Ultimate Guide to Private Equity Fundraising
- Brandon Chicotsky
- Jan 6
- 15 min read
Private equity fundraising in 2026 is tougher than ever. Rising interest rates, longer fundraising cycles, and liquidity challenges are reshaping the landscape. Here's what you need to know:
Cycles Are Longer: The average fundraising cycle stretched to 18 months by 2025, up from 13 months in prior years.
Investor Behavior Is Changing: Limited Partners (LPs) now favor larger funds, leaving smaller firms struggling to secure capital.
Operational Excellence Matters: With interest rates at 7.5%, financial engineering is no longer enough - firms must focus on improving portfolio company operations.
Private Credit Is Growing: The U.S. private credit market hit $1.3 trillion, offering an alternative to traditional fundraising.
New Strategies Are Key: Hybrid capital models, AI-driven operations, and evergreen fund structures are helping firms adapt to the evolving market.
For smaller firms, success hinges on being prepared, offering clear value to investors, and leveraging innovative financing options. This guide unpacks trends, challenges, and actionable strategies to help you secure funding in 2026.
Private Equity Fundraising Trends in 2026
The private equity landscape in 2026 stands in stark contrast to the boom years of 2021–2022. The industry is undergoing a "K-shaped" recovery, where larger, established firms dominate fundraising, while smaller mid-market players face growing challenges [11]. For lower mid-market firms, understanding these shifts is essential to navigating today’s competitive fundraising environment. Let’s dive into the numbers and trends shaping the market.
2026 Market Data
Global private equity fundraising hit $150 billion in Q2 2025, yet U.S. activity lagged, tracking about 40% below 2024 levels by late 2025 [14]. Commitments to traditional commingled funds dropped by 24% year-over-year in 2025, highlighting a pullback in institutional capital [14].
Adding to the pressure, there’s a 3:1 gap between fundraising targets and available investor capital [9]. Dry powder held by U.S. private equity funds fell to $880 billion in September 2025, a significant drop from the $1.3 trillion peak in December 2024 [14]. At the same time, unrealized portfolio values have climbed to $3.5 trillion globally, creating what insiders are calling a "liquidity jam" [9].
The days of relying on financial engineering for returns are over. Anuj Ranjan, CEO of Brookfield Private Equity, summed it up:
"For private equity, the age of financial engineering is over, and the defining go-forward narrative is operational excellence." [9]
With interest rates at 7.5%, achieving a 20% IRR now requires nearly double the earnings growth - 8.4% compared to 5% in lower-rate environments [9]. Firms are being pushed to focus on operational improvements and expanding margins to meet investor expectations.
Investor Shift Toward Larger Funds
Investor behavior is evolving alongside these market changes. Limited Partners (LPs) are consolidating their commitments, favoring fewer, larger managers. Many institutional investors now require fund minimums of $2.5 billion to even consider an allocation [13]. This "flight to quality" leaves mid-market firms scrambling for a smaller pool of capital.
Buyout distributions as a percentage of Net Asset Value (NAV) have hit a record low of 11% [11]. LPs are increasingly demanding Distributed to Paid-In capital (DPI) before committing to new funds. Tyler Wolfram, Managing Partner at Oak Hill Capital, explained the challenge:
"LPs are demanding realisations before committing to new funds, which means GPs will need to get back into market – and that simply isn't possible without selling." [15]
With fewer distributions, firms are turning to creative solutions. Continuation vehicles (CVs) now account for about 20% of distributions in 2026 [10]. Meanwhile, 24% of the buyout industry’s dry powder has been held for four years or longer, signaling aging capital [11]. The average global buyout deal size rose to $849 million in 2024, with deals over $1 billion making up 77% of total deal value [11]. Amid these challenges, firms are exploring new strategies to stay competitive.
Emerging Opportunities in the Market
Even in a tough fundraising environment, opportunities are emerging for firms that are willing to adapt. Technology integration, especially through AI and predictive analytics, has become a top priority. Over half (53%) of private equity firms plan to increase hiring for digital transformation specialists in 2026 [13]. David N. Miller, Global Head of Private Credit & Equity at Morgan Stanley, cautioned:
"Non-differentiated PE platforms that do not have the depth or scale to deploy AI resources effectively... will end up on the short end of the K-shaped recovery." [12]
Another promising avenue is retailization. Regulatory changes, including the rollback of certain Department of Labor restrictions, are opening 401(k) and retirement plans to private market investments. Around 90% of general partners (GPs) are interested in creating defined contribution (401(k)) products to tap into this new investor base [13]. This shift could unlock a significant fundraising channel for firms able to structure offerings for individual investors.
Sector-specific opportunities are also gaining traction. Private equity capital is flowing into industrial companies in need of modernization, digital transformation, and supply chain reshoring powered by AI [9]. The U.S. private credit market has doubled since 2019, reaching nearly $1.3 trillion, with over $400 billion in dry powder available [13]. Additionally, PE-backed IPO proceeds saw a 68% year-over-year increase in Q3 2025, signaling a potential recovery in exit markets [13].
Common Fundraising Challenges
Securing private equity capital in 2026 has become more difficult as rising interest rates and lower valuation multiples tighten exits and reduce capital distributions. This environment has made fundraising particularly tough for lower mid-market firms. To put it in perspective, private equity funds raised 24% less capital in 2024 compared to the previous year [4][5].
Liquidity Issues and Valuation Gaps
The current market conditions have introduced several hurdles. Longer fundraising cycles are exacerbating liquidity challenges, as managers delay exits at lower valuation multiples, limiting cash returns. One major issue is the discrepancy in valuations - sellers often overestimate the worth of their companies, while buyers are unwilling to meet those expectations. This mismatch creates a bottleneck, slowing down the entire fundraising process.
Flor Kassai, Managing Partner and Head of Buyout at Inflexion, summed up the situation:
"Those with limited liquidity and heavier reliance on valuation marks will find fundraising materially more difficult, and will increasingly rely on fund extensions, asset transfers and smaller vehicles to remain active." [15]
Adding to the strain, U.S. exit values in 2022 and 2023 reached only about 70% of the record highs seen in 2021 [16]. Meanwhile, one-third of Limited Partners are currently overcommitted to private equity due to stalled distributions [6]. This has led to a shift in investor priorities, with many demanding real cash returns instead of paper gains before committing to new funds.
Investor Preferences and Slower Distributions
On top of valuation challenges, changing investor expectations are making fundraising even harder. Limited Partners are increasingly favoring larger, well-established funds. For example, private equity funds exceeding $5 billion in size accounted for 53% of all capital raised in the first half of 2024, compared to 33% in 2020 [16]. This "flight to quality" leaves mid-market firms scrambling for a smaller share of available capital. The numbers tell the story: only 1,700 funds under $1 billion successfully closed in 2023, half the total from 2022 [17]. With approximately 13,900 funds chasing $3.3 trillion globally, the gap between capital supply and demand is now the widest it has been since the global financial crisis [4].
Pressure from Seed Funds
Another challenge comes from the changing strategies of mega-funds, which are increasingly targeting earlier-stage investments. Large firms like A16Z and Sequoia are aggressively pursuing seed-stage opportunities, pushing median pre-money valuations to a record $16 million in Q4 2024 [20]. Rob Go, Co-founder of NextView Ventures, described the competitive environment:
"...the seed funds are fighting for a smaller piece of the pie." [19]
This shift creates a bottleneck for mid-market firms. Companies that raised funds at inflated seed valuations are now struggling to justify those valuations in later funding rounds, shrinking the pool of viable Series B and C opportunities. The numbers highlight the challenge: only 15.5% of startups that raised seed capital in early 2023 secured a Series A round within eight quarters [22]. Adding to the complexity, the rise of "seed-strapping" - where startups leverage AI to scale profitably after just one funding round - means fewer companies are turning to traditional mid-market capital [21][22].
Proven Fundraising Strategies
For lower mid-market firms, staying competitive in 2026 means embracing fresh capital structures, leveraging technology, and focusing on strategies that resonate with investors.
Using Hybrid Capital Approaches
Hybrid capital strategies, which combine equity, credit, and structured transactions, offer flexibility and broaden investor interest. One standout benefit is improved liquidity - especially critical as Limited Partners (LPs) deal with slower distributions and overcommitments.
Take NAV lending as an example. This approach uses revolving credit facilities backed by fund holdings to provide cash distributions to LPs when traditional exits slow down. The NAV loan market is expected to surge from $100 billion in 2022 to $600 billion by 2030 [23]. Meanwhile, continuation funds are also gaining traction, with announcements in North America and Europe rising 48% in the first half of 2024 compared to the prior year [23]. These funds give LPs the option to cash out or stay invested while the general partner continues building value.
Another innovative angle is midlife co-investing, where LPs can directly invest in specific portfolio assets. This bypasses traditional fees and often delivers faster returns [23]. Some firms are even exploring private IPOs, selling minority stakes in portfolio companies to private investors regardless of public market conditions [23].
As PwC highlighted:
"The firms leading the recovery are deploying hybrid capital strategies, LP-led secondaries, and co-investment platforms to enhance liquidity and strengthen alignment with investors" [14].
These adaptable capital strategies also pave the way for adopting advanced technologies that streamline operations.
Using Technology to Improve Operations
Technology has become a cornerstone for improving efficiency in deal-making and portfolio management. Today, 80% of workflows incorporate technology, and 95% of firms plan to increase their AI investments within the next 18 months [27].
AI is transforming due diligence, slashing timelines from weeks to days by automating tasks like financial normalization, market research, and pricing analysis [29]. On the deal sourcing front, AI platforms can identify nearly 200 potential companies in the time it takes a human analyst to evaluate just one [27]. For instance, in March 2024, Inven, an AI-driven platform covering over 21 million companies globally, reported a 300% increase in qualified targets and a 70%-80% boost in efficiency compared to manual methods [28].
Modern tools are also reshaping investor relations. Advanced CRMs now automate relationship tracking and uncover warm introductions within a firm's network [7]. Virtual Data Rooms equipped with page-level analytics enable Investor Relations (IR) teams to pinpoint which LPs are most engaged, focusing their efforts accordingly [8].
Additionally, integrating ESG dashboards and predictive modeling has been shown to increase internal returns by up to 8% [27].
Fund Structure Options
Adapting fund structures is another critical step for lower mid-market managers aiming to attract both institutional and retail investors in 2026. While traditional commingled funds remain popular with institutional investors, evergreen structures like European Long-Term Investment Funds (ELTIFs) and Long-Term Asset Funds (LTAFs) are rapidly gaining momentum. According to Hamilton Lane, evergreen structures could hold 20% of all private market capital within the next decade, up from about 5% in 2025 [24].
Feature | Traditional Commingled Funds | Evergreen Structures (ELTIFs/LTAFs) |
Investor Base | Primarily institutional (pensions, endowments) [23] | Institutional + retail/private wealth [24][25] |
Liquidity | Illiquid; 10+ year hold periods [1] | Periodic redemptions (e.g., 5% quarterly) [23] |
Capital Deployment | Drawdown model over 3–5 years [1] | Often fully funded or immediate exposure [24] |
Structure | Fixed-term, closed-end | Open-ended; perpetual life [24] |
Fee Structure | Standard 2/20 model common [1] | Often lower base fees to attract retail [7] |
Evergreen structures offer periodic redemptions, making them more liquid, and they open the door for retail and high-net-worth investors who have traditionally been excluded from private equity [25]. Firms like Thrivent and Meketa Investment Group introduced fund structures in 2024 specifically designed for retail investors, limiting private equity exposure to 4%-6% of the total fund to manage illiquidity [23].
BlackRock emphasized this shift:
"Private assets are becoming a key component of a whole-portfolio strategy for more clients. This is happening at a time when private markets themselves are becoming more transparent, more holistic, and more accessible" [25].
For lower mid-market managers, offering LP-friendly fees (1.25%-2.0%) and committing 1%-2% of their own capital can help align interests and build trust with investors [7].
Private Credit and Diversification
Lower mid-market firms are increasingly turning to alternative financing options to sidestep the hurdles of traditional capital sources.
Private Credit Market Expansion
Private credit has become a lifeline for lower mid-market firms, especially as banks tighten their lending criteria. In the U.S., the private credit market has surged to $1.3 trillion and is projected to hit $2.3 trillion by 2027 [30]. Regional banks are focusing on low-risk, high-quality assets, leaving a gap that alternative lenders are eager to fill. Between October 2023 and October 2024, commercial real estate loans from alternative lenders jumped by 34%, while traditional bank lending sank 24% [30]. With $4.5 trillion in commercial real estate debt maturing by 2028, debt funds - expected to account for 25%-30% of lending - are stepping in with more flexible refinancing options [30].
Niraj Shah, Partner and Global Head of Credit at Harrison Street Asset Management, highlighted the growing demand for private credit:
"As a wall of maturities approaches, some sponsors are struggling to refinance, fuelling demand for private credit" [30].
For lower mid-market firms, private credit offers a faster, more adaptable solution compared to traditional lenders. Mahen Surnam, Head of Loan Market Solutions at Vistra, emphasized:
"Fund managers can move quicker and more spontaneously which is what investors are looking for" [30].
Diversifying into Real Assets and Infrastructure
Investing in real assets and infrastructure provides lower mid-market firms with a way to reduce exposure to market volatility while securing steady cash flows [2][18]. These investments often have a lower correlation with public markets, making them a hedge against economic swings [31].
Real assets offer a spectrum of opportunities, from steady income-producing properties to higher-risk ventures with the potential for greater returns [31]. This adaptability allows firms to align their strategies with the preferences of diverse investors. The trend toward real assets has gained traction, with over 70% of fund value creation now tied to operational improvements rather than financial structuring [5]. Additionally, 88% of investors now incorporate ESG (Environmental, Social, and Governance) considerations into their investment decisions [5]. For firms managing multiple strategies, pooling resources in real estate private equity can unlock access to larger deals while spreading risk across different property types and regions [31].
Applications for Lower Mid-Market Firms
For businesses with EBITDA under $25 million, private credit and diversification offer practical solutions to funding challenges. Private credit provides a faster, more flexible refinancing option [18], while investments in real assets and infrastructure attract long-term investors like sovereign wealth funds and pension plans [6][1]. Structuring credit deals with contractual management rights allows firms to stay actively involved in value creation while maintaining eligibility for VCOC (Venture Capital Operating Company) or REOC (Real Estate Operating Company) status [18]. This approach is especially useful for "Class B" properties and lower-quality retail or office spaces that traditional banks have abandoned [30].
Lower mid-market firms can also expand their offerings by creating credit or infrastructure funds alongside their main investment vehicles, meeting the evolving demands of limited partners (LPs) [6]. These strategies not only attract a broader range of investors but also provide the flexibility that today’s sophisticated investors expect.
God Bless Retirement connects lower mid-market firms with private equity professionals equipped to navigate these specialized strategies. Whether you’re exploring private credit options or considering diversification into real assets, access to expert guidance can make all the difference.
Strategy Component | Benefit for Lower Mid-Market Firms |
Private Credit | Offers alternative funding when banks tighten lending |
Real Assets | Reduces market volatility exposure and appeals to long-term investors |
Infrastructure | Delivers stable cash flows, attracting pensions and insurance funds |
Hybrid Capital | Blends debt and equity for flexible mid-market acquisition terms |
These strategies not only address immediate funding needs but also position firms for sustained growth in the future.
2026 Outlook and Best Practices
Expected Market Recovery
The private equity market is poised for a strong rebound in 2026. Ryan D. Thomas of Bass, Berry & Sims predicts a "deal explosion" driven by abundant dry powder and mounting pressure to deploy capital [33]. Signs of recovery are already visible, with valuation gaps narrowing and fundraising cycles shortening - from 18 to 17 months by Q3 2025 [4][34]. These shifts could help resolve liquidity and distribution challenges that have lingered in recent years.
Fundraising dynamics are evolving quickly. Following regulatory changes in 2025, 90% of general partners are now exploring defined contribution (401(k)) products [13]. Meanwhile, 30% of limited partners plan to increase their private equity allocations in the next 12 months, and 46% are looking to expand infrastructure investments, driven by energy transition initiatives and the growing demand for AI-related power solutions [32]. Scale remains a key factor in this landscape, as the top 100 general partners have tripled their acquisitions of competing firms over the last five years compared to the prior period [32]. For smaller mid-market firms, standing out will require deep sector expertise and operational adaptability [13].
These changes are paving the way for more adaptable and creative deal structures.
Negotiating Flexible Deal Terms
Success in 2026 will hinge on flexibility in deal structuring. With operations now driving 70% of value creation [5], structuring deals to prioritize operational control, transparent fees, and clear governance will be crucial.
Transparency is particularly important. For instance, 51% of capital providers rank clear fee and expense disclosures as a top priority, while 68% focus on team tenure and continuity when assessing managers [5]. Smaller mid-market firms should align their general partner commitments with industry benchmarks to reassure investors [5][4]. Additionally, customized side letters can address specific limited partner needs - like reporting and ESG requirements - without requiring changes to core fund documents [1].
As Niko Ludwig emphasizes:
"Preparation now defines success: Capital flows to managers who are ready, those with clear strategies, organized materials, and disciplined governance." [5]
Adopting the ILPA's new standardized disclosure templates ahead of their implementation in early 2026 will also help firms avoid costly adjustments later and bolster their credibility with institutional investors [5].
How God Bless Retirement Helps with Fundraising
In this evolving market, strategic partnerships are becoming increasingly important. For lower mid-market firms, having access to experienced guidance and strong networks is essential to thrive in the 2026 recovery. God Bless Retirement supports businesses with EBITDA under $25 million by connecting them to a tailored network of private equity professionals, CPAs, and financial planners who specialize in mid-market fundraising. This approach ensures firms receive the expertise needed to navigate the complexities of the changing landscape effectively.
Conclusion
Summary of Key Points
Fundraising in 2026 requires meticulous preparation and a sharp operational focus. A well-structured strategy that prioritizes clear value creation - primarily through revenue growth - is essential to stand out in a competitive market [24].
The fundraising landscape is gradually stabilizing, with cycles averaging around 17 months as of late 2025 [34]. However, competition remains intense, with nearly 47% of deals failing during due diligence [3]. For lower mid-market firms, success hinges on specialization in specific sectors, transparent fee structures, and adherence to the new ILPA reporting standards set to roll out in early 2026 [26].
Recommended Next Steps
To position yourself for success, here are actionable steps to secure capital effectively:
Optimize operations and valuation: Conduct a thorough audit of your operations and supply chains before approaching investors [3].
Prepare a virtual data room: Include audited financial records, governance policies, and ESG disclosures to streamline investor review [3][26].
Define a focused investment thesis: Specify the sectors and geographies you’re targeting to demonstrate a clear strategy [26].
Identify the right investors: Focus on those whose preferred deal sizes and sector interests align with your goals [3].
Integrate sustainability into your strategy: With 88% of investors factoring ESG data into their decisions, ensure your sustainability practices are well-documented and tied to your value creation efforts [26].
Seek expert guidance: Engage professional advisors to navigate legal and regulatory complexities [35].
Final Recommendations
The 2026 fundraising environment favors firms that are well-prepared, transparent, and operationally sound. As Ansarada aptly puts it:
"The key to the success of private equity fundraising is proper preparation" [3].
Expert support can make all the difference. God Bless Retirement connects mid-market firms with private equity professionals, CPAs, and financial planners who specialize in fundraising readiness. Their preliminary valuation service provides a confidential starting point to evaluate your fundraising potential - without any upfront costs.
FAQs
How can smaller private equity firms stay competitive against larger funds in 2026?
In 2026, smaller private equity firms are navigating a tough fundraising environment as larger funds continue to dominate the flow of capital. To stay competitive, boutique firms need to stand out and build trust. One way to do this is by specializing in niche markets or unique investment strategies, which can help them carve out a distinct identity. Additionally, strong general partner (GP) commitments - like co-investing with limited partners (LPs) - and transparent performance metrics, such as IRR, TVPI, and MoIC, can bolster their credibility.
Smaller firms also have the advantage of agility and personalized relationships, which can give them an edge over larger competitors. Leveraging technology to streamline deal sourcing and due diligence processes, sticking to a disciplined approach during fundraising, and partnering with skilled service providers can further enhance their effectiveness. For example, God Bless Retirement supports firms with certified valuations, confidential M&A services, and expertise in financial planning and private equity, enabling them to present well-prepared investment opportunities. By combining a clear focus, flexibility, and the right resources, smaller funds can find success even in a crowded market.
What are hybrid capital strategies, and how can they support private equity fundraising?
Hybrid capital strategies blend features of both debt and equity financing, creating flexible options for various fundraising objectives. Instruments like convertible debt and preferred equity are common examples, offering investors a mix of downside protection while still allowing for potential gains.
In private equity fundraising, hybrid capital can widen the pool of potential investors by striking a balance between risk and reward. This approach enables fund managers to craft deals that appeal to both cautious investors and those focused on growth, making it easier to secure funding effectively.
Why is operational excellence now more critical than financial engineering in private equity?
Operational excellence has taken center stage as a major value driver in private equity. With rising interest rates and stricter credit markets, the appeal of leverage-heavy strategies has faded. Instead, investors are focusing on steady, cash-flow-based returns. This shift has pushed private equity firms to prioritize improving the operations of their portfolio companies over relying on intricate financial maneuvers.
To achieve this, firms are channeling resources into areas like data-driven cost optimization, digital transformation, and talent development. These efforts not only boost EBITDA but also help businesses navigate economic uncertainties more effectively, increasing their long-term worth and attractiveness to investors. In today’s market, showcasing operational success has become critical for securing capital and delivering reliable returns.
