In 2025, the PE industry proved itself adaptable, navigating a challenging combination of cumulative and persistent inflation, higher-for-longer financing costs, geopolitical upheaval, and compressed cycles. It was a year of guarded recovery: sentiment improved, deal volume picked up, and operational value creation – rightly – re-established itself as the pre-eminent lever.

It is our strong conviction that generating alpha through hands-on operational improvement was and remains the lynchpin to sustainable success in an age of entrenching permavolatility.

Putting our money where our mouth is

But all is not as positive as we expected it to be at the end of 2024: the challenges that framed our last Outlook have not dissipated; they have simply changed complexion.

We rightly pointed out that funding costs would remain elevated, and even with base rates easing, leverage undeniably remains dearer than pre-2022. Also, AI adoption is increasing but still requires human overlay, as we stated a year ago, and there is substantially more focus on operational excellence as a critical lever for value creation. But while we suggested deal volume recovery would accelerate, the momentum of early 2025 proved short-lived, and while we saw a lot of mid-market dealflow, not all of it converted. Incidentally, AURELIUS did its bit to boost deal volume. We remain confident that 2025 will prove to be a strong vintage year, and with 13 deals signed or closed across our Mid-market and Growth funds, we did put our money – and that of our LPs – where our mouth is.

From dark shadow to dappled shade

We currently see that permavolatility’s long shadow has given way to dappled shade. Though geopolitical conflicts remain unresolved, supply chains are still fragile, and trade and foreign policy direction is unpredictable, there are glimmers of positive progress shining through. But like their catalysts, they are erratic – and can be fleeting.

For this reason, we think it is imperative to build businesses to last, transforming them to be agile and fit for the future, often necessitating significant change to organisation structures and even geographic footprints. Operational excellence should be the goal in all cycles, and absolutely must be when leverage is expensive and growth elusive.

Portfolio companies are not the only ones who benefit from this specialism; so do their PE owners: as competition for LPs’ commitments heats up, a clearly differentiated GP investment approach becomes an obvious pathway to it. AURELIUS exemplifies this: in 2025, we achieved a significant oversubscription to our AURELIUS Opportunities Fund V within a few months of active marketing.

Dealflow: pent-up demand to drive activity – albeit differently

The cautious recovery we saw in late 2024 – credit markets were open, inflation easing and debt cheaper – continued in the early part of 2025, but then lost steam mainly owing to tariff jitters. The environment for exits was more upbeat, at least in parts, as GPs began offloading long-held assets to generate much-needed distributions[1].

We believe the permavolatility means ebbing and flowing deal activity is likely to continue in 2026, and the transactions that do get over the line may look different.

The origination landscape may shift. Corporate reshaping is gathering pace as companies realise the value in focus, with non-core disposals expected to rise as boards concentrate capital and management attention. Our recently published Corporate Carve-out Survey, conducted among senior players in our industry, confirms this: like last year’s Survey, three-quarters cite a heightened need to focus on core operations as the main reason for planned disposals. Opportunities in consumer, business services and industrials are creating fertile ground for carve-out specialists. Additionally, small-cap buyouts may increase in numbers as SMEs seek out succession solutions and funding to accelerate growth. Our own Growth team, AURELIUS Growth, defied market malaise in 2025 to ink three platform deals.

At the other end of the spectrum, we expect large-cap funds to start coming down into the mid-market, as they often do when their own sweet spot slows down. They are sitting on unprecedented amounts of dry powder, and that money needs to be put to work.

Fundraising is evolving. Bigger isn’t always better. Whereas the last decade (or two) saw global LPs chase larger ticket sizes with fewer GPs, there is evidence now that some are pivoting back, with big brands being eschewed in favour of mid-market firms which deliver strong returns alongside regular distributions in today’s choppy market. We witnessed this sentiment with our own fundraise last year, which attracted demand for a multiple of the €830m we capped it at. Though mega-funds have the breadth and resources to continue to raise, their LP composition may evolve, with retail investors and even 401k retirement accounts (a la the US administration) featuring in time.

Financing’s new face

Leverage for deals will also continue to evolve. Bank lending remains more constrained than in the 2010s, and private credit funds have firmly stepped in – not only supplying debt but increasingly acting as structured equity partners, devising creative ways to tailor packages and act as partners to businesses and sponsors. Our own private debt business – AURELIUS Finance Company – has been doing just that very successfully in the UK since 2017.

The cost of capital remains elevated relative to the “goldilocks” years, not least owing to persistently high interest rates and ongoing geopolitical tension. But spreads have narrowed as competition among credit providers intensified.

Alongside this, US lenders may become more prominent in 2026 as banking regulations ease in the US[2], potentially pumping significant additional liquidity into leverage markets.

Operational alpha

Operational improvement went from support act to headliner in 2025: having fallen out of fashion as a value lever in favour of multiple arbitrage and financial leverage for the better part of two decades, it has enjoyed a glorious renaissance of popularity in the last year. This is out of necessity as the other two levers have become elusive; for us, it has been our modus operandi for 20 years.

Our focus on operational transformation is reflected in our sizeable 200-strong AURELIUS WaterRise team, and rewarded in our successful fundraise for AURELIUS Opportunities V. The former is our differentiated advisory team of in-house transformation specialists, who drive meaningful and sustainable change for our portfolio, based on repeatable in-house playbooks. The latter saw us heavily oversubscribed for Fund V[3] on the back of its predecessor’s top 5% performance.

AI to move from hype to uneven roll-out

Digital transformation, efficiency programmes and now AI adoption are crucial drivers of this operational improvement, and 2025 saw the rhetoric become reality – for some PE firms (and with mixed results). At the firm level, AI has practical uses for due diligence, helping to reduce the time and cost; for origination, to identify and rank targets, and more. At the portfolio level, AI is moving beyond pilot projects into embedded, day-to-day applications such as procurement optimisation, supply-chain forecasting, customer engagement and inventory management. Our own portfolio company Greenovis – owned by AURELIUS Growth – has been able to substantially reduce time and cost of project procurement by deploying AI tools to analyse and identify potential projects.

But for all these applications, whether at firm or portfolio level, human oversight remains paramount to success, and the winners will be firms which combine advanced tools with thoughtful execution. At AURELIUS we are very conscious that the crucial success factor, for many years to come, will be our people and how they use AI to make better decisions, rather than AI alone. As such, we expect the (currently patchy) roll-out to yield variable results.

Another strong vintage year?

The industry is – again – entering this year with record dry powder, a growing supply of corporate disposals, stabilising valuations, but also with advancing AI-enabled operating models. With permavolatility the new normal, political risk, conflict, and resultant macroeconomic uncertainty will constrain growth.

But such challenges can create strong vintages. For investors with committed funds to deploy, track records and relationships to structure creatively, and experience to transform operationally, 2026 could be a year where resilience gives way to re-acceleration.

Noble efforts A few months ago, the 2025 Nobel Prize for Economics was awarded to three economists who modelled the prerequisites for sustained growth through creative destruction and technological progress[4]. With AI becoming more sophisticated, innovation has never been more conceivable and, given the persistent lack of global economic growth, it has never been more imperative. The PE industry, highly competitive as it is, has long been excellent at driving creative destruction and innovation, at taking ideas from labs and laptops to productivity. We should all remind ourselves of this ability, and the noble responsibility that comes with it.

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[1] https://www.ey.com/en_gl/insights/private-equity/pulse#:~:text=Summary,a%20dynamic%20private%20equity%20landscape.

[2] https://www.ft.com/content/8c69189c-7594-4612-bf29-0847ed995d98

[3] https://www.aurelius-group.com/aurelius-closes-oversubscribed-fund-v-eur-830m-fresh-capital-to-be-deployed

[4] https://www.nobelprize.org/all-nobel-prizes-2025