Key Takeaways
- The 2026 outlook for market activity is cautiously optimistic amid ongoing challenges.
- Private equity firms are shifting to more hands-on, creative strategies to unlock liquidity in aging portfolios, with increased use of AI, continuation vehicles, and alternative financing as traditional exit avenues remain challenging.
- AI is dominating industry focus, but its impact on cost reduction is limited; regulatory uncertainty and overinvestment have created both innovation and new risks, signaling that adaptation to a dynamic “new normal” is key for 2026.
As 2025 draws to a close, investors, founders, and dealmakers are watching one question more closely than any other: Are we heading into a stronger 2026, or have the same structural tensions that defined this year simply become the new normal?
Foley & Lardner’s second annual Northern California Media Roundtable examined this question and venture, IPO, and PE trends for 2026. San Francisco and Silicon Valley Office Managing Partner Tom Carlucci moderated the discussion and opened with a review of a complex and unpredictable 2025. A year that began with post-election expectations of a robust Q1, but instead saw new tariffs, continued high interest rates, and delayed market momentum. Liquidity did not return until midyear, followed by a Q3 rate cut that spurred renewed IPO activity, much of it driven by developments in artificial intelligence, before a prolonged government shutdown stalled fourth-quarter progress.
Against this backdrop, the panel – featuring Foley corporate partners Louis Lehot, Brian Wheeler, and Natasha Allen – examined whether current market optimism is warranted and the key factors shaping the outlook for 2026.
The IPO Market: Momentum Meets Reality
After a sluggish start, the IPO window briefly cracked open from July to September 2025. Strong aftermarket performance from high-quality names like Klarna, Chime, and Circle suggested early signs of life. But the optimism didn’t last long.
A prolonged government shutdown that no one expected to stretch as long as it did derailed what could have been a promising Q4. As Lehot put it, 2025 “was a lost opportunity” from a listings standpoint. On the bright side, companies didn’t disappear. They’re simply stacking up for early 2026, creating the possibility of a sharp, fast opening, if macro conditions cooperate.
But that’s the sticking point: Interest rates must fall. Without a rate cut, “risk stays off,” Lehot cautioned. And without risk-on sentiment, IPO buyers won’t pay the multiples needed to clear the backlog. “We need interest rates down. We need risk on, and we need an IPO market to open now,” Lehot emphasized.
Private Equity: Creativity Under Pressure
Private equity’s challenge hasn’t changed: record amounts of capital are frozen in aging portfolio companies. DPI, distribution to paid-in capital, remains the industry’s Achilles heel. Wheeler described the environment as one that requires creativity, not complacency. Traditional five-year hold periods and quick flips are gone. Instead, PE firms are rolling up their sleeves and getting operationally hands-on. That includes:
• Platform plays and roll-ups
• AI-driven transformation of existing portfolio companies
• GP-led secondaries and continuation vehicles
• NAV loans and other liquidity bridges
Rising use of GP-led secondaries, nearly half the secondary market by some estimates, highlights the urgency. Venture and PE funds simply can’t afford to sit still.
As Wheeler noted, many firms are focused on helping portfolio companies implement “AI-first” strategies not to create new products, but to hopefully avoid falling behind competitors who are racing to add AI features. This is less about revenue expansion and more about survival. At the same time, limited partners are pushing hard for liquidity, forcing managers to consider continuation funds, partial exits, and structured secondaries at a scale the market hasn’t seen before. And with valuations still misaligned, buyers are resisting anything above 6x ARR while sellers refuse to go below 8x, the pressure to find alternative paths to DPI is only intensifying.
AI: Innovation, Hype, and the Real Risks Ahead
If 2025 had a single defining theme, it was the relentless march of AI across every corner of the economy. Yet the discussion revealed a more nuanced reality.
AI Is Not Currently Reducing Costs: Despite headlines about workforce reductions tied to AI, the panel unanimously agreed: layoffs in 2025 were not caused by AI productivity gains. In fact, in many industries, including legal, AI has not lowered operating expenses. Allen suggested that an unfocused implementation of AI use and reluctant engagement with AI in certain organizations may be partially responsible for the lack of cost efficiencies that AI was expected to create.
Companies Are Overinvesting: Wheeler pointed to a JPMorgan analysis: 1.1% of U.S. GDP growth in the first half of 2025 came from AI spending alone (not from AI-driven productivity, but from the sheer volume of investment). That’s a high-wire act. If revenue doesn’t materialize, misalignment with a high cost structure could hit GDP directly.
The “AI-first product” race has choked off SaaS growth: This may be the most underreported trend of the year: SaaS companies are diverting cash away from sales toward re-engineering products to meet market expectations for AI-first solutions. Growth rates have fallen. IPO prospects have dimmed. Many companies with strong historical metrics can’t go public simply because they lack a credible AI roadmap.
A Bubble? Maybe. A Crash? Probably Not: While cross-investment between AI, chipmakers, and cloud companies raises 1999-style concerns, Wheeler noted that any correction would likely be contained to tech, not a broad market collapse.
Regulation: A Patchwork at War With Itself
Allen described the current U.S. regulatory environment as “1100+ proposed AI bills across 50 states,” creating a patchwork that defies logic or practicality. The federal government, under a new executive order framework, is attempting to rein in overly aggressive state rules, aiming for innovation-friendly uniformity.
This led to a friendly debate:
- Allen: Regulation isn’t inherently anti-innovation. The real issue is how to regulate something evolving this fast.
- Lehot: Regulate too early, and the U.S. loses the global AI arms race, particularly to China.
- Wheeler: Kill switches and safeguards might be necessary, but broader frameworks must evolve more slowly than the technology itself.
2026: Opportunity if Markets Accept the “New Normal.”
Closing sentiments from the panel suggest reason for both the optimism and the tension ahead:
- Wheeler: Investors are learning to operate despite uncertainty. Deals must get done.
- Lehot: Inflation, the deficit, and geopolitical instability are real threats.
- Allen: The market will adapt, but transactions will look different.
The ultimate takeaway? Certainty may no longer mean stability; it may simply mean accepting the new rules of an unpredictable, innovation-driven economy. 2026 may well be the year that tests whether the market is ready to operate under that definition.