Time for private equity to bounce back?

Shares in many of these funds trade at chunky discounts to the value of their underlying assets, and returns from the sector in 2025 were patchy. The giant 3i Group is an outlier, with its shares trading on a double-digit premium (though that has much reduced recently after a wobble at its biggest portfolio company, Action).

However, private equity market followers are upbeat about the outlook for the year ahead. One positive is the downward direction of interest rates in the UK and other countries. Private equity funds often use leverage – that is, borrowing – to increase their investing power and boost returns, so when debt is available more cheaply, the sector benefits.

A second tailwind is that the world’s initial public offering (IPO) markets now seem to be opening up again. Once private equity funds have owned a business for a period, and helped to drive its growth, they will look to realise a profit by selling – often by floating it on the stock market.

However, IPOs have been difficult to get away over the past couple of years, with market volatility and economic challenges spooking investors. In 2026, however, IPOs are expected to accelerate once again. That should enable more private equity funds to sell their best companies and lock in gains.

It's also the case that the private equity sector has become more imaginative. Funds that have struggled to exit holdings are increasingly launching new types of vehicle, such as secondary buyout and continuation funds. These provide a means to sell their holdings even when other routes are blocked; there are likely to be more of these vehicles launched this year, alongside the potential IPO recovery.

The big picture is that we should now start to see an unblocking of the logjam that has developed in the private equity sector. As funds sell more of their mature holdings, profits will flow through to investors, and firms will start to raise new finance for the next generation of investments. Conditions in the sector should start to return to normality.

That could be a boon for private equity investment trusts. These funds are pretty much the only way for retail investors to get exposure to private equity, since most traditional private equity vehicles require sizeable upfront investments and have extended lock-in periods. Investment trusts, by contrast, are stock market-listed vehicles, so investors can buy or sell as much of a fund as they like, whenever they want, as with any other share.

This isn’t an asset class that is suitable for everyone. Private equity funds often invest in smaller businesses, where returns can be more volatile, and there are often failures. Charges are sometimes higher. And it’s not always easy to analyse funds’ underlying portfolios. And then there’s the discount issue to contend with.

Nevertheless, for anyone looking for opportunities to diversify their portfolios in 2026, perhaps with more adventurous holdings, investment trusts in the private equity space could be an interesting place to look. Improving sentiment should see share price discounts narrow, plus there’s scope for underlying asset values to improve as market conditions ease.