private credit fundamentals are robust: Default rates are low and expected to remain so, company balance sheets are strong, and investor demand for private funding shows no sign of abating. And while banks tentatively have begun to reenter private credit after largely vacating in the aftermath of the global financial crisis, this is unlikely to significantly impact the illiquidity premium. The need for financing will likely continue to exceed the capital available.

Key takeaway
Stabilizing interest rates, lower market volatility, and demand from AI‑related projects are helping to end the drought in key deal markets, driving renewed growth in private equity and credit.

 

 

Appendix

Financial Terms: Investors in the U.S. and Canada, for a glossary of financial terms, please go to troweprice.com/glossary.

Investment Risks:

Active investing may have higher costs than passive investing and may underperform the broad market or passive peers with similar objectives. Each person’s investing situation and circumstances differ. Investors should take all considerations into account before investing.

International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. The risks of international investing are heightened for investments in emerging market and frontier market countries. Emerging and frontier market countries tend to have economic structures that are less diverse and mature, and political systems that are less stable, than those of developed market countries.

Commodities are subject to increased risks such as higher price volatility, geopolitical and other risks. Commodity prices can be subject to extreme volatility and significant price swings.

Inflation-Linked Bonds (Treasury Inflation Protected Securities in the U.S.): In periods of no or low inflation, other types of bonds, such as US Treasury Bonds, may perform better than Treasury Inflation Protected Securities (TIPS).

Investing in technology stocks entails specific risks, including the potential for wide variations in performance and usually wide price swings, up and down. Technology companies can be affected by, among other things, intense competition, government regulation, earnings disappointments, dependency on patent protection and rapid obsolescence of products and services due to technological innovations or changing consumer preferences.

Because of the cyclical nature of natural resource companies, their stock prices and rates of earnings growth may follow an irregular path.

Financial services companies may be hurt when interest rates rise sharply and may be vulnerable to rapidly rising inflation. Health sciences firms are often dependent on government funding and regulation and are vulnerable to product liability lawsuits and competition from low-cost generic product.

The value approach to investing carries the risk that the market will not recognize a security’s intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced. Growth stocks are subject to the volatility inherent in common stock investing, and their share price may fluctuate more than that of a income-oriented stocks.

Small‑cap stocks have generally been more volatile in price than the large‑cap stocks. Investing in private companies involves greater risk than investing in stocks of established publicly traded companies. Risks include potential loss of capital, illiquidity, less available information and difficulty in valuating private companies. They are not suitable, nor available, for all investors.

All investments involve risk, including possible loss of principal. Diversification cannot assure a profit or protect against loss in a declining market. Index performance is for illustrative purposes only and is not indicative of any specific investment. Investors cannot invest directly in an index.

Fixed‑income securities are subject to credit risk, liquidity risk, call risk, and interest‑rate risk. As interest rates rise, bond prices generally fall. Investments in high‑yield bonds involve greater risk of price volatility, illiquidity, and default than higher‑rated debt securities. Investments in bank loans may at times become difficult to value and highly illiquid; they are subject to credit risk such as nonpayment of principal or interest, and risks of bankruptcy and insolvency. Some or all alternative investments such as private credit, may not be suitable for certain investors. Alternative investments are typically speculative and involve a substantial degree of risk. In addition, the fees and expenses charged may be higher than the fees and expenses of other investment alternatives, which will reduce profits. As interest rates rise, bond prices generally fall. Investments in high yield bonds involve greater risk of price volatility, illiquidity, and default than higher rated debt securities.

T. Rowe Price cautions that economic estimates and forward‑looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual outcomes could differ materially from those anticipated in estimates and forward‑looking statements, and future results could differ materially from any historical performance. The information presented herein is shown for illustrative, informational purposes only. Any historical data used as a basis for this analysis are based on information gathered by T. Rowe Price and from third‑party sources and have not been independently verified. Forward‑looking statements speak only as of the date they are made, and T. Rowe Price assumes no duty to and does not undertake to update forward‑looking statements.