ALTAROC ANALYSIS: Private Equity – Sector Rotation Instead of Broad Market Weakness

Louis Flamand, CIO at private equity specialist Altaroc Partners, on the current market picture.

The first half of 2026 presented the private equity market with a double test. Macroeconomic volatility from persistent inflation and the geopolitical conflict between the US and Iran met a reassessment of the software sector in light of advances in artificial intelligence. This partially dampened the momentum from the second half of 2025, but private equity activity continued at a solid level.

According to Louis Flamand, Chief Investment Officer at European private equity specialist Altaroc Partners, the slowdown is concentrated in individual segments and is not a sign of general weakness in the asset class. Large transactions in the US and the software sector are under pressure, while activity in other industries and regions is increasing. At the same time, the exit market is gradually picking up.

Average entry-level multiples in the buyout segment were 10.5x EV/EBITDA in the first half of 2026, up from 11.5x in 2025 as a whole. This compares to a multiple of 17.6x for the S&P 500. Valuations in the public market are thus around 68% higher than the average buyout entry-level multiples – almost double the ten-year average of 37%. Even without the "Magnificent 7", the S&P 500 is still around 53% above the buyout level at 16.1x.

However, this comparison must be viewed in a differentiated way. The decline in average buyout multiples is partly due to lower activity in the traditionally higher-valued software sector. The 10.5x is therefore not representative of the prices paid for high-quality technology companies. Nevertheless, the development shows that the valuation gap between public and private markets has widened significantly.

For disciplined and selective managers, Flamand believes that this environment can offer attractive entry opportunities.

The shift is particularly evident in the US software market. The buyout volume there fell from 36 billion US dollars in the same period last year to 9 billion US dollars in the first half of the year. It is remarkable, however, that the number of transactions remained comparatively stable at 87 compared to 93 deals. Large transactions in particular declined.

The main reason for the decline is the reassessment of the growth prospects of software providers in the age of AI. The initial concern that artificial intelligence could generally displace established software providers has given way to a more nuanced discussion: Which business models can continue their growth – and which valuation multiples are still justified for this? In large parts of the sector, operating ratios have remained stable so far. Uncertainty about valuation is currently holding back more than a deterioration in fundamentals.

At the same time, capital is being reallocated to other areas. The US buyout volume in the energy sector reached 60 billion US dollars in the first half of the year, after 40 billion US dollars in the same period last year. At the same time, the infrastructure requirement for the growing energy and computing demand around AI is increasing. The projected electricity demand for AI in the US cited in the report will increase from 7 gigawatts in 2025 to 57 gigawatts in 2030.

Activity is also shifting regionally. While the total US buyout volume fell by 22% in the first half of the year, Europe increased by 14% to 68.8 billion euros. However, the European upswing is highly polarised: the increase is driven almost exclusively by large transactions. The large-cap segment was 61% above its five-year average in the second quarter, while the mid-market in Europe remained well below its five-year average at 43%.

In Asia, private equity investment volume reached $55 billion in the second quarter alone, up 181% from the year-ago quarter. This increase was heavily influenced by China, where the three largest AI platforms alone accounted for around 40% of quarterly activity.

According to Flamand, the decline in the buyout market is thus concentrated and not nationwide. It is concentrated in the USA, where it is mainly due to the decline in large transactions and a sectoral rotation. Europe and Asia, on the other hand, gained momentum.

The environment has also improved on the exit side. The global M&A exit volume of PE-financed companies reached USD 450 billion in the first half of the year – an increase of 16% compared to the same period last year. If this pace continues, 2026 would be the second strongest year in terms of exit volume after 2021.

At the same time, the IPO market is showing movement again. The record volume of the first half of the year is distorted by the exceptionally large SpaceX IPO, which alone accounted for $86 billion, or 68% of the total volume. SpaceX is not a buyout asset, but a company that was financed in the private markets by venture capital and growth equity funds. Pathway nevertheless assigns the company to the private equity asset class in a broader sense. Adjusted for this transaction, the second quarter was still the most active quarter for PE-funded IPOs since the end of 2021.

In addition, the secondary market is the third source of liquidity. With a global transaction volume of 118 billion US dollars, it reached a new half-year record in the first half of the year and was 15% above the previous year's figure. GP-led transactions accounted for 53% and LP transactions 47% of the volume.

The valuations realized for exits have also continued to improve. For the buyout investments evaluated by Pathway, the average valuation premium for exits in the first quarter of 2026 was 9.8% compared to the valuation one year before the sale. In 2023, this figure was 3.1%, in 2024 it was 5.2% and in 2025 it was 7.4%.

However, the bottleneck remains the actual returns to investors. Although distributions are increasing for the third year in a row, they are still not sufficient to significantly reduce the portfolio of unrealized investments built up in recent years. In Pathway's reference portfolio, the annualized payout ratio was 14.3% in the first half of 2026, after 18.9% in 2025 as a whole, and thus still below its long-term average.

A further normalisation of distributions could therefore provide an important impetus for further market activity. Returning capital would give investors more leeway for new commitments and thus address one of the factors currently weighing on fundraising and investment activity.

The first half of 2026 therefore shows growing disparities within the asset class and not widespread weakness. The valuation gap between listed and private markets has widened, capital has shifted between sectors and regions, and exits have increased.

According to Altaroc, earnings dispersion is also likely to increase further in this environment. In the software sector in particular, companies with differentiated proprietary data, deeply integrated workflows and strong customer relationships could benefit. At the same time, private equity managers are increasingly integrating AI applications into their portfolio companies and reviewing their operational strategies against the backdrop of technological change. Such companies are the focus of the fund managers in whose funds Altaroc invests.

This will bring the differentiation between companies and managers more to the fore. For disciplined and selective private equity managers, the current environment offers attractive entry opportunities, according to Altaroc. However, whether this will lead to a broader recovery as early as the second half of the year is likely to depend largely on whether valuations in the software sector stabilize and macroeconomic uncertainty continues to decline.

Sources:
Pathway Capital 2Q26 Environment Report; Mergermarket; LSEG Data & Analytics; MSCI Private Capital Solutions; Bloomberg; Software Equity Group; Renaissance Capital; Jefferies; Bain & Co.; TPH & Co.

The data are as of 30 June 2026, unless otherwise stated. The management company's assessment is as of the time of preparation and is subject to change at any time.