Capital Markets Update – Q2 2026

Capstone Partners Q2 2026 Capital Markets Update

AI, Tariff Refunds Shock Middle Market Acquirers

Middle market merger and acquisition (M&A) activity lost momentum in Q2 2026, with transaction volume declining 9.1% quarter-over-quarter (QoQ), ending three straight quarters of consecutive growth; however, first-half deal volume remained firmly above prior-year levels, up 9.3%. Artificial intelligence (AI)-driven disruptions to Software-as-a-Service (SaaS) companies and ongoing turbulence in the Middle East cast a cloudy backdrop over dealmaking in Q2 2026, putting acquirer resilience to the test. Despite the positive start to the year, Private Capital markets slowed in Q2, signaling growing hesitancy as buyers increasingly prioritized capital discipline over near-term deployment. Acquirers have remained selective, gravitating toward scaled businesses with entrenched market positions and defensible competitive moats over smaller, less-established targets. Beneath the quarterly softness, dealmaking has continued to outperform on a year-over-year (YOY) basis. A growing pipeline of high-quality assets entering the market after years of delay has reinforced buyer conviction, laying the foundation for gradual improvement in the M&A landscape despite episodic volatility.

Policy Clarity and Capital Access Leave an Impression on M&A

The gradual easing of 2025’s Liberation Day tariff shock has further aided inorganic growth appetites in the middle market. A February 2026 Supreme Court ruling that invalidated the tariffs imposed under the International Emergency Economic Powers Act (IEEPA) resulted in ~$166 billion in refunds being slated for return to more than 330,000 importers, according to the Federal Reserve Bank of Atlanta and the Tax Foundation. The U.S. Customs and Border Protection (CBP) began processing claims through its Consolidated Administration and Processing of Entries (CAPE) system in April 2026. These refunds may provide additional acquisition capacity across the market as reimbursements move through the system due to an injection of cash onto a company’s balance sheet. Moreover, this liquidity or a significant reduction in tariff-related and other operating expenses should improve companies’ EBITDA and profit margins, increasing borrowing capacity and supporting strong equity valuations. Beneficiaries may also see better credit ratings and lower borrowing costs with an improvement to their balance sheet. Collectively, these impacts improve strategic buyers’ ability to bid more aggressively on high-value targets and offer business owners looking to sell improved financial health and valuations.

Simultaneously, tariff reimbursements have introduced additional complexity to middle market acquisitions. Standard pre-closing tax covenants have mapped poorly onto refund entitlement, as some importers absorbed IEEPA duties while others passed them through to customers. Tariff-inclusive inventory has distorted working capital pegs and quality of earnings analyses that treat duties as a permanent cost. This has made buyer and seller refunds a value reallocation rather than an incremental gain. Despite these challenges, Capstone’s proprietary deal data has seen the timeline from Letter of Intent (LOI) to close fall below its nine-year mean through YTD 2026, suggesting buyers remain highly motivated and underscoring the value financial advisors can provide in navigating complex transactions.

Amid this noise, private strategic middle market transactions fell 6% QoQ, an 85-deal decline. Encouragingly, increases in average value to $71.2 million (+16% QoQ) and total transaction value to $14.1 billion (+16.5%) suggest private acquirers remain willing to pursue larger, transformative transactions despite broader volume weakness among the cohort. Public strategics, meanwhile, have grown increasingly comfortable with the macroeconomic landscape. Despite a 15.9% QoQ slowdown in Q2 2026, public acquirers’ renewed appetite on a YOY basis (+5.2%) offers an optimistic signal for the broader market. This YOY growth represents a gradual reversal in deal volume trends following a prolonged period of subdued activity.

Financial Sponsors Continue to Navigate Murky Waters
Prospective Federal Reserve (Fed) rate hikes, ongoing geopolitical disruption, and a challenged exit environment have created steady obstacles for private equity (PE) firms in the current market. U.S. PE inventory continued to build in Q2 2026, surpassing 13,500 companies, according to Capstone’s H1 2026 Private Equity Index.

PE exits slowed to 213 transactions in Q2 2026 (-17.8% QoQ), while total exit value fell $40.8 billion quarter-over-quarter to $90.6 billion, the second consecutive quarterly decline and lowest level since Q3 2024. Hesitancy among sponsors has grown, as they have become unwilling to unload assets at valuations that would generate returns below their hurdle rates amid a soft pricing backdrop. The constrained exit environment has expanded the backlog within existing portfolios. This dynamic has delayed realizations and contributed to a record-high 4.2-year median holding period for active PE buyouts through YTD Q2 2026.

Capital formation in the U.S. showed a notable uptick through Q2 2026, with 199 funds closed; however, the composition of the growth contests a healthy narrative. Total capital raised in the first half of 2026 reached 112.8 billion, a $32.5 billion rise from the prior year period. Amid the tumultuous macroeconomic backdrop, fund managers have increasingly turned to continuation vehicles (CVs) to hold portfolio companies beyond traditional fund lifecycles. The strategy reflects both a reluctance to exit assets at valuations perceived to be below intrinsic value and a belief that many businesses still may have significant runway for operational enhancement, strategic growth, and future value creation. Notably, capital raised by CVs surged 126.2% YOY to $12.6 billion, with an average fund size of $1.3 billion, signaling continued appetite for the general partner (GP)-led structures following a 2025 slowdown. Revived activity among legacy PE firms contributed meaningfully to headline fundraising growth as well, as funds that had not solicited capital in years returned to refresh reserves. Firms last active three to five years ago added $7.7 billion, joined by those last active six to 10 years (+$9.4 billion) and over 10 years (+$4.7 billion), collectively totaling $21.8 billion in H1 2026. CVs and overdue fundraises accounted for 88.5% of the total increase in capital raised, underscoring the concentrated nature of the fundraising rebound.

Sentiment Signals a Turning Point

Near-term buyer confidence has shown signs of improvement, with middle market business owners’ sentiment around engaging in buy-side processes continuing to strengthen. In Capstone’s 2026 Middle Market Business Owners Survey, 20.5% of surveyed participants cited pursuing acquisitions among the most important growth strategies to focus on over the next 12 months—marking the second consecutive year of growth in this category, up from 17.4% in 2025 and 11.5% in 2024. This steady climb in owner sentiment offers an encouraging signal for the back half of 2026. As business owners increasingly view acquisitions as a key strategic growth lever, transaction activity will likely build into 2027.

Download our full Q2 2026 Capital Markets Update Report Publication:

Request instant access to the full Capital Markets Update for a deep dive into recent Middle Market activity and trends including:

• Key considerations for middle market business owners regarding dry powder levels, buyer appetite, lending conditions, and M&A pricing trends.
• An update on middle market valuations across 12 key sectors.
• An overview on Growth Equity and Credit market conditions, featuring Capstone’s Equity Capital Advisory, Debt Advisory and Financial Advisory Services Groups.