IMAGE: SATOSHI KAMBAYASHI/KATMANDU JOURNAL
FOR NEARLY two decades or so, private equity was the asset class that seldom lost money, attracting investors like pilgrims to a shrine. Today, however, its markets are crowded and returns are shrinking. The industry has grown too big to perform as well as it once did.
In other words, private equity has now reached its peak. It does not imply that the industry will die. Rather it means that the era of effortless outperformance is over. Today marginal capital does not earn the excess returns it once did, for the structural advantages that private markets held over public ones have deteriorated. Growth itself has become a drag on performance. This follows a classic economic pattern. Banking faced a similar reckoning before 2008. Conglomerates went through it in the 1960s. Hedge funds reached their own ceiling around 2007. Private equity is simply next in line for a haircut.
To understand the root of the problem, revert back to the era of easy money. Between 2010 and 2021 interest rates were near zero. Leverage was cheap and plentiful, lowering the cost of doing businesses as well as mechanically yanking up internal rates of return. It allowed mediocre operational performance to look exceptional. When the wind is at your back, even a bathtub can sail. Post-2008 regulations also played a part. They constrained bank lending and pushed risk into private markets. Institutional investors became desperate for yield. Pension funds and insurers faced return targets that were divorced from reality. Naturally they turned to private equity for salvation.
This led to the contagion of the Yale Model. David Swensen, the late investment chief of Yale’s endowment, pioneered the shift into illiquid assets. It worked brilliantly when private markets were small. Competition for deals was limited then. Alpha was ripe for the picking. But once every big institution copied the strategy, the advantage disappeared, and alpha became beta. Today private equity accounts for roughly 10% of equity markets; it was only 4% in 2003. Assets under management have exploded from $1trn before the financial crisis to more than $7trn today. Dry powder has reached record levels. This is not because capital is scarce. It is because deployable opportunities are.
The data on returns is increasingly damning. Early private equity outperformance was a real phenomenon. There was abundant low-hanging fruit and far less competition. Since roughly 2006, the story has changed: median private equity returns now track or lag the S&P 500 index of big American companies. This holds true even when using the industry’s preferred metrics. When measured by the Public Market Equivalent, the gold standard for comparison, private equity underperforms public equities after fees. Recent figures from MSCI show that from 2022 to late 2025, private equity returned roughly 5.8% annualised. The S&P 500 returned 11.6% in the same period. For funds raised between 2019 and 2024 the amount of cash returned to investors is collapsing. Capital is locked away rather than compounded.
That brings us to the most pressing issue: the exit engine is broken. Private equity only works if companies can be sold. Cash must return to limited partners so they can recycle it into new funds. That engine has stalled. In America exits peaked at over 1,200 in 2021. By 2025 that number had fallen to roughly 320. The values involved are even more sobering. Half a trillion dollars was returned in 2021. Recent years have seen that figure sink to around $100bn. Any partial recovery has been driven by a handful of mega-deals. The wider market remains frozen. There is now an inventory overhang of 31,000 unsold companies. These carry a combined valuation of roughly $3.7trn.
The resulting liquidity crisis for investors is systemic. Pension funds need cash to pay retirees. University endowments need liquidity as public funding weakens thanks to America’s mafia president, Donald Trump. These institutions are increasingly vocal about their frustration. They are caught in a “denominator effect”. Public equities rallied, but private equity valuations remained artificially high. This pushed private equity allocations above their targets. Investors cannot commit new capital even if they wish to. They are waiting for a check that is not coming.
In the absence of exits, the industry has turned to financial engineering. Dividend recapitalisations have become common, meaning portfolio companies borrow at high rates to pay cash out to investors. This weakens balance sheets and sacrifices long-term competitiveness. It is a way of paying yourself with your own credit card. Even more controversial are continuation vehicles: these involve private equity firms selling assets to themselves. The firm sits on both sides of the transaction. Naguib Sawiris, a billionaire investor, has called this the biggest scam ever. Sovereign wealth funds are starting to agree. The Abu Dhabi Investment Authority has pursued legal action over what it views as fiduciary breaches in the private markets.
The industry is also leaning on Net Asset Value loans. These involve funds borrowing against their own self-estimated valuations. The money is used to inflate performance figures. But this liquidity is illusory: many investors are forced to hold cash aside in case these loans are recalled. It is debt layered upon debt. This is the hallmark of an industry that has lost its way. When you cannot sell the house, you take out a second mortgage to pay for the gardener. It is a temporary fix for a permanent problem.
The natural outcome of this bloat is the rise of the zombie fund. These are funds older than a decade that still hold onto assets. Management fees continue to be collected. The probability of a successful exit declines with each passing year. Historically, these funds returned roughly 53 cents on the dollar. That figure has now slipped closer to 44 cents. Large, brand-name funds are not immune to this trend. It undermines the narrative that scale equals safety. In reality scale has become a trap.
Fundraising has decisively turned, too. Global private equity fundraising peaked a few years ago. Since then it has tumbled steadily. Buyout funds have been hit the hardest. The collapse in venture capital has only amplified the trend. While data providers might disagree on the exact levels, they agree on the direction: that capital is voting with its feet. Hedge funds are enjoying a renaissance, meaning they gained over $600bn in 2025 alone. Investors have rediscovered the value of liquidity and transparency. Multi-strategy platforms are absorbing the capital that is fleeing private markets.
The secondary market is also exploding. Investors are selling their fund stakes at record paces. This indicates a desperate desire for an exit even at a discount. It suggests a loss of faith in the timelines promised by fund managers. Even in smaller markets the same dynamics are visible.
Consider Nepal: the country saw a recent boom in private equity through specialized investment funds. It mirrored the global trend of rapid inflows and sector concentration. But the exit problem arrived almost immediately. An illiquid stockmarket and a lack of strategic buyers mean capital is just being recycled within the same ecosystem. Nepal is one small example of the global trap. Scale without liquidity leads to stagnation.
The industry’s best defence is that it merely needs interest rates to fall. This is optimistic: even zero rates cannot fix the sheer congestion of unsold companies. Others argue that top-tier funds will always survive. Yet zombie assets are increasingly concentrated in those very same large funds. A third claim is that private credit will save the day. In truth private credit tends to replicate the same opacity and liquidity risks. It is not a solution: it is just a different version of the same game.
What comes after the peak? The future looks smaller, meaning it involves fewer funds and more small fund sizes. Holding periods will likely lengthen, necessitating a return to real operational improvement rather than financial wizardry. There will be more honest pricing of illiquidity. The industry worked best when it was smaller and hungrier. It was a tool for fixing broken companies not a vacuum for global capital. Contraction should not be viewed as a failure: it is a necessary market correction.
Private equity has peaked because it became a victim of its own success. Its alpha was arbitraged away by its own growth. It has become systemically important, which is usually a sign in finance that the best days are in the past. The industry must now face a difficult paradox: to recover its edge, it may first have to shrink. The smartest guys in the room might finally need to find a smaller room. ■
