The $3.8 Trillion Logjam

It was not supposed to look like this. When interest rates began rising in 2022, the working assumption across private equity was that the tightening cycle would be short, the dealmaking drought temporary, and the backlog of unsold assets a bridge to be crossed. Three years on, that bridge has become a dam. The value of companies sitting in buyout funds reached a record $3.8 trillion in 2025, up 3 per cent year on year despite more than $700 billion of exits, exits that were themselves skewed heavily towards a handful of megadeals.¹ For the vast majority of the industry's roughly 15,000 firms, the exits are not happening. The buyers are not there. And the clock on holding periods, now averaging seven years, up from five to six pre 2022, is ticking loudly.

This is not a cyclical blip. It is a structural reckoning, playing out simultaneously across PE returns, pension fund allocations, law firm revenues, and the very definition of what a viable private equity firm looks like.

The Core Problem: A Debt Driven Era Meeting Higher For Longer Rates

Private equity's business model has always been straightforward: buy a company with a significant slug of debt, improve it, sell it at a higher multiple, and return the proceeds to investors. That model worked extraordinarily well in the era of zero interest rates. Cheap debt amplified returns, high technology multiples inflated valuations, and a buoyant M&A market ensured there was always a buyer. All three of those tailwinds have reversed.

The interest rate environment is the root cause. Higher financing costs have made leveraged buyouts more expensive to execute and harder to service. Valuations, particularly in technology and healthcare, where PE was most active between 2019 and 2022, have compressed. And the exit market, which depends on either strategic acquirers or public listings, has been thin. IPO windows opened briefly in 2024 and 2025, but they rewarded only the strongest assets. The rest remain on PE balance sheets, ageing past their optimal holding period.

"Those are pretty dismal numbers. In private equity, returns should be at 15 per cent minimum." Senior Canadian pension investor, Financial Times, March 2026.²

Bain and Company's 2025 Global Private Equity report is unambiguous: assets are being held longer, returns are falling, and the industry is at an inflection point.¹ Once investments pass the eight year mark, value creation slows materially, and with average holding periods now at seven years and climbing, a growing portion of the $3.8 trillion backlog is already past its peak.

The Pension Reckoning: Canada's Funds Signal Something Broader

Canada's pension system, with around 22 per cent of public sector pension money allocated to private equity, according to think tank New Financial, offers a clear window into what happens when the asset class underdelivers.³

Ontario Teachers' Pension Plan reported a -5.3 per cent return on its private equity portfolio in 2025, its worst result since 2008. The Ontario Municipal Employees Retirement System posted -2.5 per cent, its worst since 2020. La Caisse, Quebec's C$517 billion state fund, returned 2.3 per cent against a benchmark index gain of 12.6 per cent.² These are not marginal underperformances. They represent a cohort of the world's most experienced PE allocators failing to generate any meaningful return from an asset class that is supposed to deliver 15 per cent or more annually.

"Navigating increased cost of capital, more constrained exit markets and greater operating complexity, creating a drag on returns." Dale Burgess, Executive MD of Equities, Ontario Teachers' Pension Plan.²

The significance of Canadian pension underperformance extends beyond Canada. These funds are price setters and signal senders for the broader institutional market. When OTPP reports its worst PE returns in 17 years, it validates the concerns of every pension CIO who has been quietly reducing PE exposure or demanding better terms on new commitments. The capital formation data reflects this: the number of PE funds reaching final close fell 23 per cent in 2025, its lowest level in at least nine years.⁴

The Zombie Problem: The Industry's Long Tail Is Growing

Per Franzén, chief executive of Sweden's EQT, delivered one of the starkest assessments of the industry's structure in late 2025: up to 80 per cent of all private capital firms could become zombie entities within the next decade, alive on paper, managing existing investments, but unable to raise fresh capital or deploy new funds. Of the 15,000 plus PE firms in existence, only around 5,000 had successfully raised a fund in the past seven years.⁵

"How many of these firms will have a successful fundraising also in the next five to 10 years? Probably less than half. The number of zombie firms will increase by an additional couple of thousand." Per Franzén, CEO, EQT, Financial Times, November 2025.⁵

Preqin data confirms the structural pattern: the unrealised value of PE vehicles more than ten years old rose sixfold in the past decade to over $1 trillion, while total industry assets grew just over threefold.⁴ In other words, the oldest, most problematic assets are accumulating faster than the industry as a whole is growing.

Firms have attempted to bridge the gap using continuation vehicles, selling assets to themselves to generate new management fees, but Franzén's view is that this is not a sustainable business model. It delays the reckoning rather than resolving it. The firms that cannot credibly demonstrate value creation will eventually cease to be able to retain talent, raise capital, or justify their existence.

The Adaptation Response: Pivoting Towards Activity

Not everything in private equity is in retreat. The overall value of exits in 2025 hit $717 billion, the highest level since the 2021 boom, and global dealmaking topped $4 trillion for the first time since that peak year, fuelled by a record number of megadeals.¹ The difference is that this recovery is heavily concentrated. Seven large exits accounted for a fifth of all exit value. Thirteen megadeals drove most of the increase in acquisitions. The broad market is not healing; the top of the market is performing, while the middle and bottom languish.

Firms are responding to the structural challenge in several ways. Carlyle's overhaul of its European PE team, replacing co heads, pivoting away from consumer deals toward technology, healthcare, and professional services, is emblematic of a broader shift in how PE firms are repositioning.⁶ The 2018 Carlyle Europe fund, which held consumer investments including luxury streetwear retailer End Clothing, became a cautionary tale. The new team under Michael Wand is explicitly moving away from the sectors that underperformed and into areas where operational value creation is more tangible and exit multiples more defensible.

"There's real scope in the market for new firms to form and for the smaller firms to develop. If you look at the demand for private capital over the next decade, it is immense." Rob Lucas, CEO, CVC Capital Partners.⁵

Meanwhile, the legal advisory market provides a useful proxy for where the activity actually is. Kirkland and Ellis, whose revenues grew 20 per cent to a record $10.6 billion in 2025, making it the first law firm to break $10 billion, did so by riding both sides of the PE cycle: advising on megadeals like the $55 billion Electronic Arts take private while simultaneously building a restructuring practice capable of handling the inevitable casualties of the overleveraged 2019 to 2022 vintage.⁷ The tension within Kirkland over that restructuring practice, which antagonised PE clients by working against their interests, is itself a microcosm of the industry's internal contradictions.

Editorial View: The Reckoning Is Structural, Not Cyclical

The instinct in PE, as in most financial industries, is to describe current difficulties as cyclical, a product of the rate environment that will reverse once central banks pivot. That view is increasingly hard to sustain. The problems now visible across the industry, record unsold assets, ageing holdings, zombie funds, pension underperformance, predate the current rate cycle and will outlast it.

The underlying issue is that private equity expanded dramatically during a period of artificially suppressed rates, inflated multiples, and abundant deal flow. Firms that were viable in that environment, deploying capital across broad deal sets, relying on multiple expansion rather than operational improvement, holding assets for four years and flipping them, are not viable in the current one. The survivors will be those that either have genuine sector expertise and can therefore command better entry prices and create operational value, or are large enough to access the megadeal market that is still functioning, or have diversified into adjacent strategies like credit, infrastructure, or secondaries.

The pension fund data is particularly instructive in this regard. Canadian funds are not passive observers. They are sophisticated co investors and direct investors who have been making their own PE bets for decades. When they report their worst returns in 15 to 17 years, they are telling you something about the vintage of investments made at peak multiples between 2019 and 2022, and about the difficulty of realising value from those assets in the current environment. Those investments will mature or default over the next three to five years, and the reckoning will become visible whether or not exit markets improve.

The concentration dynamic, where 50 to 100 globally diversified firms capture 90 per cent of future capital flows, per EQT's Franzén, seems not just plausible but probable.⁵ The LP base has become more discerning, the fee compression at the institutional level is real, and the retail capital that private credit firms have courted aggressively is now retreating. The firms left standing at the end of this cycle will be those that proved they could create value through operational skill, not financial engineering. That is a much smaller group than the 15,000 currently operating.

Forward Scenarios: Two Paths from Here

The defining characteristic of private equity right now is that the two dominant forces, the slow normalisation of rates and the structural weight of the backlog, are moving at different speeds and in partly opposite directions. Rate relief, if it comes in H2 2026, will help at the margin. But it will not resolve the vintage problem: $3.8 trillion of assets that were bought at higher multiples, held too long, and now need to be sold into a market of choosier buyers. That gap will close through exits, write downs, or restructurings, and the mix of those three outcomes will determine which firms and which pension funds emerge strongest.

From an analytical standpoint, the next 12 to 18 months will likely produce more clarity than the past three years, simply because the clock is now forcing decisions that were previously deferrable. Holding periods of seven years and rising cannot be extended indefinitely. The PE industry is at its own version of the Strait of Hormuz: pressure is building, options are narrowing, and whatever happens next will set the trajectory for the rest of the decade.

Footnotes

1. Bain and Company, Global Private Equity Report 2025↗ (opens in a new tab). ↩ ↩² ↩³

2. Financial Times, Canadian pension funds count cost of private equity slump↗ (opens in a new tab), March 2026. ↩ ↩² ↩³

3. Mary McDougall, Alexandra Heal and Sun Yu, 'Pension groups cut back on pioneering private equity investments'↗ (opens in a new tab), Financial Times, 22 April 2025; 'Canadian pension funds pivot to private equity partnerships as direct investing pressure mounts'↗ (opens in a new tab), Private Equity Insights, April 2025. ↩

4. Preqin, Private Capital Markets Data 2025↗ (opens in a new tab). ↩ ↩²

5. Financial Times, Private capital zombie firms will pile up in next decade, says EQT chief↗ (opens in a new tab), November 2025. ↩ ↩² ↩³ ↩⁴

6. Financial Times, Carlyle overhauls European private equity team after poor performance↗ (opens in a new tab), March 2026. ↩

7. Financial Times, Kirkland defies private equity downturn with record $11mn partner pay↗ (opens in a new tab), March 2026. ↩