Yves here. Welcome back Sebastien Canderle, who tells us that the private equity long game, as in taking money from investors and returning it when they feel like it, as in after they have sold or otherwise pulled out lots of cash, is breaking down. While the private equity funds are still in compliance with their extremely one-sided limited partnership agreements, these developments underscore the depth of soft corruption in private equity. Limited partners treated widely understood bogus valuations (understating price declines in bad equity markets) as a feature rather than a bug since it allowed them to pretend that things were better than they were in bear markets. Similarly, the private equity firms provide what ought to be seen as bribes to staff that select and oversee private equity funds, via having periodic briefings at resort or otherwise desirable destinations lavish meals and top-tier entertainment paid for by the fund, as in the investors, not the fund managers.
We warned over many year of extractive fee and cost levels, that CalPERS had estimated at a nosebleed 7% per year. We warned (as confirmed by academics) that that egregious fee level meant that to the extent private equity did outperform, the fund managers retained the excess value. We warned that private equity did not outperform public stocks on a risk-adjusted basis. We warned that private equity fund manager economic interests were not aligned with those of investors. Nearly 2/3 of fund income comes from fees they collect regardless of performance, making private equity a “Heads I win, tails you lose” game. We warned that valuation practices were misleading, and that once timing was corrected, private equity was highly correlated with public equity returns, meaning it added no portfolio asset class diversification value. We warned that private equity’s status as levered equity made its pretense of attractive risk-adjusted returns vulnerable to interest rate increases.
As Seb describes below, those chickens have come home to roost. The short version is that private equity kingpins have been hanging on to investor monies longer than the customary 4 to 5 average (the total fund life is longer; that figure is the average; recall that investors commit but do not send cash until they get a capital call; similarly, the fund manager returns money when they sell an investee company or strip value out via a dividend recap). This leaves investors like pension funds, who had become accustomed to getting their capital back on the old normal timetable and using it to pay its obligations based on their actuarial projections, scrambling to fill the cash shortfall.
By Sebastien Canderle, a private equity consultant, a university lecturer, and the author of The Debt Trap
For several years now, private equity (PE) fund managers have been struggling to dispose of portfolio assets. The situation began in the aftermath of the war in Ukraine, with the subsequent rise in interest rates leading to a slump in enterprise values and a disconnect between private and public valuations. For some, this exit dry spell is turning into an existential threat.
Reality Check of Public Markets
During the era of zero-interest rate policy (ZIRP) and quantitative easing that followed the global financial crisis (GFC), very generous valuations were assigned to leveraged buyouts (LBOs).
The central banks’ decision, during the Covid pandemic, to turbocharge their bond purchasing programs provided institutions with excess liquidity, encouraging them subsequently to take part in an unprecedented flow of PE-backed and VC-backed listings. The year 2021 registered 1,034 IPOs in the US market alone,[1] up from 480 the year before, which was already an all-time high, exceeding the previous peak of 397 in the dotcom-bubble year of 2000.[2] Many of these public listings were pummeled in the aftermarket.
Disastrous case studies, including Blackstone’s Oatly[3] and Advent’s Olaplex, both down more than 90% since listing five years ago, have made retail and institutional investors wary of overpriced PE assets.
The reputation of financial sponsors was not helped by their aggressive push for SPAC structures during the pandemic.[4] The vast majority of these SPACs turned out to offer very poor returns for public investors. By mid-2022, the average SPAC of the 2020 vintage had lost 55% of its value while the 2021 cohort had erased two-thirds of it.[5]
In It for The Very Long Hold
The valuation gap between the marks set by private capital owners and the prices that outsiders – be they public markets or corporate buyers – are prepared to pay means that portfolio holding periods are likely to remain stretched for the foreseeable future.
Already, the average PE asset is held close to 7 years, compared to an average historical range of 4-to-5 years. This general trend is particularly noticeable in the UK, the most active market for private capital in Europe, where the median holding time for LBOs has now reached 7.2 years.[6] In the US, one in nine PE portfolio companies has been held for more than eight years, and almost 30% of them for more than six years.[7]
Many investments made since the start of the decade are yet to find an attractive exit option. PE firms with adequate dry powder remain active deal makers on the buy-side yet prove unable to draw attractive offers for their ageing investee companies.
As of 31 August 2026, French PE firm Astorg, with €24 billion under management, had yet to dispose of a single portfolio asset acquired since 2020.[8] As of the same date, British firm Oakley Capital had realized only two of its 10 holdings from Fund IV (vintage 2019), none of its nine holdings from Origin Fund (2021), none of its 11 holdings in Fund V (2022) and none of its seven assets in Origin Fund II (2023).[9]
Long Time No Fee
Unable to return capital to their LPs, some PE firms have failed to attract sufficient fresh commitments and halted fundraising efforts indefinitely. Pan-European group Equistone stopped its fundraise last year after three years of frustrated efforts.[10]
In recent years, Carlyle has had to reshuffle and restructure its senior European team multiple times due to persistent portfolio underperformance, doing so again earlier this year in an attempt to relaunch the protracted fundraising campaign of its buyout activities in the region.[11]
Equally, Astorg’s struggle to achieve portfolio exits partly explains the difficulties the firm has faced in raising its most recent fund.[12] In such a fiercely competitive environment, even PE firms that eventually secure fresh capital at times manage to do so only by downscaling, as UK-headquartered Charterhouse did four years ago, closing its Fund XI with only 60% the commitments of the preceding 2016 vintage.
Other fund managers, including Vestar in the United States[13] and Silverfleet in Europe[14], have gone into wind-down mode or decided to focus on managing their remaining portfolio assets. As former top-10 European firms Candover[15] and Terra Firma[16] showed during the last crisis, abandoned or postponed fundraises erode fee-earning potential and are often precursors to a drawn-out and painful death.
Anecdotal evidence is a reflection of a broader malaise. PE fundraising is experiencing a persistent slump. Last year, globally, the sector picked up the lowest amount of capital commitments since 2018.[17]
Operational Management
LP investors now truly understand why the asset class is labeled ‘illiquid’. Notwithstanding the odd exception, such as the recent Blackstone-sponsored IPO of sandwich chain Jersey Mike’s, engineered after an 18-month holding period, long gone are the days of widespread quick flips[18] and predictable annual dividend recapitalizations for the benefit of IRR maximization.
In the time of ZIRP, the occasional lack of exit opportunities was nicely circumvented via the frequent use of dividend recaps. This tool, while still available and a popular way to upstream cash to LP investors,[19] is a lot more expensive due to stubbornly high interest rates.
Research shows, however, that recurring recaps and permanently elevated levels of indebtedness significantly increase the probability of financial distress.[20] Aware of that downside, fund managers try to work on operational improvements. They go about it in two ways.
First, many have built acquisition platforms to lead a series of bolt-ons and integrating these multiple businesses as best as possible to derive synergies through market consolidation. Ideal add-ons are accretive from day one when enterprise value multiples are lower than the entry multiple paid for the original platform company. Buy-and-build strategies are very much part of any modern PE group’s toolkit.
The second element of a fund manager’s operational capabilities consists of bringing in operating partners, often former corporate executives who have, in the past, run businesses in the same sector.
Since financial sponsors continue to be active deal makers even if their portfolio companies have no clear exit option, the size of portfolios has ballooned. Whereas, in the past, single-fund PE firms typically held 10 to 12 assets at any one time, nowadays it is not uncommon for the number of investees to be twice as large. As at 31 August 2026, Charterhouse held 20 investments while its British rival Montagu was managing 25 holdings. Value-enhancing portfolio management techniques have become an absolute necessity for buyout firms.
But operational improvements are time consuming and hard to deliver. They also fail to address liquidity issues that arise when stuck with assets ever longer. In order to spruce up investment returns, fund managers have concocted a variety of novel financial engineering remedies.
Desperately Seeking Solutions
To meet distribution obligations and satisfy their LPs’ need for liquidity, fund managers increasingly use net asset value (NAV) loans to hand capital back to investors,[21] securing debt against the entire portfolio instead of individual assets. But it adds a layer of debt on top of another layer already sitting at the investee company level.
Consequently, NAV loans have made exits somewhat more challenging because the entire portfolio is used as collateral. The valuation of any portfolio exit must warrant the valuation applied to obtain the NAV loan in the first place.
To compensate for the lack of external exit solutions, fund managers have also resorted to secondary transactions via the formation of continuation vehicles (CVs), rolling over remaining assets into new 3-to-5-year funds to restart the holding clock. By 2024, continuation funds represented already 14% of global PE-backed exit deals, up from 5% in 2020.[22] As a result, fund managers face fresh accusations of self-dealing and asset pricing opacity, as well as probing from regulators.[23]
Another means to monetize portfolios early, when traditional exit routes are not available or not attractive enough, is the creation of collateralized fund obligations (CFOs), as Blackstone was recently considering for some of the strategic stakes it held in buyout firms.[24] These vehicles purchase funds from existing LP investors by issuing new tranches of securities sold to new institutional investors. Whereas, in the case of CVs, individual assets are handpicked and transferred to a new private structure, with CFOs the entire fund is securitized and tradable.
Portfolio realizations are not, however, a new challenge. In the past, a very small proportion of PE fund managers actually managed to distribute their capital back to investors within the contractual 10-year limit. For that reason, the largest PE groups created longer-dated buyout funds.
While infrastructure and real estate funds always benefited from longer maturity, in recent years, longer-dated buyout vehicles, labeled ‘core PE’, have enabled fund managers to hold onto assets for 14 or 15 years, sometimes longer. In return, management and performance fees are usually much lower than the traditional 2/20 structure.
Long Story Short
Despite this flurry of innovation, the Big Long means that, with their capital trapped indefinitely, given the impact of the time value of money on internal rates of return,[25] LP investors will fail to derive adequate performance to compensate for the risk associated with illiquid alternative assets.
In fact, as the backlog of portfolio realizations builds up,[26] when PE firms eventually dispose of these assets, they could flood the M&A market and lead to further contraction in corporate valuations.
Due to chronic and persistent underperformance, many PE fund managers will never raise another fund and turn instead into zombie firms.[27] This doomsday scenario would mirror the market correction that the sector experienced during the financial crisis.
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[1] https://stockanalysis.com/ipos/2021/
[2] https://stockanalysis.com/ipos/2020/
[3] https://www.google.com/finance/beta/quote/OTLY:NASDAQ
[4] https://rpc.cfainstitute.org/blogs/enterprising-investor/2021/spac-fever-clear-and-present-danger
[5] https://www.valuationresearch.com/insights/spac-market-update-who-turned-on-the-lights/
[6] https://pitchbook.com/news/reports/q2-2026-uk-exit-market-dearth-or-revival
[7] https://pitchbook.com/news/reports/q3-2026-private-equitys-zombie-problem
[8] https://www.astorg.com/investments
[9] https://www.oakleycapital.com/our-companies/
[10] https://www.bloomberg.com/news/articles/2025-01-14/equistone-pauses-fundraising-after-missing-2-5-billion-target
[11] https://www.ft.com/content/247da046-afbe-4c3c-9ef3-02073cc61dd2
[12] https://www.ft.com/content/b2003079-4a4a-421a-a978-2ed5296df73e?syn-25a6b1a6=1
[13] https://www.buyoutsinsider.com/vestar-decides-to-not-raise-new-fund-focus-on-existing-portfolio/
[14] https://www.unquote.com/uk/news/3024520/silverfleet-calls-off-fundraise-for-third-fund
[15] https://www.amazon.com/Private-Equitys-Public-Distress-Candover/dp/1500558044/
[16] https://www.amazon.com/Debt-Trap-leverage-private-equity-performance/dp/0857195409/
[17] https://pitchbook.com/news/reports/q1-2026-global-private-market-fundraising-report
[18] https://www.forbes.com/sites/mergermarket/2016/12/05/private-equity-embracing-the-return-of-the-quick-flip/
[19] https://www.transacted.io/private-equity-firms-turn-to-dividend-recapitalizations-amid-exit-challenges
[20] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5122154
[21] https://www.cgphbanquedaffaires.com/post/the-rise-of-nav-lending
[22] https://www.jefferies.com/wp-content/uploads/sites/4/2024/07/Jefferies-Global-Secondary-Market-Review-July-2024.pdf
[23] https://www.reuters.com/legal/government/us-sec-probes-popular-type-private-equity-fund-it-steps-up-industry-scrutiny-2026-06-24/
[24] https://www.ft.com/content/98ccabf5-229f-4a47-b125-7c4538a6ee3f?syn-25a6b1a6=1
[25] https://rpc.cfainstitute.org/blogs/enterprising-investor/2022/tricks-of-the-private-equity-trade-part-2-leverage
[26] https://www.pwc.com/us/en/services/consulting/deals/library/capital-considerations-private-equity-exit-drought.html
[27] https://www.reuters.com/commentary/breakingviews/buyout-zombie-wave-will-favour-preppers-2026-01-21/
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