Challenging Deal Environment Continues in Q1-26
When Bantry Partners conducted our last PE middle market activity survey, as the new year dawned, most deal professionals expressed some hope of improved conditions in the middle market. Many conveyed to us a "cautious optimism" that 2026 would be a better year than 2025 and that the first quarter would see the start of a period of higher growth in deal activity. Investment bankers revealed that several deal processes were primed and ready to go to market, and there was a general willingness to move on to the new year.
"We had a lot of deals that we were working on as the year started. There seemed to be a bit of an I’m glad to get 2025 over with' feeling among many of our clients. There was what I would call a cautious optimism regarding the middle market deal environment for the first quarter and beyond." Director, Middle Market Investment Bank
Geopolitical Turmoil Continues to Create Challenges for Dealmakers
However, several factors have led to ongoing challenges for middle market dealmakers. Although somewhat abated by the Supreme Court's February 20th decision that the Trump Administration exceeded its authority under the International Emergency Economic Powers Act (IEEPA) to impose broad-based tariffs on foreign imports, uncertainty surrounding U.S. tariff and trade policies continued to challenge dealmakers.
This uncertainty was compounded just 8 days after the Supreme Court ruling when the United States and Israel launched "Operation Epic Fury", targeting Iranian military, nuclear, and leadership sites. The ensuing disruption to oil prices and other supply chains has continued to drive uncertainty around energy prices and supply chains, and pressure on inflation rates to this day, negatively impacting deal activity.
"We started the year with the hope that the prior year's uncertainty was settling down. But it's been an even more volatile environment thus far this year. Continued uncertainty regarding trade policies and the war (with Iran) has continued to make it challenging." Partner, Middle Market Private Equity Firm
About The Bantry Partners Middle Market Activity Index
The Bantry Partners Activity Index draws on proprietary deal and activity data from the past decade. This data is corroborated by deal data from Pitchbook, PE Hub, Capstone Partners, and other sources. In addition, Bantry compiled feedback from 54 deal professionals across private equity buyout shops, portfolio companies, and investment banks.
But Administration policies have not been the only challenges facing the PE middle market thus far in 2026. Concerns about AI disruption to SaaS software companies raised questions about the health of private credit and the outlook for many software/technology-related portfolio companies.
As a result, most of the 50+ professionals in Bantry Partners’ Q1-26 Market Activity Survey report that deal activity remained the same (44% of deal professionals) or was slightly down (28%) since Q4 of 2025. Bantry Partners' Middle Market Activity Index reflects these sentiments and reflects what we believe was a slight decline in deal activity in the first quarter of 2026.
Many See Continued Challenges Ahead
There is no clear consensus on what lies ahead in the PE middle market, which, given the events of the past year, is not surprising. Predictions and outlooks tend to go awry when geopolitical events, war, and other macroeconomic shocks impact the deal market. The middle market continues to face the most uncertainty since the Financial Crisis of 2008-2009 and the early days of the COVID-19 pandemic. The resulting volatility is creating challenges that many deal professionals have never faced (certainly, no one has had to deal with the impact of a closed Strait of Hormuz).
In these unprecedented times, many dealmakers note that their biggest challenges remain the ongoing competition for deals, often due to the limited number of deals available that fit their investment focus / criteria.
"Because of the uncertainty in the market, the number of deals that have gone deep in processes has been about the same as late last year. But when you drill down to verticals or niche markets that you might be interested in, the deals that have gone to market have had very competitive processes. When a good deal is available, it's hard to get." Partner, Middle Market Private Equity Fund
Views on the other top challenges facing the market include some valuation levels that have yet to adjust to the changing market, and an increased focus on portfolio company value creation. But uncertainty is on the minds of many deal professionals - the impact of AI, access to financing, U.S. trade / tariff policies, and, of course, the Iran War and other U.S. foreign policy decisions present a wide range of challenges for investors.
"These really are unique times in the deal market with a lot of different factors at play that are driving uncertainty. It can be difficult to navigate. When will the Iran War end? Will there be new trade wars and tariffs?" Principal, Middle Market Private Equity Fund
Many Expect "More of the Same" – But Some Express "Cautious Optimism"
Views on both the near-term Q2 outlook and the rest of 2026 are mixed. Several deal professionals view the current litany of challenges facing the middle market as too severe to allow an increase in deal activity.
"I'm usually very optimistic. But, there is just so much uncertainty facing the deal market. I don’t think we'll see activity drop markedly, but I'm expecting more of the same in the market. More of the same type of conditions that we've seen, really, for about 3 years now. I expect deal activity to remain at the lower levels seen for much of 2024 through the rest of this year. I just don't see many of the issues facing the market being resolved anytime soon." Managing Director, Middle Market Private Equity Fund
However, many other deal professionals are more optimistic about the outlook for the middle market. Several note they expect slight increases in Q2, given the low level of activity in Q1 and the hope that the Iran War will conclude, and many expect the market to start to rebound later in the year as deal conditions improve.
"I expect to see activity increase a bit (in Q2). If the war ends, it could be much better. But, don't forget, I'm saying that activity is increasing from a low level of first quarter activity. The environment should continue to be challenging, but, I feel as if it has to get a little better. If things can settle down with foreign policy." Principal, Middle Market Private Equity Fund
Given recent geopolitical events and other market uncertainties, it's probably apt that deal professionals have mixed views on the outlook going forward.
Business Services Viewed As Sector Likely To See Increased Deal Activity
Nearly three-quarters of deal professionals in Bantry's survey expect the business services sector to realize the most deal activity through the rest of the year.
Business Services is one of the sectors that realized some investment growth in 2025. As more enterprises outsource key functions, many dealmakers expect opportunities in the sector to increase, particularly for target companies that have adapted efficiently to new technologies. Other service sectors (Professional Services & IT Services) are also expected to benefit from continued outsourcing trends.
Many expect increased activity in the industrial goods & services sector (with 40% reporting they envisage it as the most active sector) – again, often driven by the outsourcing of services at industrial/manufacturing plants and facilities.
Although not surprisingly, AI Infrastructure is expected by many to be the most active sector in the middle market in 2026. Other technology sectors are viewed by deal professionals as likely to continue seeing depressed deal levels, most notably the Technology & Software market. Although the SaaS-pocalypse is viewed by some as "overblown", it is clearly affecting the outlook for deals in the sector.
Uncertainty Mars Outlook & May Push Back Middle Market Rebound
As mentioned in Bantry Partners' Q1 summary of middle market deal activity, prior downturns in the middle market, the 2009 financial crisis, and the 2022 COVID pandemic shutdown were followed by sharp recoveries that led to sustained higher levels of deal activity. Going into 2026, few deal professionals in our survey expected to see a spike in deal activity.
However, most did expect to see steady improvement in 2026 with financing conditions easing and exit activity resuming growth. Thus far in 2026, a rebound in the middle market has not occurred. The middle market is ripe for a rebound. But will we see a rebound by year's end? Will deal growth start to post greater growth in the middle market in 2026? Much will depend on the state of the credit / financing market and increased geopolitical stability, among other factors.
Given the myriad challenges facing the middle market, Bantry Partners can only offer a tepid growth forecast for Q2 and beyond in 2026. It is hard to envision any drastic changes to the Administration's approach in the near term, and thus, the foggy and uncertain outlook for middle market deal activity is likely to continue.
About The Bantry Partners Market Activity Index & Quarterly Survey
The Bantry Partners Middle Market Activity Index reflects our view on the state of the Private Equity Middle Market based on more than a decade of deal data and market feedback from a wide range of deal professionals (the data compiled for this quarterly update includes feedback from 54 deal professionals).