Middle-Market Private Equity Faces Exit Squeeze: How GPs Are Adapting

The Bloomberg article “Private Equity’s Middle Tier is Struggling as Capital Tightens and Exit Options Dry Up” delineates a consistent theme across industry reports in 2025: middle market private equity is caught in a squeeze. Higher interest rates are increasing financing costs and reducing the feasibility of leveraged buyouts, while macro-uncertainty—including trade policy and inflation—has pushed strategic buyers and IPO markets into cautious or inactive modes [2][4][5].

Alternative exit structures such as continuation vehicles (CVs) have become mainstream tools to allow GPs both to retain high-conviction assets and to return some cash to LPs. In a recent survey of 164 middle market sponsors, 33 % reported increased hunger for CVs; 88 % of those using CVs cited maintaining ownership of “trophy” assets and liquidity for LPs [1]. CVs are not a stopgap; 79 % said even if deal activity improves or rates fall, their use would remain the same or increase, indicating structural adoption [1].

Exit value rebounded globally in 2025 but exit volume remains near decade- lows. In the U.S., exit value through mid-2025 ($318.97 billion) approached 2024’s annual total ($373.1 billion), but the pace of fund-raisings and number of exits lag behind [5]. Meanwhile, IPOs fell sharply: first-half IPOs dropped ~31 % relative to the same period in 2024 [2]. Such collapse of public market themes has amplified reliance on trade-sales, secondary deals, and CVs.

For LPs, distributions—the hallmark metric of realized returns—have dropped badly. Partners Capital finds payouts now run ~15 % annually versus long-term averages around 23 % [6]. That dearth of returns contributes to fundraising softening: global PE fundraising declined to around $310–$314 billion by Q3 2025, down from $399 billion same period in 2024 [7][5]. This dry powder, while available, is increasingly trapped in older-vintage funds or assets where exits are delayed—or impossible at acceptable valuations.

Strategically, GPs are shifting investment toward resilient sectors (business services, financial services, utilities, tech infrastructure), tightening deal selection, and emphasizing certainty of close. LPs are pushing for more governance around continuation vehicles, demand clearer exit paths, and growing more skeptical about sectors with high cyclicality, consumer exposure, or geopolitical risk [1][5].

Open questions remain critical: Will the IPO window meaningfully reopen—internationally as well as in the U.S.? When will financing costs drop sufficiently to permit acceptable leverage? How will CVs be priced and governed to avoid serious conflicts of interest? And, lastly, will LPs tolerate persistently lower distributions and longer holding periods—or shift allocations away from PE?