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For years, private equity’s expedient playbook for making money out of flipping businesses has been a simple formula: raise cash, buy low, add cheap debt, exit high, return capital, and repeat. This flywheel of funding — which has powered the industry’s rise from the sidelines of finance to the mainstream — is now sputtering. It is jammed at the exit. Buyout barons are finding it harder to profit on their investments through sales or initial public offerings. As returns dwindle, traditional backers including pension funds and university endowments are less willing to offer funding. With trillions of dollars’ worth of debt-saddled portfolio companies festering on their balance sheets, PE executives need a new game plan.
One option is to wait for economic conditions to improve. Last year, there were signs of a revival in global IPO activity after dealmaking jumped during the pandemic. But Donald Trump’s return to the White House has upended that. The US president’s chaotic trade and tax policies make it impossible to value most assets, let alone opaque private ones. In the first three months of 2025, global PE exit activity slumped to its lowest level in two years. For the first time in a decade, no buyout fund that closed in the first quarter raised more than $5bn of capital, according to Bain & Company.
Treading water is also harder when fundraising is weak. With thinning capital distributions, investors are souring on the asset class and are increasingly eager to liquidate their stakes, even at a loss. Trump’s threats to cut off funding for Ivy League universities are also pushing endowment managers to consider selling their holdings. To top it off, though interest rates have been falling in the US and Europe, they are still elevated compared with much of the past decade, sapping appetite for further debt-fuelled acquisitions.
Policymakers may offer a reprieve. Trump’s advisers are weighing up proposals to allow PE to become a larger part of retirement savings. In the UK, Chancellor Rachel Reeves last week confirmed plans to create backstop powers forcing pension funds to boost allocations to private assets. The timing isn’t ideal. Investors and trustees should be nervous of moving more money into private assets now. In recent years, default rates have been twice as high for PE-backed firms than others, according to Moody’s.
Rather than twiddling thumbs, some PE firms are resorting to innovative — and risky — methods of generating liquidity. This includes creating so-called continuation vehicles — where executives sell assets into a new fund which they also control — and net-asset-value loans, where funds borrow against their own value to pay investors. These add another layer of leverage, and risk, to the PE edifice. Larger players have already branched out into different asset classes, from private loans to life insurance.
These strategies buy time, but they are just a sticking plaster. Eventually, some assets will need to be sold at a discount, and consolidation may be necessary. Introspection will also be important. PE’s bottleneck today is largely a consequence of poor discipline when rates were low, liquidity was plenty, and exits were easy. In that era, there was an assumption that company valuations would always rise in time. But strategies that are reliant on economic conditions being optimal aren’t sustainable — nor are efforts to keep zombie portfolios alive.
As investors become more discerning, to thrive, PE will increasingly need to go back to its roots: unearthing companies with potential and building real operational value. What better way for executives to prove they are deserving of their high fees.
