Resurgent M&A Sentiment in Private Equity Middle Market: In-Depth Portfolio Allocation Strategy Report

Based on collected authoritative industry data and research reports, I will provide you with a systematic and comprehensive analysis of M&A trends in the private equity middle market, along with portfolio allocation recommendations.

According to Citizens Financial’s newly released 15th Annual Middle Market M&A Outlook Report, M&A optimism among U.S. middle-market companies and private equity firms has reached a six-year high. The survey shows that 58% of respondents rate the current M&A environment as “favorable”, a proportion that marks a significant rebound in market confidence [1]. More critically, the structure of market participants is undergoing profound changes: the share of potential sellers rose from 73% in 2024 to 79% in 2025, while the share of potential buyers increased from 56% to 61% [2]. This simultaneous uptick in activity among both buyers and sellers signals a more balanced and active M&A market in 2026.

Confidence in the private equity sector has rebounded particularly sharply. In Q1 2025, only 48% of private equity leaders were confident in M&A decisions, but by Q4, this figure had soared to 86%, nearly doubling [2]. Meanwhile, 90% of private equity firms expect transaction flow to increase or remain stable in 2026, indicating a broad industry consensus on the attractiveness of middle-market M&A opportunities. Capstone Partners’ research further corroborates this trend: its 2026 M&A Outlook Report notes that private equity will continue to deploy capital resolutely, pursuing asset allocation through buy opportunities while providing more transaction targets to the market via exit activities [3].

The rebound in M&A activity is underpinned by a combination of favorable factors. First is the improved interest rate environment. Historical data shows that when the federal funds rate is at or below 2%, quarterly middle-market transaction volumes are 22% higher [3]. As the Federal Reserve continued to cut rates in 2025, the decline in financing costs is creating more favorable conditions for M&A activity. Second is the rational reversion of valuations. After adjustments in 2022-2023, middle-market valuations have pulled back from their 2020-2021 peaks, providing private equity with more reasonable entry points [4].

A third key factor is the deployment of private equity “dry powder”. The large amount of idle capital held by private equity firms is seeking outlets, and 2026 may finally see a window for large-scale deployment of these funds [1]. Franklin Templeton, in its 2026 Private Markets Outlook, points out that there are compelling opportunities in the current private markets; while some industries may face headwinds, others exhibit significant investment appeal driven by strong fundamentals and structural changes [5]. Additionally, the rise of AI technology is emerging as an important catalyst for M&A activity: 39% of private equity firms expecting growth in transaction flow cite targeting AI companies or assets as a driver of their activities [2].

From an industry perspective, the pharmaceutical and consumer goods sectors present prominent M&A opportunities in the 2026 middle market [4]. M&A momentum in the pharmaceutical industry stems from patent expiration pressures, demand for R&D efficiency, and the continuation of industry consolidation trends. The consumer goods sector benefits from the dual drivers of consumption upgrading and brand integration, strengthening middle-market companies’ motivation to achieve scale expansion and product line extension through M&A.

Notably, succession planning is emerging as an important source of middle-market M&A. The survey shows that 19% of respondent companies indicate their transition plans include a sale option, a significant increase from 14% last year [2]. Meanwhile, 30% of companies have a succession plan in place, but 51% have no transition plan at all—meaning a large number of companies without succession plans could become potential sellers in the future. Among these potential sellers, 22% cite rising raw material and commodity costs as a key motivation for selling, while 20% list supply chain challenges as a primary consideration [2].

Market participants generally plan to launch transactions in the first half of 2026, with the second quarter seen as the preferred transaction window [2]. This timing reflects investors’ desire to avoid uncertainty from the mid-term elections. For portfolio allocation, understanding this timing rhythm helps grasp the pace of capital deployment and strategic focus.

Partners Group, in its 2026 Private Markets Outlook, notes that private equity activity is rebounding, with transaction volumes recovering from multi-year lows and the valuation environment favoring buyers [4]. The institution recommends that investors seek value in control investments and selected secondary market opportunities, while remaining cautious about GP-led continuation vehicles due to their uneven quality, which requires enhanced due diligence [4].

In the current market environment, alternative assets have evolved from “optional allocations” to “core allocations”. State Street Global Advisors, in its 2026 Global Market Outlook, clearly states that alternative assets, with their multiple attributes of income generation, diversification, and growth capture, have become a core tool for investors to rebuild portfolio resilience [6]. Against a backdrop where stock markets are near historical highs and core index concentration is at a record level, the traditional 60/40 stock-bond portfolio faces multiple challenges including elevated valuations, rising stock-bond correlations, and increased tail risks, making the allocation value of alternative assets increasingly prominent.

For 2026 asset allocation, Standard Chartered recommends that aggressive investors increase their alternative asset allocation ratio to 30%, with allocations of 8% to private equity, 7% to private debt, and 4% to private real estate [7]. Franklin Templeton explicitly states that its highest-confidence investment directions for 2026 include the private equity secondary market, commercial real estate debt, real estate, and infrastructure [5]. These recommendations align well with middle-market M&A trends, indicating that professional institutions have already positioned themselves ahead of this theme.

Based on the rebound trend in middle-market M&A, investors should adopt the following strategies for private equity allocation. First is seizing secondary market opportunities. Given the current discount space in the market, investors can acquire existing fund shares through the private equity secondary market to mitigate the J-curve effect and reduce “blind pool risk” [4]. Partners Group recommends overweighing inflection LP-led transactions while maintaining allocations to mature secondary markets, as competitors are liquidating old funds [4]. While transaction volumes for GP-led continuation vehicles are growing, their quality is uneven, requiring investors to raise screening standards.

Second is balancing regional allocations. Partners Group recommends a balanced target allocation: 40%-50% to North America, 40%-50% to Europe, and 10%-20% to other regions [4]. Franklin Templeton believes both the U.S. and European markets offer attractive investment opportunities [5]. For the Asian market, investors should focus on policy dividends and structural growth opportunities, but need to be mindful of valuation volatility risks.

Third is controlling the pace of position building. Private equity should adopt a phased position-building strategy over 3-4 years to achieve year diversification, enabling flexible responses to market fluctuations and valuation resets [4]. This strategy not only smooths entry costs but also allows investors to fully leverage opportunities across different stages of the M&A cycle.

Private credit plays a key financing role in middle-market M&A. State Street Global Advisors points out that against a backdrop of constrained bank lending and pressured yields and spreads on public market fixed-income products, private credit has emerged as an important force to fill the financing gap, with a market size of $2.8 trillion [6]. By providing flexible financing solutions to middle-market companies and M&A activities, private credit’s direct lending and opportunistic strategies have delivered total returns superior to public market fixed-income products.

For 2026 allocation recommendations, Franklin Templeton is relatively more optimistic about the European market, as it offers wider spreads, lower leverage, and stronger creditor protections [4]. However, market differentiation is intensifying: direct lending to large enterprises may underperform due to compressed profit margins and fierce competition, while selected middle-market loans remain investment-worthy [4]. Investors should select managers with strict underwriting standards and strong track records to avoid credit cycle risks and individual risks.

As a strategic overweight asset, infrastructure’s allocation value is particularly prominent in the current environment. Infrastructure assets have inflation-linked cash flows, exhibit resilience in volatile environments, and benefit from long-term structural growth trends [4]. Specific investment directions include: on the secondary market, prefer middle-market inflection secondary assets, as such assets provide stable and predictable cash flows; on the primary market, focus on high-quality direct-investment projects, with notable opportunities in U.S. power and energy assets [4].

Allocation to the real estate sector requires greater prudence. Franklin Templeton is particularly bullish on opportunities in commercial real estate debt [5]. Investors should focus on projects that remain commercially viable without government support, while conducting additional due diligence on renewable energy and data center sectors, evaluating valuation rationality in combination with policy changes and supply-demand dynamics [4].

While pursuing returns from the M&A theme, risk management cannot be overlooked. Partners Group recommends that investors incorporate scenario analysis into project evaluation, conducting stress tests for scenarios such as recession, stagflation, and productivity improvement [4]. At the investment strategy level, investors should adhere to focusing on assets driven by long-term structural trends, avoid being influenced by short-term economic cycles, and refrain from opportunistic investment strategies [4].

Investors also need to closely monitor the following risk factors: first, changes in geopolitics and trade policies, which may affect the approval and execution of cross-border M&A; second, fluctuations in U.S. dollar assets, for which selective hedging strategies are recommended; third, market concentration and regime shift risks, which can be mitigated by risk parity strategies that balance risk exposures across various asset classes [6]. Additionally, sovereign wealth funds in the Middle East are emerging as a new force in the private equity market, and their interest in privatizing listed companies may accelerate the decline in the number of listed companies, further reshaping the market landscape [8].

The resurgent M&A sentiment in the private equity middle market is the result of multiple factors including improved interest rate environment, rational reversion of valuations, deployment of accumulated capital, and AI technology impetus. This trend has important implications for portfolio allocation:

1. Upgrade Alternative Asset Allocation
   : Recommend increasing the alternative asset allocation ratio to 20%-30%, with allocations to private equity, private credit, and real assets reaching 15%-25%, 20%-25%, and 15%-20% respectively.

2. Private Equity Secondary Market Opportunities
   : The current market offers discount space; investors can acquire existing shares through the secondary market to reduce entry costs and blind pool risk. Recommend overweighting inflection LP-led transactions while carefully screening GP-led continuation vehicles.

3. Allocation Value of Private Credit
   : Private credit is an important financing channel for middle-market M&A, and its attractiveness as a revenue source continues to rise amid constrained bank lending. Selected middle-market loans remain investment-worthy, and investors should choose managers with strict underwriting standards.

4. Balanced Regional and Industry Allocation
   : Achieve a balanced private equity allocation of 40%-50% to North America, 40%-50% to Europe, and 10%-20% to other regions; focus on pharmaceutical, consumer goods, and AI-related investment opportunities at the industry level.

5. Long-Term Structural Investment Theme
   : Adhere to focusing on assets driven by long-term structural trends, avoid short-term opportunistic investments, and adopt a phased position-building strategy over 3-4 years to achieve year diversification.

Overall, 2026 will be an important window for private equity middle-market M&A. Investors should seize this opportunity to capture excess returns while diversifying risks through a scientific asset allocation strategy.

[1] Morningstar - “M&A Market Set to Broaden as Confidence Surges” (https://www.morningstar.com/news/business-wire/20260106652514/ma-market-set-to-broaden-as-confidence-surges)

[2] Citizens Bank - “M&A Market Set to Broaden as Confidence Surges” (https://investor.citizensbank.com/about-us/newsroom/latest-news/2026/2026-01-06-141605878.aspx)

[3] Capstone Partners - “Merger and Acquisition Outlook 2026” (https://www.capstonepartners.com/insights/merger-and-acquisition-outlook-2026/)

[4] Partners Group - “Private Markets Outlook 2026: Investing at High Altitude” (https://www.partnersgroup.com/en/news-and-views/perspective/private-markets-outlook-2026)

[5] Business Wire - “Franklin Templeton Sees Opportunities in Private Equity, Private Credit, Real Estate, and Infrastructure” (https://www.businesswire.com/news/home/20260106721000/en/Franklin-Templeton-Sees-Opportunities-in-Private-Equity-Private-Credit-Real-Estate-and-Infrastructure)

[6] Zhihu Column - “State Street Global Advisors 2026 Global Market Outlook: AI Leads, Anchoring Core Opportunities Amid Uncertainty” (https://zhuanlan.zhihu.com/p/1985354706466394538)

[7] Standard Chartered - “2026 Outlook” (https://av.sc.com/market-outlook/publications/global-market-outlook-sc-hk-12-12-2025.pdf)

[8] Freshfields - “M&A Predictions and Guidance for 2026” (https://blog.freshfields.us/post/102lzhy/ma-predictions-and-guidance-for-2026)

This report is compiled based on public market data and research reports as of January 2026. The views contained herein are for reference only and do not constitute investment advice. Investors should make investment decisions based on their own risk tolerance and investment objectives, combined with the latest market information.