PHOTO: JACK TAYLOR/AFP/GETTY IMAGES
IN 2021 private-equity firms sold 1,210 American companies they owned, returning $528bn to pension funds, endowments and sovereign wealth funds. Last year they sold 321 companies for roughly $100bn. The maths is grim. Some 31,000 firms now sit in private-equity portfolios, valued by their owners at $3.7trn, waiting for an exit that will never arrive. The industry says this is a temporary freeze, a bout of indigestion after the feast of ultra-cheap money. It is a structural problem. Private equity has grown too large to operate smoothly.
The industry’s defenders cite a glittering past. For two decades private equity did what it promised: it bought underperforming firms, cut costs, loaded them with debt and sold them at hefty profits. Limited partners—the pension funds and university endowments that supply the capital—earned returns public stockmarkets failed to match. David Swensen’s Yale Model, which placed heavy bets on private markets, became gospel. Everyone copied it. That was the trouble.
When private equity managed $1trn in assets in the mid-2000s, there were enough inefficient firms to buy and enough buyers to sell to. Today the industry controls $5trn-7trn and claims 10% of all equity markets, up from 4% two decades ago. Excess return has turned into market return. Median private-equity returns since 2006 have tracked or trailed the S&P 500, even using the industry’s preferred yardstick, internal rate of return. Measured with public-market equivalents that account for timing and fees, private equity has trailed. Between 2022 and the third quarter of 2025, private equity returned 5.8% a year. The S&P 500, an index of big American companies, returned 11.6%. Investors pay a 2% management fee and 20% of profits for the privilege of lagging an index fund.
The exit engine has stalled. Private equity functions only if firms can be sold and cash returned to investors, who then recycle it into new funds. That cycle has fractured. Exit values fell from $528bn in 2021 to some $100bn in 2023. The rebound since has been narrow, driven by a handful of mega-deals rather than the broad churn the industry needs. General partners sit on an inventory worth, by their own generous reckoning, $3.7trn. They struggle to sell into public markets, which insist on transparency and steady earnings. Corporate buyers face their own constraints. So firms sell to themselves.
Continuation vehicles—in which private-equity firms move portfolio companies from one fund to another—have become the industry’s favourite tactic. The same general partner sits on both sides of the deal, sets the price, collects fees twice and calls it an exit. Naguib Sawiris, an Egyptian billionaire, calls it “the biggest scam ever”. Abu Dhabi’s sovereign wealth fund is suing over fiduciary breaches. Even limited partners hungry for distributions sense decay.
Financial engineering has taken the place of genuine value creation. Firms load portfolio companies with fresh debt to pay dividends to investors—weakening balance-sheets to simulate liquidity. They borrow against their own fund valuations through NAV loans, using paper marks to produce cash. The outcome is debt stacked upon debt, with pensioners and endowments holding IOUs instead of gains. Funds older than a decade, which historically returned 53 cents on the dollar, now return 44 cents. The balance sits trapped in zombie assets that will never find buyers.
Limited partners are voting with their feet. Fundraising peaked in 2019-21 and has fallen each year since. In 2025 hedge funds, once dismissed as flashy and shallow, drew in $628bn—their strongest year since 2009. Investors rediscovered the appeal of liquidity, transparency and daily pricing. The secondaries market, where limited partners sell fund stakes at a discount to escape, reached $110bn in 2025. That signals retreat.
The industry’s defences sound thin. Lower interest rates will fail to cure exit congestion when 31,000 firms crowd the pipeline and buyers are scarce. Top-tier funds share the same ageing assets. Private credit, the new favourite, reflects private equity’s opacity and illiquidity without operational gains. It is the same ailment in a different wrapper.
What follows is correction rather than collapse. Fewer funds will raise smaller pools of capital. Survivors will hold companies longer, as well as focus on operational gains and drop the pretence that financial wizardry equals genius. Honest pricing of illiquidity, once marketed as a virtue, will arrive at last. Some firms will close. Many more ought to.
Private equity thrived when it was smaller and hungrier. It arbitraged inefficiencies, disciplined slack management and returned capital swiftly. Scale destroyed that model. The industry now resembles conglomerates in the 1960s, banks before 2008, hedge funds before 2007: bloated, overconfident, ripe for mean reversion. Contraction signals renewal. For private equity to regain its edge, it must first regain modesty. That means shrinking. ■
