Geopolitics, AI and Valuation Gaps Reshape Deal Environment

Survey findings as reported in the 2026 Global Private Equity Outlook show that GPs are grappling with a complex and unpredictable deal environment. 

Geopolitical conflict is cited by almost half (49%) of all respondents as a broad macroeconomic factor expected to have one of the biggest influences on the deal environment over the coming 12 to 18 months. 

“Deal opportunities might be low due to geopolitical conflicts, and we will have to avoid investing in countries that are affected by these,” a North American-based respondent says. 

“Geopolitics is definitely top of mind on almost all of our deals,” says Markus Bolsinger, co-head of Dechert’s private equity practice. “No company will be totally immune to geopolitical change, and GPs are putting in significant amounts of work on tariffs, supply chain and cross-border risk.” 

EMEA respondents, who are more exposed to risk from the Ukraine and Middle East conflicts, are particularly sensitive to world events, with 65% expecting geopolitical conflicts to shape the future deal environment. 

Only 30% of APAC-based respondents, however, cite geopolitical conflict as a top deal risk, with relatively weak economic growth a far bigger concern for GPs from the region. The relatively low number of APAC respondents with particular concern for geopolitical risk is somewhat surprising given tense relations between China and the U.S. 

For North American GPs, meanwhile, supply chain disruption is chosen by the most respondents, reflecting the impact sudden shifts in U.S. cross-border trade and the implementation of higher tariff barriers have had on dealmaking. 

Sector challenges  

In terms of industry-specific challenges, 60% of respondents say stabilizing portfolio company costs is one of the biggest issues currently facing the PE asset class.  

The availability and cost of leverage is also a major concern, according to a majority (58%) of respondents, particularly those based in North America (67%).  

“The cost of leverage is high, particularly when PE firms are looking to invest in companies in the higher risk category,” a North American GP says. “Risk exposure will have to be carefully selected in order to get funds at a reasonable cost.” 

Cost leverage will vary according to sector, with businesses in high performance industries, such as technology, in a position to negotiate better pricing when raising financing.  

PE returns: optimistic expectations 

For all the challenges and uncertainty that GPs have to navigate, the survey findings reveal that respondents remain confident of delivering returns in the mid-to-high teens, with GPs generally more sanguine about return prospects than a year ago. 

Asked to forecast net returns in 2025 for the PE industry as a whole, EMEA and North American respodents estimate an average of 17.1%, while APAC respondents expect an average of 17.4%. Interestingly, survey respondents expect slightly lower returns for their own funds. APAC and EMEA respondents each estimate their funds will deliver net returns for 2025 of 16.5% on average, and North American respondents estimate net returns of 16.8%.

Overall, respondents’ estimates for net returns are more optimistic than one year ago, with predictions for their own funds up from an average of 15.8% to 16.6%, and predictions for average net returns for the industry as a whole up by one percentage point, from 16.1% to 17.1%. 

“The expectation of a 17% net return implies a 2.4-2.6 gross multiple on invested capital across a five-to-six-year period. That might be ambitious for deals done at high entry valuations at the peak of the market in 2020 and 2021, but is realistic for deals in 2023, 2024 and 2025, given the entry multiples and the financing mix and value creation playbooks that PE sponsors have refined,” Bolsinger says. 

Bridging the valuation gap 

Even though sentiment around expected returns is improving, several GPs still expect gaps between the valuation expectations of sellers and buyers to remain a feature of M&A negotiations.  

“Sellers will have to define the potential buyer universe more clearly and processes will require more creativity from buyers and sellers to bridge valuation gaps,” Bolsinger says. 

“The gap in valuation expectations has been present for a few years now,” an EMEA respondent says. “The future perception of buyers and sellers has been very different and has been affected by unreasonable financial projections of sellers.”  

An APAC GP adds: “Given the increase in market volatility, I think that the decision makers have been largely uncertain about valuations, and the valuation discussion between parties is lengthy.” 

Overall, 38% believe the valuation gap will widen compared to 30% who feel it will narrow. Nearly half (48%) of EMEA respondents expect valuation gaps to widen over the coming 12 to 18 months. 

“GPs active in Europe are not at a point where they absolutely have to sell, and they will not sell at any price just to get a deal done,” says London-based Dechert partner Nick Tomlinson. “If an asset can’t be sold at a GP’s target valuation and has to be held for an extended period, continuation vehicles (CVs) and similar structures provide GPs with more optionality.” 

APAC and North American respondents, however, are notably more undecided on the issue. Among North American respondents, 38% expects the valuation gap to remain the same over the next 12 to 18 months.

Earnouts on the up 

Indeed, the survey findings show GPs are using a variety of structuring tools to facilitate alignment on value between buyers and sellers. 

Earnouts are one of the most favored strategies for 48% of respondents, rising to 60% for those in the APAC region. Meanwhile, North American respondents more commonly turn to leveraging high/low deal competition (51%) and aligning financial metrics and assumptions with their buyer/seller (45%). Dechert’s team also sees managers making use of seller contingent considerations, seller notes and deferred considerations to bring buyers and sellers together. 

For EMEA respondents, on the other hand, allowing flexibility in the deal's structure is found to be one of the most effective strategies in helping to close the gap, as stated by 54% of this group. 

“In the APAC region for example, market valuation gaps, particularly in the mid-market, continue to persist. These gaps can prolong negotiations, but GPs are finding ways to work around the delta between buyers and sellers with clever structuring to bridge the gap,” says Maria Tan Pedersen, co-head of Dechert’s Emerging Markets practice. 

“Sellers in North America are not willing to take a haircut on valuation yet,” Bolsinger adds. “Buyers recognize that and will structure around the seller’s requirements to reach a price where sellers will be prepared to transact.” 

However, structuring deals creatively – in a more flexible or non-traditional manner – takes time and requires a shift in expectations when it comes to deal execution. In the current environment, sellers have to adapt auction process strategies and take a more curated approach to buyer selection. 

“The detailed structuring required to bridge valuation gaps suggests that fewer broad auction processes will get done. There will be more bilateral processes that are very targeted at hand-picked buyers and offer buyers more time. I think we could also see some pre-emptions and more club deals, but the crowded auctions of the past will be rare,” Bolsinger says. 

Extended hold periods 

Slow exit activity has seen GPs hold onto portfolio companies for longer, with analysis from Private Equity Info putting the average hold period for PE-backed companies at 5.8 years, the longest average since 2000. 

In a large majority of cases, respondents' maximum hold period for a portfolio company with which they and their investors are comfortable is either 10 years (45%) or 15 years (42%), further underscoring how the industry is growing accustomed to extended hold periods. 

“The fund life cycle is undoubtedly becoming longer, and the standard LP investment timeframe is stretching out. The growth in the CV market, which provides different structures for GPs to retain its exposure to trophy assets, is a further sign of this,” says Sabina Comis, global co-managing partner of Dechert.  

The impact of technology  

Technology is not only having a direct influence on the selection and execution of PE deals, but also on the way PE managers run their own operations. 

As the PE industry has matured and grown assets under management (AUM), so has the regulatory spotlight brightened and investor expectations grown for more frequent and detailed investor reporting.  

This has recalibrated the demands on the operational models of firms, who have had to upgrade their technology stacks and back-office resources to keep up with higher compliance obligations and investor demands. 

Technology is also transforming the way managers invest and structure their core front-office operations, with firms now effectively using AI tools to parse deal flow, identify the best deal targets and expedite deal execution.  

It comes as no surprise, then, that GP survey respondents agree that technology is affecting both how firms are run internally and how they invest. 

A plurality of respondents overall (45%) agree that AI is one of the technologies which will have the biggest impact on the PE industry in the next 12 to 18 months, including half of APAC respondents (50%) and 47% of North American respondents. EMEA respondents more commonly point to potential impacts of cybersecurity (46%).