Authored by Jacob Ambrose Willson, Senior Editor, Criticaleye

Higher financing costs, more challenging exit markets and a tougher macroeconomic backdrop are challenging some of the assumptions that have underpinned the traditional private equity playbook.

As a result, emphasis is increasingly shifting towards operational value creation, with technology and AI, disciplined M&A and stronger management teams playing a greater role in driving returns. 

At the same time, longer hold periods, continuation funds and alternative routes to liquidity are becoming more common as the path to exiting investments remains complex.

Against this backdrop, we asked Alastair Mills, Managing Director and Head of European Business Services at H.I.G. Capital, for his thoughts on four key recent developments shaping the PE world, and the implications of the changes for leadership teams.

 

Operational Value Creation has Overtaken Financial Engineering

Returns are now being driven far more by improving businesses than by leverage or multiple expansion.

AM: Historically, private equity returns were supported to a meaningful degree by financial engineering and multiple expansion, even where investment cases were not built on those factors alone. Looking back, however, it is clear that returns over that period benefited materially from both.
 

The picture today is different. Higher interest rates have increased the cost of debt and reduced the amount that can prudently be borrowed, making it considerably harder to generate the uplift that leverage alone used to provide.
 

Similarly, the sustained multiple expansion seen across the 15 years following the global financial crisis has not resumed post-Covid. Valuations have risen in pockets of high demand sectors, but not on average. As a result, managers need to look elsewhere for value creation: a sharper operational focus and closer collaboration with management teams to improve the underlying business, alongside other levers such as ‘buy and build’. 

 

Exits are Returning, but More Selectively
 

After several subdued years, exit activity is improving as financing conditions stabilise.
 

AM: Exit volumes did increase in 2025, but have stepped back again in 2026. While the trajectory was improving, it remained well short of the levels seen in 2019 and in the bumper year of 2021. Broader macro and geopolitical uncertainty appears to have weighed further on confidence, particularly in the second quarter of 2026.
 

In our experience, top quartile assets in sectors currently in favour continue to sell well, reflecting strong demand to deploy capital into high-quality opportunities. Below that top tier, however, the picture is far less certain.
 

That said, PE houses need to sell assets, and none have been selling enough over the past few years. Anecdotally, the larger advisors are still sitting on substantial backlogs of work-in-progress mandates awaiting the right window to bring to market. The floodgates are far from open, and if anything, 2026 is presenting additional challenges.
 

 

Continuation Funds are a Genuine Exit Option
 

The rise of continuation vehicles is providing an alternative exit route for investors in a slower market.
 

AM: In some respects, continuation vehicles do represent a genuine exit. Typically, the investors backing the continuation vehicle are a different set from those in the existing fund.
 

From the perspective of investors outside the general partner, in most cases they are exiting, with new investors stepping into the special purpose vehicle at a fresh valuation. The question is whether that constitutes as high quality an exit as a sale to another private equity fund, which would – on balance – scrutinise the asset more rigorously given the change of control, or a trade sale – arguably the purest evidence that an industry participant genuinely wants the asset.
 

My view is that continuation vehicles will become part of the solution. But used too extensively, they can raise questions for future fund investors, since they do not necessarily demonstrate that a manager is exiting enough businesses to the institutions and trade buyers that would validate the quality of the assets built.
 

 

AI has Become a Core Investment Theme
 

AI has moved beyond experimentation and is now influencing almost every stage of the investment lifecycle.
 

AM: AI is being deployed across private equity in a number of ways, and while adoption remains nascent overall, in certain areas it is already adding real value.
 

For a target business a firm might invest in, there is a genuine question over how AI could erode its performance and perceived value over time, something we have seen most acutely in software. Equally important is how AI could enhance a business' prospects, which increasingly informs how we build the investment case.
 

Then there is the use of AI within the PE firm itself: evaluating potential investments, managing investor reporting and other external communications, tracking deal flow and supporting thematic sourcing initiatives.
 

At H.I.G. in Europe alone, we have three in-house operating partners focused on AI, working with our portfolio companies and across the firm's internal operations to ensure we are using AI as effectively as possible, and helping our portfolio companies do the same.