6 Key Questions for Midmarket Companies, Private Investors

Writer: Juan Tagle, Director, Palm Beach Capital

Key points:

• Interest rates, private credit competition, and M&A activity are the hey elements for midmarket companies and private investors to consider.

• Private equity exits remain constrained as valuation gaps and liquidity pressures persist.

• AI adoption and investor discipline will increasingly influence value creation across the middle market.

January 2026 ─ With a new year underway, our inboxes are filled with a flurry of market and economic outlook pieces. There’s always a lot to contemplate when trying to absorb the macro and micro points of view, while also accounting for industry- or market-specific headwind or tailwind opportunities.  I’ve highlighted a few questions below that will remain top of mind for middle-market businesses and private markets investors in the New Year.

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 1. Will 2026 continue to see interest rate decreases with a new Fed chair, and how will long-term rates react?

Coming off of three rate cuts in 2025, it seems like the Fed is preparing to shift toward a more neutral position for 2026. But the reality is that we will have a new Fed chair next year who will need to account for the political pressures of the new job (while also taking the factual data points into account).  Personally, I don’t feel that another quarter point rate cut moves the needle either way, and perhaps what is more important is how the longer end of the yield curve takes shape. However, every 50-100 bps cut does provide some meaningful breathing room for companies to redeploy dollars that were going to interest expense elsewhere.

2. Will the growth in private credit continue to drive competition as deployment cycles and overall credit performance come into focus?

We’ve all seen the data over the last few years; private credit has become a major asset class with piles of cash on the sidelines.  As interest rates decline, so does the overall cost to borrow. Will competition within the private credit markets push borrowing spreads to tighten, while also driving more borrower-friendly terms? 2026 could be a bumper crop year for private credit, especially if M&A activity does tick up.

3. Will the exit environment for PE backed companies improve or remain the same in 2026?

According to Pitchbook, there are more than 12,000 private equity portfolio companies with an average hold period of greater than  seven years. The “pro” to this argument would be that looser credit markets coupled with lower interest rates may help add some fuel to the valuation fire. The “con” to this argument is that companies purchased in 2021 and 2022 are still being held at valuations that aren’t currently clearing the market.

Said differently, PE sellers still have some work to do in bridging the valuation gap with today’s buyers, especially if they want to sell above current NAV marks. Lastly, continuation vehicles in 2025 saw massive growth as exit deal count and exit values reached a historic peak. We should see similar activity in 2026, but I’m not sure it will be enough to top 2025 levels as some investors wait to see how these investments perform. 

4. Will strategic buyers start to become more aggressive with M&A in 2026, as public company stock prices continue to accelerate?

We are coming off three consecutive years of 10%+ stock market returns and some strategic buyers are sitting on piles of excess cash. It’s always tough to predict how the equity markets will perform, but if we see another year of high single-digit or low-double stock market performance, I could certainly see some sectors (banking, tech, among others) start to heat up from an M&A perspective. 

5. Will this be the year that we start to see how AI investments translate into real operational ROI for middle-market businesses?

My quick joke when someone asks me my thoughts on AI is that I can’t even spell AI. While I can’t precisely articulate how AI technology impacts will ripple across the middle market, I do think some things are pretty clear. People are embracing AI, both at the individual and enterprise level. Things are moving faster, as AI streamlines the speed at which you can find information or complete a task.

Lastly, individuals and companies are willing to pay for this increased capacity and efficiency, translating to real revenue for these AI-centric companies. It’s also clear that businesses and PE sellers need to have a clear strategy on AI, as it will either be a value enhancer or value detractor as exit timing nears.  

6. How will investors approach further deploying into private funds as distributions continue to be muted for certain asset classes and GP’s?

When you look at much of the private equity fundraising data, on the surface it looks bleak:  three straight years of declines, as LP’s continue to manage the lack of liquidity and distributions across several private markets’ asset classes. But is this really the case given the rise of capital flowing into evergreen funds, independent sponsors, and secondary market vehicles? Are primary fund commitments down but overall capital into the PE sector neutral?

It’s tough to tell for sure, but GP’s are certainly facing the stark reality of a challenging fundraising environment heading into the New Year.  Some pockets of brightness abound in lower middle-market-focused funds, especially those with a clear differentiated strategy and sub-$1 billion fund size. 

Perhaps the last big question is always about what is lurking around the corner that we aren’t seeing today.  What are the tariff shocks, inflation smacks, and Silicon Valley Bank failure-type situations that can come on fast and quick? It’s easy to plan for the things we see through the windshield or having the wisdom that comes from the rear-view mirror, but what’s in the periphery that should be better accounted for?

One hallmark of the middle market and privately held businesses is their overall resilience despite all the idiosyncratic risks. The ability to improvise, adapt, and overcome; acting decisively, pivoting quickly, leveraging relationships across industries and advisers, and forging ahead with the fortitude that defines so many great businesses (and the investors behind them).

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