Private equity: Stabilisation in times of operational value creation

Europe’s private equity markets are adjusting their focus: activity is stabilising in the mid-cap segment while capital commitments are concentrated more and more on funds with proven strategic and operational strengths. Increased financing costs and more selective exit windows have put a stop to convenient multiples arbitrage – smart transformation to digital processes, buy-and-build strategies and expert implementation are the order of the day again.

Fundraising and deals: Quality over quantity
Fund investors are adopting a more selective stance, with capital primarily flowing to teams with a consistent track record. Fundraising cycles take more time. This is actually a rational move given that, over the long term, the net IRR of European buyouts is around the mid-teens, which is well above common equity benchmarks. Mid-market funds are in the lead, thanks to their operational performance, which has an especially strong impact in this respect.

Following a cautious recovery during the first half of the year, geopolitical tensions are taking their toll on the number of transactions being executed. This calls for more resilient concepts that offer potential for consolidation, such as in the software or healthcare sectors or in selected industrial niches. Now that capital-intensive investments have become a luxury in an environment shaped by more expensive financing, the focus is on cash conversion.

Valuations: Back to reality
Higher capital costs are a drag on multiples and therefore require discipline regarding investments. Managers who enhance portfolio companies in a structured way – in terms of efficiency, pricing, commercial excellence and buy-and-build skills – will be at the head of the pack. While a small degree of monetary policy relief is set to stabilise financing, value will still be created through hands-on implementation, not on the drawing board.

Performance: The proof is in the pudding
European buyouts are clearly outperforming public markets over the long term, with mid-market strategies taking the lead. But at the same time, dispersion is increasing and it is manager selection, access to deals and real value levers that are truly decisive – not the storyline.

Outlook for 2026: How market players are setting themselves apart in private markets
Three factors will make all the difference for companies in 2026: ongoing operational development, geopolitical resilience and the ability to cope with the new interest rate environment. The strategic use of AI can be a boost to all three – but only by scaling up manual work, not by trying to replace it.

AI-driven efficiency: A key competitive advantage
In deal sourcing and due diligence, AI helps to shed light on unclear or confusing data. This is done by reviewing unstructured documents more rapidly, by prioritising red flags and by providing a clear basis for comparing KPIs. This saves time – but more importantly, it reduces “noise” when making decisions. On a portfolio level, continuous AI-driven monitoring tools provide early indications regarding working capital, pricing or churn. This allows operating teams to take more pointed action and to roll out effective measures more broadly.

Geopolitical complexity: A home advantage is a key advantage
Tariffs, supply chains, regulation – all this enhances the value of local networks. Being able to diversify procurement, enforce price adjustments or secure government subsidies will create discernible benefits right away. Europe offers tailwind opportunities, especially in energy, security and digitalisation. Focused implementation based on specific local knowledge nearly always beats a “one-size-fits-all” global approach.

The new interest rate paradigm: More than just higher costs
The new interest rate environment has turned out to be a reality check – more expensive capital enforces investment discipline and requires cash to be generated rather than merely hoping for favourable exit multiples. Managers differentiate themselves by raising operating margins, stabilising organic growth and skilfully timing add-ons rather than just stacking them up. In private debt, the environment opens up opportunities for clean structures – security packages, covenants and amortisation. However, these options are only open to teams with strong processes and an in-depth knowledge of the sector in question.

Conclusion
Companies that use technology as an amplifier, manage geopolitical complexity pragmatically and deliver a strong operational performance will continue to achieve sustainable returns in a more selective market environment. Everything else is still just noise.