Mid-market 2026: between caution and momentum – why an anti-cyclical approach can pay off

German mid-market private equity is sending mixed signals: sentiment remains subdued, yet deal flow and fundamentals are improving. The FINANCE Midmarket Private Equity Monitor highlights where the brakes are still applied – and where opportunities may open up in 2026.

Sentiment vs facts: the dichotomy remains – deal flow is turning
The latest FINANCE Midmarket Private Equity Monitor, which FINANCE conducts twice a year together with Deutsche Beteiligungs AG (DBAG), captures the situation succinctly: 44 per cent of the surveyed private equity professionals rate the current market environment as worse than in the summer, and only 17 per cent see an improvement. At the same time, 56 per cent are optimistic about 2026 – while 39 per cent expect a weaker development. This polarisation shows that the market is pricing in a turning point, but many are still waiting for more tangible triggers.

However, the most important hard indicator speaks more clearly than sentiment: deal flow continues to improve and has reached 5.4 points on a scale from 1 to 10 – the fourth improvement in a row and the highest level since summer 2023. This brings the market environment back towards “normalised”, even though there is still some distance to the all-time high of 6.4 points (winter 2021).

Exit constraints: from a cyclical issue to a structural bottleneck
There is one main reason why sentiment remains defensive: exits. The Monitor describes the exit crisis – and the resulting low distributions to limited partners – as a structural problem. This directly affects fundraising and LP behaviour: two-thirds of respondents describe fundraising as challenging or very challenging (44 per cent challenging, 22 per cent very challenging). Notably, no one describes the situation as “hardly” or “not at all” challenging.

For fund managers, a clear imperative follows: liquidity becomes a strategy. The Monitor emphasises that funds which use exit routes such as secondaries, 
GP-led transactions and continuation funds – or can credibly explain how they intend to generate liquidity over the next 12 to 18 months – will enjoy a noticeable advantage in fundraising. In the mid-market in particular, this becomes a differentiator because it proves track record not only through valuation, but through the ability to return capital (“DPI story”).

Value creation in 2026: efficiency remains king, buy and build becomes more selective
The value-creation logic is also shifting at portfolio level. The Monitor points to a paradigm shift: efficiency and cost programmes remain the most frequently cited method of value enhancement (78 per cent), while buy and build follows closely behind at 67 per cent. This is not a one-off snapshot; it has been consolidating over two survey rounds – i.e. for just over a year. The message is clear: in uncertain times, investors secure profitability first before investing aggressively in growth.

Multiple arbitrage will not be a reliable baseline driver in 2026. Anyone aiming to deliver returns will have to earn them within the business – through cash conversion, pricing discipline, process performance and a robust working-capital set-up. Buy and build remains important, but it becomes more granular: less “broad” consolidation, more selection based on strategic fit and a clearly defined synergy path.

Sector trends: defence and energy – momentum with pricing risks
Sector preferences reflect the geopolitical landscape directly. 56 per cent of respondents name defence as the most promising sector for 2026, with energy following at 28 per cent. Professional services, by contrast, drop to 6 per cent in the survey, despite having been heavily discussed recently.

For the mid-market, this implies a twofold discipline. First, funds need a clear sector narrative to sharpen deal sourcing and the equity story. Second, in “hot sectors” they must remain rigorous in underwriting, because momentum can quickly translate into pricing spreads and exit uncertainty.

Those who act anti-cyclically gain time and quality
The central takeaway from the current edition of the Midmarket Monitor is clear: the mid-market is recovering fundamentally, but exit liquidity is lagging behind. Precisely for that reason, 2026 creates opportunities for funds that are bold enough to act anti-cyclically – with operational value creation at the core and an early-planned exit path as part of the investment thesis.