Illustration: Katmandu Journal
FOR MUCH OF the past decade or so, the private-equity industry functioned like a high-speed conveyor belt. Investors poured cash into funds, which in turn used enormous heaps of cheap debt to buy companies, spruce them up and then flip them for a handsome profit. It worked so well that private equity swelled to more than 10% of global equity markets, up from a mere 4% two decades ago. But in 2025 the belt has slowed to a crawl, and the sound of grinding gears is becoming difficult to ignore.
The clearest sign that the industry is in trouble is the sheer volume of companies sitting on the books of private-investment firms. Some 31,000 unsold businesses, worth an eye-popping $3.7trn, are currently waiting for an exit that refuses to arrive. High interest rates have made the traditional route of selling to another debt-fuelled buyer prohibitively expensive. Geopolitical jitters and trade spats have further curdled the appetite for deal-making. Even a late-year revival in the market for initial public offerings has done little to clear the backlog. The industry is, quite literally, full.
This congestion is having a predictable effect on the mood of institutional investors, the “limited partners” who provide the industry with its fuel. In the first three quarters of 2025, firms raised roughly $900bn, a figure that, though big, marks the fourth consecutive year of decline from the heights of 2021. The cooling of enthusiasm is understandable. Investors who once viewed private equity as a reliable source of outsized returns are now looking at their portfolios and seeing only a lack of liquidity. At the current pace of distributions, some backers may have to wait nine years to see their money returned from American buyout funds.
The industry in turn has responded with a degree of financial creativity. Lacking outside buyers, many firms have turned to “continuation vehicles”—a practice that boils down to selling a company from one fund to another run by the same firm. This allows managers to record a paper gain and keep assets under their control, but it leaves investors confused about what the assets are really worth. The assets held in such vehicles are expected to strike $100bn by the end of the year. Critics argue that when a firm acts as both buyer and seller, the resulting valuations are more a matter of opinion than market reality. The risks of this circularity are already surfacing: companies like Wheel Pros and United Site Services, which were shuffled into continuation funds, subsequently suffered defaults that left investors empty-handed.
The allure of the asset class has also been dented by the performance of the public markets. Between 2022 and 2025 the average annualised return for American private equity was under 6 or so%. Over the same period the S&P 500, a benchmark of large American companies, delivered some 11%. When a low-cost index fund outperforms a complex and illiquid alternative by such a margin, the sophisticated justifications for private equity begin to lose appeal. The “easy money” tailwind provided by ultra-low interest rates has vanished, exposing businesses that were perhaps better at financial engineering than operational excellence.
Institutional giants are taking note and in turn adjusting their behaviour. Sovereign wealth funds and prestigious university endowments at Yale and Harvard have begun selling their stakes in private funds at a discount to find the exits. Other backers are becoming more discerning with their cheques. The Texas Teachers’ retirement system and the Alaska Permanent Fund have shifted their gaze toward smaller, mid-market funds, which are generally less reliant on the massive leverage that has become so costly. Pension funds in Arizona have trimmed their typical investment size by more than half, preferring a larger number of smaller bets to the multi-billion-dollar “mega-buyouts” of yesteryear.
There are attempts to find new sources of capital to replace the departing institutions. Major firms are increasingly courting retail investors, pitching the “democratisation” of private markets to individuals who might not fully appreciate the lack of transparency or the difficulty of getting their money back in a pinch. Meanwhile the industry is diversifying into private credit, infrastructure, insurance and so on. These sectors offer steadier, if lower, returns and provide a way for firms to stay relevant while the buyout business hibernates.
The current malaise may well lead to what some veterans call a “natural washout”. The weaker, more overleveraged players who relied on the crutch of zero-percent interest rates are likely to fade away, leaving behind a leaner and more disciplined industry. This transition, however, will be uncomfortable. As the era of cheap leverage recedes into memory, the private-equity moguls who once felt like the masters of the financial universe are finding that, without the wind at their backs, they must actually learn how to row. They would be well advised to keep their life jackets close at hand; the water is unlikely to calm anytime soon. ■
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