"Darwin Moment" Arrives! Analysis Warning: Some PEs Face Extinction Risk

The private equity industry is standing at a brutal crossroads.

According to Bain & Company’s latest report, the industry has been returning less profit to investors for four consecutive years, with a distribution ratio of only 14% in 2025, the lowest level since the 2008-2009 global financial crisis. Meanwhile, the industry has a backlog of approximately 32,000 unsold companies, with assets totaling up to $3.8 trillion, and exit challenges continue to worsen.

This pressure is reshaping the industry landscape. Fundraising is highly concentrated among top-tier firms, while small and medium-sized funds struggle; GP Score managing partner Romain Bégramian bluntly states, “The long-anticipated Darwinian survival of the fittest is happening,” and some smaller, undifferentiated fund managers face the fate of “extinction.”

At the same time, according to Chasing Wind Trading Platform, warning signs are also emerging in the private credit market. Fourier Asset Management CIO Orlando Gemes issued a stern warning: “The warning signals we see today in private credit are eerily similar to those in 2007.” Deutsche Bank describes the current situation as “heavy smoke, but the fire is not yet clear.”

Returns hit crisis lows, exit challenges continue to worsen

Bain’s data shows that in 2025, the distribution ratio of private equity to net asset value remains at 14%, the second-lowest level since the most severe period of the 2008 financial crisis, and the fourth consecutive year at a low.

Exit pressures are also significant. The report indicates that exit transaction volume in 2025 decreased by 2% year-over-year, and the average holding period has extended from five to six years (2010-2021) to about seven years.

Rebecca Burack, head of Bain’s global private equity practice, notes that management companies have sold “gem-level” high-quality assets, but assets with less certain prospects are difficult to offload. “When a company’s holding period exceeds five or six years, internal rates of return don’t look as attractive,” she says.

Fundraising is also under pressure. In 2025, leveraged buyout fund fundraising declined 16% year-over-year to $395 billion, with the number of funds closing fundraising down 23%, marking the fourth consecutive year of decline. Burack also points out that uncertainty caused by Trump tariffs abruptly halted deal activity in early 2025, even though in January of that year, deal momentum still looked “extremely strong.”

Large deals mask structural weakness, small and mid-sized funds hit hardest

Although global M&A transaction value in 2025 increased sharply by 44% year-over-year to $904 billion, there is clear structural differentiation behind this impressive figure.

Bain’s report shows that just 13 mega-deals over $10 billion contributed about 30% of total transaction value, mainly concentrated in the U.S. Meanwhile, the total number of deals declined by 6% to 3,018, and large privatizations like Electronic Arts have limited impact on digesting the backlog of $3.8 trillion in unsold assets.

PitchBook senior analyst Kyle Walters states that large institutions, due to their diversified strategies and managing vast capital pools, have a stronger buffer during slowdowns in deal-making and exits.

“This pressure impacts mid-market managers more, especially those emerging managers trying to stand out among peers.”

Walters further warns that “based on the current environment, many funds of all sizes are struggling to raise capital, and many managers have already raised their last fund without realizing it.” He adds that underperforming managers are “likely to quietly wind down, and that will be all the outside world sees and hears.”

"Darwinian"淘汰：整合、僵尸化与灭绝

Faced with industry reshuffling, opinions on the way forward are increasingly divided. Some industry leaders expect consolidation to accelerate, but Bégramian of GP Score remains cautious.

He points out, “Not all PE firms can be acquired by Blackstone or Apollo, and they are not interested in buying everyone,” especially when the assets for sale are essentially tied to management fee income linked to “gray” assets that are hard to exit or value.

Lucinda Guthrie, head of Mergermarket, suggests another path—“zombification.” Some managers choose to transfer assets into continuation vehicles, providing liquidity to investors while continuing to hold assets, essentially buying time.

But she warns that if funds cannot continue to distribute capital to investors, this model cannot last. Guthrie predicts 2026 will be a key year to distinguish “those who can deliver on promises” from “those who cannot,” and describes this industry reset as “absolute Darwinian淘汰.”

Old methods fail, “12% is the new 5%”

Even those institutions that survive this round of reshuffling face much greater profitability challenges.

According to Wall Street Insights, Bain notes that in the 2010s, with ultra-low borrowing costs and rising valuation multiples, buyout funds could achieve twofold or higher returns within five years by modestly growing portfolio company profits.

Today, that tailwind has dissipated. Current leverage costs are near 8-9%, and valuation multiples are relatively stagnant. Bain summarizes this shift as “12% is the new 5%”—meaning portfolio companies need to grow EBITDA by 10-12% annually over five years to achieve the same 2.5x return.

Burack states that previously, maintaining a 5% annual EBITDA growth rate before exit was sufficient, but “considering current interest rates and valuation multiples at entry and exit, you now need to grow 12% annually over five years to get the same returns.”

Walters also points out that “the current environment is truly testing how much operational value managers can create, rather than relying on financial engineering,”—meaning fund managers must drive profitability growth through pricing discipline, working capital improvements, and management upgrades, rather than simply relying on cheap debt chasing valuation multiples.

Is the current “private equity private credit crisis” a new round of “subprime”?

The difficulties in private equity are not isolated. According to Chasing Wind Trading Platform, warning signs are also emerging in the private credit market.

Orlando Gemes, CIO of Fourier Asset Management, warns that “the warning signals we see today in private credit are eerily similar to those in 2007,” especially pointing to deteriorating lender protections and complex liquidity terms masking asset mismatches.

A February report from Deutsche Bank shows that the spread between the S&P BDC index components and net asset value has reached its highest level since the COVID-19 pandemic. Events like Blue Owl restricting redemptions on a fund and Breitling private equity holdings halving their value have further fueled market panic.

However, Deutsche Bank remains cautious about systemic risk, describing the current situation as “heavy smoke, but the fire is not yet clear,” and believes conditions for a large-scale market contagion are not yet in place. They note that over $3 trillion in private capital “dry powder” could serve as a key buffer.

Deutsche Bank also highlights four key indicators to watch: sharp widening of credit spreads, substantial contraction in corporate profits, stress in the government bond market, and changes in bank regulation or capital requirements related to private markets. Currently, none of these indicators have reached dangerous levels.

Nevertheless, Rebecca Burack from Bain still considers private equity overall a strong investment choice, capable of offering diversification not available in public markets. “It’s just a bit stuck right now,” she says.

Risk warning and disclaimer

Market risks exist; investments should be cautious. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions herein are suitable for their particular circumstances. Invest accordingly at your own risk.