- U.S. private equity is sitting on about 12,900 portfolio companies with ~7-year holds, creating a large backlog of legacy assets bought at peak valuations.
- Dry powder has fallen sharply, tightening deal capacity while raising pressure on managers to invest and return cash to LPs.
- Exits rebounded in 2025 but remain narrow beyond top-tier assets, pushing many firms toward continuation funds, secondaries, and sponsor-to-sponsor sales.
- In 2026, LP scrutiny on fees, valuations, and extended fund lives will intensify, making operational improvements more critical than leverage-driven returns.
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The private equity (PE) industry enters 2026 in a state of partial recovery but significant structural strain. The accumulation of nearly 13,000 unsold portfolio companies in U.S. PE funds, alongside elongated holding periods (near seven years), reflects assets purchased during peak valuation and low interest rate regimes that are now misaligned with current capital costs and investor return expectations. The decline in dry powder signals that GP pools of undeployed capital are becoming a constraint, particularly as LPs grow impatient with delayed exits and underwhelming distributions.
Exit activity did rebound strongly in 2025, buoyed by a rise in strategic sales and IPOs of marquee names—such as Medline’s IPO (largest PE-backed IPO since 2021) and Ampere Computing’s sale for US$6.5 billion. However, IPO windows remain narrow, favoring top-tier, high-growth assets. For many mid- or lower-tier investments—especially those heavily leveraged or in rate-sensitive sectors—exit options remain limited, pushing firms toward continuation funds, secondary transactions, or sponsored sales.
LPs are increasingly demanding more transparency and alignment. Fund terms, fee structures, valuation benchmarks, and fund lifecycles are under heightened scrutiny. PE managers must now deliver operational improvements—cost discipline, margin enhancement, tech adoption—instead of relying primarily on multiple expansion or leverage. Industries like SaaS/AI, insurance, and certain industrials are positioned better given their potential for adaptation and growth; sectors with heavy debt loads or regulatory exposure (telecom, consumer, healthcare, regulated energy) face headwinds.
Strategically, firms that move first to offload risky legacy assets—ideally via structurally clever exits—and prioritize selectivity in new investments stand to outperform. Open questions include the pace and scale of interest rate normalization, whether IPO momentum is sustainable across more sectors, and how regulation (both U.S. and globally) will shift capacity, disclosure, and tax/treaty environments. LP patience wears thin: underperformance or dissipating returns could lead to capital reallocations, even reputation risks.
Supporting Notes
- As of September 30, 2025, U.S. PE firms held ~12,900 companies in their portfolios, up slightly from end-2024; average hold periods remain near seven years, significantly above the pre-pandemic norm (~5–5.5 years).
- Undeployed capital in U.S. PE stands at about US$880 billion by September 2025, down from US$1.3 trillion in December 2024; global dry powder similarly fell from ~US$2.7 trillion to US$2.2–2.5 trillion.
- Global PE sales/IPOs rose more than 40% in 2025 through late December compared with 2024, with notable exits like Medline’s IPO and Ampere Computing’s US$6.5 billion sale.
- Continued use of alternative exit structures: continuation funds, sponsor-to-sponsor deals, and secondary buyouts are increasingly common.
- LPs are increasingly questioning fund lifecycles, valuation practices, fees, and alignment; many traditional funds structured for 10-12 years are in effect stretching toward 15 years.
- Sectors with better exit potential include technology (especially AI-enabled), industrials, insurance, while sectors with high debt burdens or high regulatory risk—telecom, consumer, health care—are under more pressure.