After a tepid 2025, cautious optimism is building for private equity in 2026

[SINGAPORE] The expected rebound in the private-equity (PE) sector did not materialise in 2025, but observers say the signs are positive for 2026.

The first half of this year saw PE deal conversations delayed due to the US tariffs announced on Apr 2 or “Liberation Day”. The initial public offering (IPO) window also remained muted by historical standards, making it difficult for exits, said Sean Yoo, head of Asia-Pacific at Federated Hermes’ PE division.

“Distributions back to investors, as a per cent of industry net asset value, are at their lowest point on record, two-thirds below the levels we saw up to and during Covid,” he told The Business Times.

Deal volume in 2025 might surpass 2024, according to a report by Preqin. The data platform tracked 5,809 PE deals globally for the first three quarters of 2025; in 2024, there were slightly more than 8,000 such deals.

Still, it has not been a broad-based improvement across the sector, but more of a selective recovery.

For example, data-centre infrastructure continues to attract capital fuelled by demand for artificial intelligence (AI), computational capacity growth and shortages in South-east Asia, said Jonathan Olier, partner and head of corporate mergers and acquisitions and PE for South-east Asia at law firm White & Case’s Singapore office.

This includes Digital Edge’s US$1.6 billion capital raise via equity and debt-financing in January 2025, and Keppel DC Real Estate Investment Trust’s acquisition of asset manager Keppel’s remaining interests in two data centres in Singapore in December.

Secondaries also became more prominent in 2025 in the region despite being “quasi-absent” a few years ago, noted Olier.

On the downside, Indonesia, a traditional core market for PE activity has yet to find its feet under the new administration’s “policy reset” and geopolitical uncertainty.

“So, 2025 hasn’t been a classic PE recovery, but rather a recalibration: narrower, more thematic, with data centres and secondaries driving the momentum, while Indonesia’s reset weighs on traditional deal flow,” summed up Olier.

Complex instruments go mainstream in South-east Asia

A new development this year was how instruments normally reserved for more complex deals became mainstream across South-east Asia. The likes of preferred equity, ratchets and earn-outs have become standard in mid-market deals, noted Timothy Goh, partner at law firm Hogan Lovells.

Preferred equity, for example, is less risky for investors than holding the usual form of shares. Ratchets are a way of protecting early investors from being diluted when more investors enter.

Limited partners’ (LP) appetite for more bespoke solutions, such as co-investments and hybrid semi-liquid structures, during fundraising also continued to grow.

“2025 proved that flexibility is no longer optional – and those equipped for it from the onset forged better outcomes for themselves and their partners,” added Goh.

A surprise that emerged in the year was the resilience of the Asian markets, as they quickly adapted to the new tariff environment and avoided a prolonged period of decline. Gross domestic product growth across the region outperformed expectations, and Asian equity markets showed resilience.

In addition, fundraising saw more participation from private wealth rather than institutions, a global shift that was also observed in Asia. The speed with which capital went into digital infrastructure, such as data centres, subsea cables and edge-computing platforms, also outpaced expectations.

“Asia is seeing the conjunction of a general catch-up on cloud computing compared to the US, with the deployment of AI computing assets,” said Olier.

Challenges ahead

The lack of meaningful exits remains the most stubborn reality for 2025, with the anticipated rebound not materialising, said Dickson Loo, managing director for PE at SeaTown.

“The industry’s liquidity overhang remains a multi-year process to work through,” he added, as PE managers pivoted to secondaries and creative exits to engineer liquidity.

The low distributions and difficult fundraising environment created more challenges. With distributions being depressed, investors had less capital to recycle into new funds, which meant that smaller fund managers without the scale or resources had it tough.

According to a report by Preqin, first-time PE managers faced a bleaker fundraising environment than last year, with LPs favouring established general partners and recognised brands. This could well continue into 2026.

Ben Balzer, partner at Bain & Co, pointed out that where and how PE managers will get their returns will remain a challenge. Historically, about half of the returns generated by PE have been by revenue growth, and about half by multiple expansion, with a small percentage by margin growth.

But valuation multiples in Asia-Pacific are close to 13 times now, and there have only been two years when multiples were higher, added Balzer.

Coupled with slower revenue growth, due to macroeconomic uncertainties from tariffs and inflation, this leaves margins as the remaining returns driver. This is resulting in PE firms taking on a more active role, to go beyond just putting capital into a good company and letting the management run it.

“So, in a nutshell, more active value creation is a big theme we’re already seeing this year and playing out into next year for sure,” added Balzer.

Another key challenge is the tepid Indonesian market, a traditional cornerstone of South-east Asian PE. The combination of policy calibration under the new administration and uncertainty has made sponsors cautious.

The recent high-profile scandals involving billion-dollar startups and lack of compelling assets or businesses have made for longer deal timelines, wider valuation gaps, and more deals falling through.

The dominance of state-owned enterprises – sovereign wealth fund Danantara, in particular – across sectors is making investors tread more cautiously.

“Unless there is greater visibility on how the new administration intends to balance state leadership with private-sector participation, the Indonesian deal pipeline will remain subdued into 2026,” said Olier.

Major geopolitical shocks that could disrupt trade flows, capital markets or supply chains in Asia are a major concern going into 2026. With the current environment already conditioned by tariffs and strategic realignments, a single event could unwind much of the stability that investors are counting on for 2026, he added.

Then there is the possibility that the lack of exits could become a structural issue rather than a cyclical one, where subdued IPO markets lead to holding periods that stretch longer than investors like.

Goh said: “This could also have a negative impact on distributions and LPs’ willingness to redeploy into successor funds.”

Singapore’s Equity Market Development Programme, along with the wider equities market review package, was highlighted by Loo, as this could make exits via an IPO more viable in the Republic. As more institutional capital is dedicated to Singapore equities, post-listing sell-downs can be done in an orderly manner, which can reduce execution risk and improve price discovery, he added.

This means that there is some light at the end of the tunnel for PE, as valuations are largely reset, and capital is deployed in a more disciplined manner. This could likely make more sectors attractive to investors.

Olier concluded: “While it won’t be a return to the exuberance of 2020 to 2022, 2026 should look more like a rebuilding year, with clearer pathways for both buyouts and growth capital.”