Private Equity & Venture Capital: Ready for the Rebound in Deal Flow

After years of subdued merger and acquisition (M&A) activity and a near-standstill in initial public offerings (IPOs), 2025 economic fundamentals were improving and interest rates were trending down, lowering the cost of capital and raising expectations for a rebound in deal-making and listings. Private equity (PE) investors were optimistic that, finally, the tide had turned. Today, many of the same reasons for optimism remain in place. So, the question is, will 2026 be another muted year, or will deal flow and IPOs finally rebound and unleash the capital that has been sitting on the sidelines?

Our view is more toward the latter, but last year showed just how quickly things can change. Coming out of 2024 and into the early months of 2025, there were signs that activity was picking up. The value of private equity M&A deals in Canada during the first quarter of 2025 was nearly US$20 billion higher than in the previous quarter¹. But then, in April, it all turned again. New geopolitical risks and trade policy uncertainty—most notably from the Trump administration’s so-called “Liberation Day” tariffs—cast a pall over business confidence. The nascent recovery stalled.

In the third and fourth quarters of 2025, there were modest upticks in the M&A and IPO markets. In Canada, total investment hit a record, although smaller transactions (<C$25 million) accounted for the lion’s share of deals. In general, the recovery was fragile, as ongoing tariff risks and geopolitical tensions continued to weigh on sentiment. The bounce was also highly concentrated in specific sectors, especially artificial intelligence (AI) and the oil-and-gas sector. On the plus side, this sectoral focus is consistent with historical patterns, where recoveries in deal activity often begin in a narrow set of industries before broadening out as confidence returns.

Canadian Private Equity Investment Activity	2024 (Full Year)	2025 (YTD Q3)
Total Investment	C$27.0B	C$56.5B
Deal count	669	483

Source: CVCA Q3 2025 Canadian Private Equity Market Overview

Yet there are other reasons for cautious optimism in 2026. PE activity has been muted since a blockbuster 2021, and that four-year period of doldrums is almost without precedent; even after the Great Financial Crisis in 2008, activity rebounded within 18 months and remained strong for several years. The current long fallow period has only built up demand, both from the input side (capital sitting on the sidelines) and on the output side (firms wanting to exit through an M&A or IPO). At some point, we believe something has to give. If the benign interest rate environment continues, and if something approaching stability takes hold on the geopolitical and macroeconomic fronts, then it could happen in 2026.

Another side effect of subdued PE activity has been the rise of continuation vehicles, which enable general partners to extend the holding period of their best assets beyond the typical fund life cycle and provide liquidity to limited partners. The continuation “market” has become more specialized and sophisticated; large pension funds now have dedicated teams to pursue these opportunities, and continuation investments are shifting towards highly curated, sector-specific opportunities.

Meanwhile, the sponsor-backed IPO market looks like it’s picking up, and we anticipate more activity in 2026. There is currently a long list of IPO filings, and many companies are at least in the planning phases of going public. And we note that IPO activity tends to lag a rebound in M&A activity, which has arguably been on a recovery trajectory, by about six months.

Sectoral Realities and Opportunities

Of course, the threat presented by tariffs and geopolitical shifts has not gone away. In the most tariff-sensitive sectors, such as manufacturing and building products, companies are taking steps to mitigate adverse impacts. Some are shifting production to the U.S. to hedge against potential disruption of the U.S.-Mexico-Canada Agreement; others are working to diversify their customer base and increase domestic manufacturing for export. In our view, such reconfigurations of the supply chain may be necessary, but they also invoke new risks given the ever-shifting landscape of global trade policy.

It’s worth noting, however, that many sectors are largely insulated from tariffs; investors’ focus remains on scalability and capital efficiency rather than trade policy risk. Among these resilient sectors are healthcare and food/consumer packaged goods, which generally offer stable demand and attractive return potential. Meanwhile, service businesses tend to offer efficient scalability potential while being largely immune from tariffs.

Artificial intelligence (AI) merits special mention. It continues to attract massive capital inflows, and while there will be winners and losers in the AI revolution, the potential is real. It’s important to bear in mind that AI is not only a direct investment opportunity, but can also be a catalyst for productivity improvements across portfolios. From the perspective of PE, the sheer scale of capital deployment in the space implies that as winners emerge, underperformers will likely become acquisition targets, fuelling further consolidation and innovation.

 

Defence in Focus

Defence, one of the sectors we are watching most closely within the venture capital (VC) space, seems poised to benefit from shifting geopolitical realities. Rising military spending, especially by NATO countries after years of under-investment and over-reliance on the U.S., should create tailwinds for the defence sector. Defence also has (for lack of a better word) defensive potential against volatility, since governments tend to maintain spending even in uncertain times.

A generation ago, defence investment was the domain of a few large contractors, with slow-moving procurement cycles and massive, long-term contracts. Today, the landscape is far more dynamic, with smaller, agile firms bringing innovations to market at speed. Rather than focusing on traditional hardware such as ships or tanks, modern defence investment increasingly targets software and automation, especially in areas like unmanned aerial and underwater drones. And firms have adopted the technology sector’s bias toward rapid iteration and commercialization. That is reshaping the industry.

In Canada, several companies are developing software for advanced defence systems (for instance, a multinational arctic defence network). Some of these innovations may end up being dual-use technologies—developed for military applications but having utility in consumer contexts. That broadens their total addressable market; heads-up display technology, for instance, originated in fighter jets but is now commonplace in the automotive sector.

There is no doubt that private equity and venture capital investors will face a complex environment in 2026. Geopolitical tensions and trade policy uncertainty may trend towards normalization, but they are highly unlikely to disappear; rapid technological change is creating shifts across business operations and in capital flows, but that brings both benefits and risks. Yet, amid the volatility, there will be pockets of resilience and opportunity. If, as is possible, the long pause in dealmaking activity breaks in 2026, it may unleash a new era of capital flows, and those who have positioned themselves for the next wave of growth should be well rewarded.

¹ The Q1 2025 PE Briefing, Bennett Jones, April 2025.