Is Private Equity Now Trapping Capital?

The Great Exit Logjam

Public markets have staged a remarkable rebound since the Covid lows – the S&P 500 is up almost 95% over five years – yet private equity is stuck in the slow lane. There are an estimated 12,000 unsold PE-backed businesses in the US alone. At the current exit pace of around 1,500 per year, it’ll take the better part of a decade to clear the backlog.

Capital returned to LPs has collapsed. Where distributions once hovered around 30% of NAV annually, they’re now closer to 10%. Some big-name institutions – Yale, Harvard – are trimming exposure and offloading stakes in the secondary market. The “over-allocation” whispers have grown louder.

UK Allocators Are Not Immune

Here in the UK, PE deal activity looks healthy at first glance: £33bn raised in 2024 and nearly 1,600 businesses backed. But the problem lies in exits. While there's been a modest uptick in European PE exit volumes recently, we're still well below pre-pandemic norms. This has serious implications for pension funds and endowments banking on PE to provide long-term, but regular, distributions.

Hangover from the 2020-22 Deal Frenzy

The 2020-22 period was the private markets' champagne phase: cheap debt, rich valuations, and a deal boom fuelled by ultra-low rates. Sponsors were flipping companies to one another – “GP-to-GP” deals accounted for nearly 45% of all exits in 2022.

Fast forward to today: interest rates have surged, but those same high-multiple deals are still sitting in portfolios. Many were underwritten with assumptions of perpetual cheap capital. Now, with floating-rate debt pushing interest costs into the 9-10% range, and Debt/EBITDA multiples above 8x, a lot of these companies simply can’t grow, can’t refinance attractively, and certainly can’t exit easily.

When Exit Doors Close, GPs Get Creative

With fewer buyers around and capital harder to raise, GPs are increasingly selling assets to themselves via continuation funds. These vehicles essentially delay exits by rolling assets into a new fund – often backed by secondaries capital. But this isn’t a real exit, and LPs know it. Continuation funds may help defend paper valuations, but they don't solve liquidity problems. In some cases, they may even compound them.

Fundraising Cooling Off

The impact on fundraising is clear: fewer fund closes, longer timelines, smaller cheques. Globally, fund raising in 2024 dropped significantly, and the start of 2025 hasn’t reversed that trend. LPs are cautious. If they’re not receiving distributions, they simply can’t commit new capital – especially not to vehicles that rely on recycling rather than realisations.

IPOs Still Not the Lifeline Sponsors Need

Although public markets have done well overall, small and micro-cap equities – where PE typically sits – haven’t kept pace. That means the IPO window is still largely shut. European PE-backed IPOs in 2024 barely reached double digits. Until equity markets become more receptive to these names, IPOs won’t save the exit problem.

Structural Stress: Leverage and Default Risk

PE is built on leverage. But the environment today is unforgiving. Private credit yields for LBOs are hovering around 9.5%, most of the debt is floating-rate, and many portfolio companies are cashflow-negative. Moody’s estimates PE-backed default rates at 17% – more than double those for non-sponsored companies. Refinancing is only delaying the inevitable for some assets.

MY VIEW – Where the Smart Capital Goes Next

1. Vintage Diversification is Critical

   Older vintages with pre-pandemic acquisitions may have realisable upside. Funds raised during the 2020-22 frenzy, however, are most vulnerable. Balanced exposure across vintages helps reduce timing risk.

2. Back GPs Who Drive Operational Alpha

   Relying on leverage and multiple arbitrage isn’t enough anymore. GPs with strong value creation teams and real sectoral expertise will separate from the pack.

3. Secondaries Could Offer Smart Entry Points

   Discounts of 10–20% to NAV are now common in the secondaries market. For investors looking to gain exposure at lower risk, selectively buying into quality assets at a markdown is an attractive route.

4. Beware of Continuation Fund Hype

   Not all continuation vehicles are created equal. If alignment between the GP and LPs isn’t airtight, they could become value traps.

5. UK Small-Caps May Hold the Key

   The UK public markets, particularly in the small- and mid-cap space, are still trading at a meaningful discount to US peers. That gap may offer exit potential for UK-based PE firms in the near term – if policy reforms boost listing activity.

Final Thought

Private equity isn’t broken, but the model is clearly under strain. For over a decade, PE outperformed thanks to cheap money, generous multiples, and friendly markets. Those tailwinds are gone. Without meaningful exits, the whole flywheel – capital in, capital out – stalls. Until that changes, LPs and GPs alike need to recalibrate expectations.

Right now, it’s less a question of whether the PE model still works — and more a question of whether there’s room for everyone trying to get out.