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The author is a founding partner of Verdad Advisers and the author of “The Humble Investor.”
The US stock market has been operating banners for many years since Covid-19 market panic. However, a study by Cherry Bekaert shows that US private equity companies have struggled to sell valuable portfolio companies that have accumulated by US private equity companies, despite a surge in nearly 95% over the past five years. At the current exit pace of 1,500 companies a year, it will take nearly eight years to clear existing inventory.
According to Bain, private equity investors have seen the distribution of capital collapses from a typical 30% of net asset value to about 10% of net asset value. And while investors who are unhappy with the funds, Yale and Harvard in particular, look to the secondary market to sell their stock, they talk about “over allocation” and “on target” investments to asset classes.
The most proximal cause of this disorder is the over-vibrantness of the 2020-22 year period in private markets where valuations are booming and interest rates are approaching zero. Private Equity Group tried to sell everything it had purchased before 2020 to this foamy market, then paid a massive amount of prices for new deals. A survey by Harvard Law School found that transactions between private equity managers peaked at around 45% of the total exit in 2022.
And now we’re experiencing a hangover from this deal’s fuss. While pre-2020 transactions that were not sold during this period are generally deeply flawed, new transactions that began during that period were held at a very high valuation.
Depletion of exits reveals deeper issues in asset classes. Private equity was the apple of most allocators’ eyes in the 2010s. The fundraiser appears to have risen relentlessly, with deals between private equity managers gaining a larger share of the exit. However, allocations have begun to surpass the market size. My estimate is that private equity addressable markets (companies that can be purchased) are only about a one-tenth of the public equity market. However, where Yale’s donations are almost there, the 40% allocation to private is becoming more and more common. This represents a large overall allocation to highly illiquid asset classes.
According to Pitchbook Data, this process is beginning to reverse with private equity funding, which experienced a sharp decline in 2024 and has slowed down so far in 2025. There are fewer buyers within the industry, and fewer funding, resulting in fewer exits. This will reduce your rating and reduce your return. The allocator then reduces the allocation further.
All this is fine if there were other natural buyers for private equity inventory of assets. However, while large US stocks are thriving, small and microcap stocks are not running as well. According to rope and grey data, the initial public offering market is not currently an attractive option for many companies, as 50-60% of private equity trading value falls straight within the microcap range of the public market.
Financially, private equity-backed companies are nervous. The industry’s operational model relies heavily on leverage. As of 2024, private credit yields for leveraged buyout transactions rose to 9.5%, Pitchbook reports. The majority of this obligation is volatile. We estimate that many portfolio companies’ debt to EBITDA ratios are currently more than eight times. And a significant portion of these businesses is cash flow negative. This is the logical result of an environment in which cheap debt hides vulnerabilities in high trading and operations. And these companies are already in debt and cannot buy growth either. Moody’s reports exceed the default rate of private equity-backed companies, nearly 17%, and more than twice as many non-private equity companies.
Private equity sponsors play for time by refinancing in new structures or selling companies to so-called continuity funds to hold assets. But kicking cans can be a dangerous strategy if expensive debt continues to erode stock value, or if economic growth slows even further.
For years, private equity may not be wrong. But now it’s beginning to look like a massive money trap. According to McKinsey, he has performed the S&P 500 for over three, three and five years.
The consensus on private equity is quiet, but has been rewritten definitively. The question is not whether the model is broken or not. That’s whether the exit is wide enough for everyone to leave.
