"Darwin moment has arrived! Analysis warns: some PE firms face extinction risk"

The private equity industry is standing at a brutal watershed.

According to Bain Consulting's latest report, the private equity sector has returned less profit to investors for the fourth consecutive year, with the payout ratio in 2025 at just 14%, the lowest level since the 2008-2009 global financial crisis. Meanwhile, the sector has a backlog of around 32,000 unsold companies, with assets amounting to as much as $3.8 trillion, and the exit dilemma continues to worsen.

This pressure is reshaping the industry landscape. Fundraising is highly concentrated in leading institutions, while small and medium funds are struggling. Romain Bégramian, Managing Partner of GP Score, bluntly stated, "the long-awaited Darwinian survival of the fittest is happening," with some smaller, non-differentiated fund managers facing the fate of "extinction."

At the same time, according to Chasing Trends Trading Desk, warning signs are also emerging in the private credit market, with Orlando Gemes, Chief Investment Officer of Fourier Asset Management, issuing a stern warning, "The danger signals we see in private credit today are strikingly similar to those in 2007." Deutsche Bank has characterized the current situation as "heavy smoke, but the fire is unclear."

Returns Hit Crisis Lows, Exit Dilemma Worsens

Bain Consulting's data shows that in 2025, the payout ratio for private equity remains at 14% of net asset value, the second lowest level since the worst period of the 2008 financial crisis, and the fourth consecutive year at a low level.

Pressure on the exit side is also significant. The report shows that exit transaction volume in 2025 fell by 2% year-on-year, and the average asset holding period has extended from five to six years between 2010 and 2021 to about seven years.

Rebecca Burack, Global Head of Private Equity at Bain Consulting, pointed out that firms have sold "gem-quality" premium assets, but assets with less certain prospects are difficult to offload. "When the holding period exceeds five or six years, the internal rate of return doesn’t look as good," she said.

Fundraising is also under pressure. The scale of leveraged buyout fund raising in 2025 fell by 16% year-on-year to $395 billion, with the number of fundraising funds falling by 23%, marking the fourth consecutive year of decline. Burack also pointed out that uncertainty caused by Trump tariffs suddenly halted deal activity at the beginning of 2025, even though momentum looked "extremely strong" in January of the same year.

Large Deals Mask Structural Weakness; Small and Medium Funds Bear the Brunt

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

The Bain report shows that only 13 mega-deals exceeding $10 billion contributed about 30% of total transaction value, mainly concentrated in the U.S. At the same time, the total number of deals fell by 6% to 3,018, and privatizations of large companies such as Electronic Arts have limited effect in digesting the industry's backlog of $3.8 trillion in unsold assets.

PitchBook Senior Analyst Kyle Walters said that large institutions, due to diversified strategies and the management of large capital pools, have stronger buffering capacity when deals and exits slow down.

"This pressure has a greater impact on mid-market managers, especially emerging managers trying to stand out among their peers."

Walters further warned, "Given the current environment, many funds—large and small—are struggling to fundraise; many managers have already raised their last fund without realizing it." He added that poorly performing managers "will likely wind down quietly, and that will be all the outside world sees and hears."

"Darwinian" Elimination: Consolidation, Zombie-fication, and Extinction

Faced with industry reshuffling, the judgment about the way out has become polarized within the sector. Some leaders expect consolidation to accelerate, but Bégramian of GP Score is cautious.

He points out that "not all PE firms can be acquired by BlackRock or Apollo, and they aren’t interested in buying everybody," especially when the assets for sale are essentially fee income tied to "grey" assets that are difficult to exit or value, super-large platforms have limited acquisition willingness.

Mergermarket’s Lucinda Guthrie points to another pathway—"zombie-fication." Some managers are choosing to transfer assets to continuation vehicles, offering liquidity to investors while retaining assets, essentially buying time.

But she warns, if funds cannot continue to distribute capital to investors, this model will be hard to maintain. Guthrie predicts that 2026 will be the key year to distinguish managers who "can deliver on promises" from those who "cannot," and calls this industry reset an "absolute Darwinian elimination."

Old Practice Has Failed, "12% is the New 5%"

Even those institutions able to survive this round of reshuffling find it much harder to profit today than before.

According to a Wallstreetcn article, Bain noted that in the 2010s, thanks to ultra-low borrowing costs and rising valuation multiples, buyout funds only needed portfolio companies to achieve modest profit growth to double or more returns in five years.

Now, this tailwind has dissipated. Current leverage costs are close to 8%–9%, valuation multiples are relatively stagnant, and Bain summarizes this change as "12% is the new 5%"—i.e., portfolio company EBITDA annual growth rate must rise from the previous ~5% to 10–12% to achieve the same 2.5x level of returns.

Rebecca Burack said that previously, it was enough to keep EBITDA annual growth at 5% before sale, "given current interest rates and entry/exit valuation multiples, you need to grow by 12% each year over five years to achieve the same returns."

Walters also pointed out, "The current environment is truly testing how much operational value managers can create, rather than relying on financial engineering to generate returns"—meaning managers must drive investee company profit growth through solid measures such as pricing discipline, working capital improvements, and management upgrades, rather than simply chasing multiples with cheap debt.

Is the Current "PE Private Credit Crisis" a New Round of “Subprime”?

The dilemma of private equity is not isolated. According to Chasing Trends Trading Desk, warning signs are also emerging in the private credit market.

Fourier Asset Management CIO Orlando Gemes warned that "the danger signals we see in private credit today are strikingly similar to those in 2007," specifically pointing out deterioration in lender protection clauses and asset mismatch risks obscured by complex liquidity terms.

Deutsche Bank’s February report shows that the discount of the S&P BDC Index constituent funds’ stock prices to net asset value has reached the highest level since the pandemic. Blue Owl imposed redemption restrictions on a fund, and Breitling's private equity holders cut their investment value in half—these events have further fueled market panic.

However, Deutsche Bank’s view of systemic risk is relatively prudent, describing the current situation as "heavy smoke, but the fire is unclear," believing there are no conditions for large-scale market contagion at present, and noting that over $3 trillion in private capital “dry powder” reserves could serve as a key buffer.

Deutsche Bank also lists four key trigger indicators to watch: sharp rise in credit spreads, substantial contraction in corporate profits, stress in the treasury market, and changes in bank regulation or capital requirements for private market exposure. As of now, none of these indicators have reached dangerous levels.

Despite this, Bain’s Rebecca Burack still believes private equity overall is a strong investment choice, providing diversified allocation no longer available in public markets. "It's just kind of stuck right now," she said.

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