Private equity: deadlock, liquidity problems for investors, falling profits. A crisis worse than 2008

The exit market is not finding the road to recovery and private equity portfolios are ageing. A stalemate that is creating a liquidity problem for investors, who are not getting their capital and interest back from funds. The year 2025 was the fourth consecutive year in which profits from the closed-end fund industry returned to underwriters' coffers, and funds find themselves holding some USD 3.8 trillion in undrawn assets. The virtuous cycle has been interrupted and returning to the market to raise new funds is more complex.

In detail, distributions as a ratio of net asset value (NAV) stood at 14% last year, touching the second lowest level since the lows of the 2008 financial crisis, according to a new report by Bain & Co. The duration of the downturn is also more prolonged than that faced by the industry during that period.

The other side of the coin is investment: the value of transactions in 2025 grew 44% year-on-year to USD 904 billion, supported by large transactions including the USD 56.6 billion delisting of Electronic Arts. However, this only marginally affected the so-called dry powder, i.e. resources available for investment that have not yet been deployed. By contrast, the total number of deals fell by 6 per cent to 3,018. "Not everyone perceived 2025 as a big year," said Rebecca Burack, global head of Bain's private equity practice, pointing out that the uncertainty generated by President Donald Trump's announcement of 'Liberation Day' tariffs suddenly dampened dealmaking activity that until January appeared to be booming.

M&A's activity started to slow down as early as 2022 as interest rates rose, forcing managers to distribute less profits to investors and consequently reducing their ability to raise new cash. This is evidenced by last year's figure: inflows fell by 16% to USD 395bn in 2025, marking the fourth consecutive annual decline, despite increased investor interest in infrastructure-focused vehicles and secondary operations, the report notes, adding that institutional investors, such as pension funds and foundations, have nevertheless become more selective and are targeting vehicles capable of generating net returns (IRRs) in excess of 20%. This implies that managers have to define a value creation plan even before acquiring a company, Burack noted. In the past, it was sufficient to grow Ebitda by about 5% per annum until the stake was sold. Today, in light of rate levels and entry and exit multiples, 'you need 12% growth per year for five years to achieve the same returns: 12 is the new 5'.

According to the report, funds sold the highest quality assets more easily, while encountering difficulties in divesting those with less certain prospects. Globally, private equity firms own about 32,000 investees and hold their investments in their portfolios for about seven years on average, compared to the five to six years still typical in 2021. 'Beyond the five- or six-year threshold, internal rates of return tend to deteriorate,' Burack added.