Private Equity Can't Exit

Private Equity (“PE”) has been on an unprecedented boom since the industry began in the 1980s. Post 2008, ultra-low interest rates and yield-hungry investors allowed PE firms to borrow at cheap rates while valuation multiples grew rapidly, yielding incredible returns. The PE strategy of buying companies with leverage, improving operations and reselling has produced countless success stories over the years.

However, the combination of macroeconomic headwinds and higher interest rates is finally starting to break PE’s magic formula.

The Slowdown

The numbers tell a bleak story. Market conditions have shifted dramatically since 2021. Inflation and the corresponding increase in interest rates have made LBO financings more expensive and pressured highly levered PE-backed companies. Fears of an economic slowdown have dampened the markets and M&A activity. More recently, uncertainty over US trade policy has added further challenges to deal-making.

PE firms cash out of their investments by selling their portfolio companies to strategic industry buyers, other PE firms or through IPOs. As acquisitions and deal-making have slowed globally, private equity’s ability to exit and monetize investments has also been affected:

Liquidity Crunch

As PE firms harvest their investments (typically targeting a 5-year timeline from investment to exit), they return capital to their fund investors, Limited Partners (“LPs”), through distributions.

However, with the exit slowdown, PE funds are increasingly forced to hold companies beyond the typical investment timeline. The share of US buyout companies held for 5+ years reached a high in 2024 as PE exits continue to drop:

The pile-up of portfolio companies is driving the core challenge for private equity today: lack of liquidity. As PE firms struggle to exit their investments, they have less capital to distribute to LPs. According to Bain & Company, recent fund vintages are consistently lagging historical benchmarks in capital returned to LPs. Lower distributions hinder new fundraising and make achieving return targets — which drive carry fees for PE firms — more difficult.¹  

The liquidity challenge is becoming increasingly evident in fundraising, as buyout capital raised has declined for five consecutive quarters since Q1 2024:

Looking Ahead

The PE industry continues to weather the storm, hoping for rate cuts and economic improvement on the horizon. Firms are increasingly turning to continuation funds — structures that extend ownership of portfolio companies by transferring them to new vehicles, providing partial liquidity to existing LPs while allowing GPs to retain future upside.

On the LP side, investors are considering reallocations. LPs are increasingly allocating capital to more predictable income-generating asset classes like infrastructure and private credit.¹

It is clear the private equity business model shines in a stable, low interest rate environment. However, in the new reality of global volatility and higher-for-longer rates, the looming question is whether PE can replicate past performance, or if it needs to adjust its core strategy.

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1  https://www.bain.com/insights/private-equity-midyear-report-2025/