Challenges for Private Equity in 2026: Stale Assets, High Valuations & Exit Pressure

The primary article from The Wall Street Journal highlights that private equity firms made meaningful progress in trimming aging investments during 2025, but significant “housecleaning” remains ahead in 2026 [1]. Data indicates that PE portfolios still contain roughly 12,900 U.S. companies as of September 30, 2025, slightly above end-2024 levels, underscoring persistent exit challenges [1]. Meanwhile, the average holding period for investments is nearly seven years — elevated versus norms before the pandemic, and slowing the return of capital to limited partners [1].

Interest rates have played a central role in this dynamic. The rate-hiking cycle from 2022 drastically increased the cost of debt financing, which underpins many leveraged buyouts. As a result, PE firms are reluctant to exit positions made during frothy market periods at valuations that will generate low or even negative returns [1][2]. This valuation gap between buyer and seller expectations has contributed to the exit logjam, slowing down M&A and IPO exits especially.

Dry powder—the committed capital not yet deployed by PE funds—declined from about $1.3 trillion in December 2024 to roughly $880 billion by September 2025 [1][2]. Though this drop suggests increasing deal flow, deal volume remains weak even while value increases, indicating that larger deals are being done while smaller ones struggle [2]. Exit mechanisms are shifting toward trade sales, continuation vehicles, and secondary transactions: IPO exits have fallen sharply, while trade sales remain the more dependable route for liquidity [3][1].

From a strategic standpoint, several pressures are converging. Limited partners (investors in PE funds) are growing impatient for distributions and clearer return pathways [2]. Managers are being forced to emphasize operational transformation—improving business performance, cutting costs, possibly restructuring—to bridge valuation gaps, rather than relying heavily on financial leverage. The competitive landscape is also evolving: corporate acquirers are stepping in to buy portfolio companies when PE buyers hesitate, and family offices and sovereign wealth funds are increasingly “patient” capital sources [2].

For 2026, we anticipate a gradual easing of exit conditions if interest rates stabilize or retreat, and economic and trade policy uncertainty abates. However, the legacy of high valuation entry points, large backlogs of unsold assets and elevated capital cost mean that the pace of exits may accelerate unevenly. The pressure on the traditional raise-buy-exit PE model is likely to provoke innovation in deal structuring, with continuation vehicles, carve-outs, and co-investment platforms playing larger roles.

Open questions remain: how far interest rates will fall, whether trade policy uncertainty resolves, and what investor sentiment toward PE fundraising will be once distributions materially improve. Also, sectors with weaker growth trajectories or built on inflated valuations may see more distress and write-downs than others, creating asymmetric outcomes across PE portfolios.