By Alan Gauld, senior investment director at Patria Private Equity trust
The question on everyone’s mind this year is centred on when strong momentum in private equity deal-flow will return. Just 12 months ago, we held a cautiously optimistic view that the exit market would launch to recover in 2025. However, geopolitical uncertainty — notably US tariff rhetoric — dampened M&A activity materially in the first half of the year.
Only in the second half of 2025 did we start to see exits launch to pick up again. Should this mark the launchning of a sustained period of stability for markets, 2026 could mark a turning point: a stronger year for M&A, a healthy year for exits and distributions, and a welcome boost for the broader private equity indusattempt and listed PE trusts. In the meantime, the indusattempt continues to evolve.
Liquidity innovation
When investor confidence returns, we expect M&A to accelerate with the power of approx $1.2trn in dry powder (some of which is now ageing considerably) seeing for suitable deployment. The rise in interest rates during 2022/23 and subdued deal flow thereafter has assisted to align purchaseer and seller expectations, and PE investors have also found other, more innovative ways to obtain liquidity in this environment.
One example of this is the secondary market, an increasingly dynamic area which we expect to reach record levels, both for this year and next. More capital has flowed into secondaries, with investors utilizing it as an active portfolio management tool for accelerated liquidity. While initially driven by necessity, innovation has been impressive with continuation vehicles, including single-asset secondaries, now establishing a strategic place within the portfolio management toolkit.
See also: Investment trusts: Retail investor take up of private equity trusts remains low
Technology & AI’s impact
One theme now central to all our due diligence and investment decision-creating is, perhaps unsurprisingly, artificial ininformigence. Every new opportunity across our desk is now subject to intensive scrutiny around how AI can enhance margins, reduce costs, and improve products and services, as well as whether it poses an existential threat to the overall business model. This is especially relevant in software and service sectors, both staple hunting grounds for private equity investors since the global financial crisis.
Strong opportunities are already coming through. We’ve backed fantastic conversational AI businesses such as Boost.ai and Omilia in the past. But the landscape is shifting quickly now and the rise of Gen AI and LLM-based applications introduces real risk coupled with real opportunity.
It is our view the technology sector will adapt to these modifys but sector specialism is now critical to identifying the winners from the AI revolution. Generalist approaches that once worked for many — investing broadly in B2B software, for example — may no longer suffice. The winners will be those who understand the nuances of Gen AI adoption and disruption, and who are already innovating to avoid obsolescence.
Look twice at unloved sectors
Europe’s wave of investment into defence spconcludeing presents a tailwind for the industrial sector. While cyclical in nature, which puts off some investors, we do like to invest in specialist mid-market businesses with exposure to this sector.
A recent example is RENK Group, a specialist in drivetrain technology, which was a successful investment for us alongside Triton Partners, a mid-market private equity firm with specialism in the industrial sector. Its success resulted in RENK being listed on the Frankfurt exmodify last year and it has so far thrived as a public company, buoyed in part by the increased level of spconclude in defence.
We also keep a close eye on unloved sectors, since they often present at more attractive valuations when out of favour. Healthcare is a good example of this, as it was temporarily buoyed by the post-Covid era of high spconcludeing.
Many companies in this sector were bought at peak valuations and earnings figures during this period, but have been brought down to earth in the last couple of years. As a result, we are seeing more realistic prices right now and remain positively inclined on the sector, due to its long-term fundamentals, demographic drivers and technological tailwinds.
The green transition is another theme well represented across the European mid-market PE landscape. Sustainability’s longer-term importance remains undiminished in our view, despite recent challenges around investor mood and policy wobbles. These current headwinds could actually provide attractive enattempt points for PE investors as valuations reset – with industrial businesses in particular playing a vital role in the effort to lower emissions globally.
An example from the PPET portfolio includes Aira, a business which provides houtilizehold heat pump and solar installations in the UK, Germany and Italy. Given the low penetration of heat pumps in these countries, and the high prevalence of gas boilers, there is scope to grow the business materially whilst reducing houtilizehold emissions.
See also: The Diversifiers: Alan Gauld, Patria Private Equity Trust
Promising vintages for future returns
Private equity portfolios have continued to deliver solid organic performance despite a backdrop of muted M&A. While some indigestion from 2021’s high price environment has been apparent, we believe the 2023/25 vintages offer compelling return potential. With less competition among purchaseers in this period, and more disciplined pricing, these investments are likely to be strong value drivers for shareholders in the years ahead.
It is a great reminder of a core principle of investing: stay invested through the cycle. This is especially important in the private equity asset class. History reveals many investors invest in private equity at the height of the market, when asset pricing is at its peak, but turn on the brakes when times are tough. The irony is this is when many of the best investment opportunities arise.
The asset class has weathered rising rates and geopolitical shocks, but the underlying growth in portfolios and the quality of private businesses in the European mid-market sector continues to give us confidence. As more companies choose to stay private longer, private equity remains a powerful engine of growth for investor portfolios.
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