- UK remains a strong environment for entrepreneurial businesses.
- Dry powder plus a ‘flight to quality’ means top-performing companies will see a boost in valuations
- European mid-market attractive in the hunt for DPI and Alpha
- As 2020/21 vintages hit five-year hold periods – expect more exits but with tighter processes
- Revenue visibility and AI become the defining themes for 2026
Following a quieter than usual 2025 for the UK PE market, we still believe the UK continues to be a good environment for entrepreneurs and predict that 2026 will see more deals but with a flight to quality and a more nuanced approach to processes.
UK – a fertile environment for entrepreneurialism
Managing Partner of ECI Partners, Tom Wrenn, comments:
“Uncertainty before the Budget prompted international LP questions but over the last 12 months, the UK is only behind North America in GDP growth, and the business environment is positive, with a thriving digital economy and good levels of company formation. The 24% capital gains tax regime and 47% combined top rate of income tax and NI for highly paid employees present an environment that encourages entrepreneurialism. The proof is in the fact that the UK represents around 25% of European M&A volumes.”
In this market, the most successful investors will be those with a consistent model of identifying resilient out performers and having the right value-add capabilities to help them deliver growth. Tom adds, “The best investors will have a long track record of delivering strong results over multiple economic cycles. Returns are not reliant solely on GDP growth, and at ECI we’re investing in niches that are growing well ahead of GDP because of structural growth drivers.”
Fundraising and the great wait for exits
Elongated fundraising timelines will likely continue into 2026, with DPI still the most important metric in the market. Tom comments, “We’re seeing a pivot from both the large-cap to the mid-cap and from the US to Europe, as LPs search for DPI and Alpha. However, LPs are being more selective, and commitments may be smaller owing to the shortage in returning liquidity. Funds with a focussed portfolio and strong DPI will be the ones most likely to attract that LP capital.”
We expect a more active 2026 as 2020/21 vintages hit five-year hold periods, and GPs sitting on assets need to deliver liquidity. At ECI, the average hold period is under five years, versus the average of 5.3 years in the UK, according to gain.pro. Tom comments: “PE firms are building up big portfolios that they need to start exiting. 2020-21 was the high watermark, where PE companies paid big prices, hence it’s difficult for them to exit those businesses when they haven’t yet generated their returns. Next year, we should start to see some of those businesses coming to market.”
Tom predicts there will still be a flight to quality: “We have a bifurcated market with the haves and have-nots. Capital is plentiful, but only the top 10% of businesses are attracting competitive interest. Funds without strong origination or sector expertise will find deployment increasingly difficult, as exit processes are likely to be tighter, testing the market with more bilateral conversations versus big processes.”
Value creation and AI: the defining themes for 2026
We believe revenue visibility and non-discretionary demand will be critical differentiators in 2026. ECI has a long-standing value-creation model and its ability to work closely with management teams across its 14-company portfolio. With the advent of generative AI, we believe this will be more important than ever, with a divergence between portfolios that are impacted by AI as an existential threat and those that use it as a driver for outperformance.
Tom states: “We were the first mid-market UK PE firm with a distinct value creation team, founded in 2008 and for the last 17 years we’ve evolved through multiple cycles and macro events. AI is the newest part of that evolution and we’re excited about the opportunities AI is bringing to help drive growth in our portfolio companies. It is a key driver of efficiency and competitive advantage and will become a fundamental performance indicator. It can materially improve cost bases and unlock capacity for innovation. The best companies will be those whose management teams lean into AI rather than waiting for clarity.”
He adds that our own use of generative AI, including ECI’s Amplifind™ platform, is already improving early-stage evaluation and strengthening its niche sub-sector focus.
Tom concludes: “For ECI, 2026 will be defined by quality, selectivity and smarter growth. We’re confident that the UK mid-market is well placed for a stronger year of investing and value creation.
Tags: DPI ECI Partners, Tom Wrenn generative AI