DEER ISLE: Insights, Flows & Investment Trends
Happy Holidays and Wishing You a Wonderful 2026!
Listen to the Podcast:
Chaos Is Not Crisis
One of the defining aspects of 2025 was confusing chaos and disruption with crisis.
For instance, artificial intelligence created many headlines about potential crises driven by rapid advances and what an AI economy may foretell. But crises are marked by failed capacity and that did not occur. What the year revealed instead was transition: systems under strain, not systems collapsing.
An example of the transition and possible chaos is the fear that AI would displace workers. However, as AI emerges, labor availability has been naturally tightening.
- Labor force participation is declining for demographic reasons, a shift that implies roughly three million fewer available workers over the coming decade.
- The economy is ending in 2025 with roughly seven million unfilled jobs, driven by retirements, skills mismatches, geographic frictions, turnover, and constrained immigration, even with unemployment near historical norms.
Labor scarcity, not surplus, is the binding constraint to future US economic growth.
In that context, AI’s impact looks different. Research from MIT’s Project Iceberg finds that only 11–12% of U.S. jobs are economically and technically automatable under current conditions—roughly 18–19 million jobs where tasks can be automated or augmented over time, not eliminated outright.
With workforce growth constrained, AI is being absorbed as productive capacity, not deployed against excess labor.
This distinction matters for company valuations. In a labor-constrained economy, even modest gains in productivity per worker can support higher enterprise values without any margin expansion. Consider a firm with flat headcount and $1 billion in revenue. A 5% increase in revenue per employee, driven by AI-enabled throughput, lifts revenue to $1.05 billion with no additional labor cost. If margins remain unchanged, cash flow rises proportionally. At a constant valuation multiple, enterprise value increases by the same 5%. If that productivity gain is viewed as durable—because it offsets a structural labor shortage—risk perception falls, and the multiple itself can stabilize or rise. That is how productivity, not headcount reduction, becomes the valuation lever.
Chaos created outsized valuations in both public and private markets for those companies proactively positioning for AI in 2025. In 2026, as applications and AI productivity benefits become clearer, the case for broader valuation benefit grows.
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Thank you to our clients! We have been grateful for the opportunity to work together and to help you outsource one of the most tedious parts of a capital transaction – building the top of capital funnel. If we can help others, email us at info@deerislegroup.com to learn how.
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Capital Provider Interest: Demand remains strong for basic industry, cash-generating businesses. In a market defined by perceived chaos, capital flows toward stability.
Private Equity: Secondaries and continuation funds open question is “are these structures disciplined portfolio management tools or thinly veiled distress exits”? As traditional liquidity events dry up, GPs are using the tools that public portfolio managers have always used which is rebalancing exposure. That said, price discovery and incentives are misaligned which means buyers should proceed with caution.
Credit: The market is increasingly distinguishing between “Good PIK,” “Bad PIK,” and “Synthetic PIK.”
- Good PIK: agreed at origination.
- Bad PIK: imposed through restructuring.
- Synthetic PIK: new leverage used to avoid a PIK on another loan.
When borrowers start engineering ways not to pay cash interest, it’s rarely a sign of strength. Despite many assurances otherwise, stress seems to be building beneath the credit market surface.
Venture Capital: Fundless and Independent sponsors are gaining traction as an alternative to traditional VC for entrepreneurs to pursue. The logic is straightforward: acquiring and scaling an operating business appears easier than starting from scratch. Sometimes it is—but operating risk doesn’t disappear.
