Private equity owns a record 13,000 U.S. businesses. But it’s sitting on 31,000 companies valued at $3.7 trillion that it hasn’t yet been able to exit.

For two decades, private equity delivered on its core promise: taking illiquid risk in exchange for superior returns. Institutional investors allocated heavily. The model worked well, particularly during the 2010-2019 period.

The environment since 2022 has been more challenging.

The Performance Question

From 2022 to Q3 2025, PE funds returned 5.8% annually compared to the S&P 500’s 11.6%. The underperformance extends across one, three, and five-year periods. When you’re charging 2% management fees plus 20% of profits, sustained underperformance raises questions about value proposition.

The industry has grown substantially—13,000 U.S. businesses owned today versus 6,000 in 2010, representing about 7% of GDP. But exits have slowed considerably. Annual exits fell from 1,210 in 2021 to 321 in 2025. Exit proceeds dropped from $527.8 billion in 2021 to $100.8 billion in 2023 before recovering to $243.9 billion in 2025.

More assets under management, fewer successful exits, compressed valuations. It’s a challenging combination.

The Fundraising Environment

The capital raising picture has shifted notably. PE fundraising declined from over $1.7 trillion in 2022 to $906.9 billion through the first nine months of 2025. Only 41 new funds closed in 2025—the lowest on record. The top ten mega-funds captured 45.7% of all capital raised, up from 34.5% in 2024.

After eight consecutive years of positive cash flows from 2011 to 2018, limited partners have seen contributions exceed distributions for four of the past five years. This creates funding constraints—LPs can’t commit to new funds when they’re not receiving distributions from existing ones.

Many of these challenges trace to the 2020-2021 vintage, when funds deployed record capital at elevated valuations with typical five to six-year exit assumptions. Those exit windows are now—2025-2027. Many of those anticipated exits are taking longer to materialize than originally underwritten.

The Blue Owl Situation

Last week, Blue Owl provided a window into some of the structural tensions in private markets.

Blue Owl, a direct lender focused on software companies, announced selling $1.4 billion of loans to institutional investors at 99.7% of par value. The sale price itself was solid—institutional buyers paying essentially full price.

But the announcement included another element: Blue Owl would replace voluntary quarterly redemptions with mandatory capital distributions funded by future asset sales. The market interpreted this as evidence of redemption pressure, despite management noting that investors would actually receive about 30% of their capital back by March 31 versus the previous 5% quarterly limit.

Shares of Blue Owl fell sharply. The stock is down over 50% for the year. Treasury Secretary Scott Bessent noted concerns about potential contagion to regulated financial institutions. The episode sparked broader questions about liquidity management in private credit structures.

The Private Credit-Private Equity Relationship

Blue Owl’s situation highlighted the interconnections between private credit and private equity.

Blue Owl primarily lends to sponsor-backed companies—over 70% of its loans fund software companies owned by PE firms. Private credit more broadly now finances 60-80% of European PE deals and has become a primary capital source replacing traditional bank lending.

This creates mutual dependencies. When PE firms struggle to exit portfolio companies, those companies often need to refinance existing debt rather than repay it. Average private credit loan duration has extended from 2-3 years historically to 4-5 years currently. Meanwhile, some private credit vehicles offered quarterly or monthly redemption features to attract investors. The combination—extending loan durations while promising liquidity—creates structural tension.

Neither private credit nor private equity is likely to collapse, but both are working through adjustments. The question is how much stress the adjustments create and how long they take to resolve.

Private Credit’s Path Forward

Private credit grew from about $2 trillion in 2020 to $3 trillion by 2025. The growth was driven by solid fundamentals—banks retreating from middle-market lending, attractive yields for investors, and strong historical performance relative to both private equity and public credit markets.

The Blue Owl situation doesn’t invalidate the asset class but does reveal some challenges. Semi-liquid structures that offered frequent redemptions on illiquid loans face inherent tensions. During 2020-2022, underwriting often assumed low interest rates would persist. With base rates now around 5% plus typical spreads of 300-400 basis points, some borrowers face pressure.

Default rates are rising modestly from historically low levels. Payment-in-kind features—where borrowers pay interest with additional debt rather than cash—are becoming more common. Continuation vehicles, where loans roll from one fund to another, are being used more frequently, with over $7 billion in credit continuation vehicle transactions in 2025.

The asset class will likely moderate rather than collapse. Semi-liquid structures may largely disappear in favor of traditional closed-end funds with appropriate lockup periods. Growth projections of $5 trillion by 2029 might prove optimistic—a more conservative $3.5 trillion seems plausible as structures and return expectations adjust. Top managers with disciplined underwriting should continue performing reasonably well, while weaker managers face more difficulty.

Sponsor-to-Sponsor Transactions

One development worth noting: sponsor-to-sponsor transactions—where one PE firm sells a portfolio company to another PE firm—have become increasingly common as a percentage of overall exits.

These transactions serve a purpose—providing liquidity when strategic buyers are cautious and public markets aren’t receptive. Fund A can return capital to LPs even if traditional exit routes aren’t available. Fund B gets exposure to assets at potentially attractive entry points.

But there are limitations. These aren’t third-party validations of value the way strategic acquisitions or IPOs are. The company still needs an eventual exit to non-PE buyers. And if Fund B financed the purchase with private credit, you have layered financing structures on the same underlying business.

The rising prevalence of sponsor-to-sponsor deals suggests the industry is increasingly transacting with itself rather than achieving true liquidity events. That’s sustainable to a point, but not indefinitely. For private equity more broadly, continuation vehicles—where portfolio companies move from one fund to another within the same firm or to a different sponsor—now account for about 19% of PE exits.

The 401(k) Development

In August 2025, President Trump signed an executive order to expand 401(k) access to alternative assets. Within five days, the Department of Labor rescinded prior guidance that had discouraged PE in retirement plans.

This opens a significant new capital source. The administration estimates potential retirement income benefits of around 2.5% for the youngest groups of savers. The industry welcomes the expanded investor base.

The timing is notable—it comes as institutional investors are reducing PE allocations rather than increasing them. Retail investors would be accepting longer lockup periods, higher fees, and limited transparency relative to public market alternatives. Current returns of 5.8% trail public markets. Whether this represents genuine opportunity democratization or late-cycle capital raising depends significantly on whether performance recovers.

If retail investors have poor experiences—particularly if they’re surprised by liquidity constraints or performance shortfalls—regulatory backlash seems likely within 3-5 years.

Career Considerations

The talent market has shifted as mid-market funds consolidate and mega-funds dominate fundraising. Experienced professionals from struggling funds are competing for positions, creating more competition than existed during 2015-2021. The work itself has changed—less new deal execution, more portfolio company management of aging investments from 2020-2021 vintages.

Carry packages tie to fund performance that depends on exits that remain uncertain. Mid-market funds that can’t demonstrate distributions may struggle to raise follow-on funds, creating employment uncertainty. The mega-funds remain stable career options but are hiring selectively. Distressed and special situations strategies are positioned to benefit from market stress. But the broader opportunity set has contracted from the prior expansion period. For those without top-tier offers, waiting 12-24 months for better market visibility may be prudent.

Possible Outcomes

Gradual Adjustment (Most Likely)

PE moderates in size over 5-7 years as the portfolio backlog clears through various mechanisms—sponsor-to-sponsor transactions, strategic sales at modest discounts to carrying values, continuation vehicles, and some failures of over-leveraged companies. Capital concentrates among proven managers. The industry settles around $2.5-3 trillion versus today’s $3.7 trillion. Private credit finds equilibrium around $2.5-3 trillion with more realistic liquidity terms and compressed returns.

Recovery Scenario

Economic recovery drives M&A and IPO markets open in 2026-2027. PE firms execute exits at reasonable valuations. LPs receive distributions and resume commitments. Fee structures compress but remain viable. Both industries emerge somewhat smaller but fundamentally healthy. Private credit matures as a legitimate alternative to bank lending. Performance differentials versus public markets narrow but remain modestly positive.

Extended Adjustment Period

Redemption pressures spread to other private credit vehicles. Mark-to-market revaluations cascade through PE portfolios. Capital commitments slow significantly. Refinancing becomes challenging. More companies fail. The industry contracts more substantially toward $2-2.5 trillion for PE and $2 trillion for private credit. Regulatory intervention increases. The adjustment takes longer and is more painful than the base case.

Assessment

Private equity isn’t dying—it’s adjusting to a different environment than 2010-2021. The industry that benefited from zero interest rates, steady multiple expansion, and abundant exit opportunities now operates with 5% rates, compressed multiples, and selective exit markets.

Blue Owl’s challenges don’t signal industry collapse but do reveal structural tensions around liquidity management that both private equity and private credit need to address. The interconnections between these asset classes mean stress in one can affect the other.

The next several years will likely be challenging. Top-tier managers with genuine operational capabilities should navigate successfully—the dispersion between top and bottom quartile funds exceeds 25 percentage points, so manager selection matters considerably. But many firms will struggle. The industry will probably be smaller and more selective.

For investors, the core question is whether the illiquidity premium adequately compensates for actual illiquidity. For the industry, it’s whether enough firms can demonstrate genuine value creation to justify fee structures. For professionals, it’s whether the career trajectory and compensation justify the elevated uncertainty.

The answers will emerge over the next few years as exits either materialize or don’t, as fundraising either recovers or contracts, and as performance either validates the model or suggests fundamental repricing is needed.

The easy money period is over. What comes next will separate sustainable business models from those that depended primarily on favorable market conditions.