Private Equity: The Meteoric Rise and Warning Signs
Private equity (PE) is an investment made by a specialized firm that raises capital from institutional investors like insurance companies, pension funds, and university endowments to buy and manage companies privately. These purchases are often highly leveraged to amplify returns, and the sponsor company, or PE firm, usually has an investment time horizon of ten years. A PE fund’s lifecycle has a fixed period to gather capital, a search period to look for investments and buy portfolio companies, a holding period to improve operations or scale the businesses they bought, and an exit from the investment to realize profits. Exits can include initial public offerings (IPOs), sales to strategic buyers, or sales to other private equity sponsors.
In recent years, alternative investments like private equity and private credit have grown at a remarkable rate. Private market assets under management (AUM) reached roughly $13.1 trillion as of mid-2023. This reflects a near 20% growth rate in AUM per year since 2018 (McKinsey 2024). The amount of money invested in private assets has skyrocketed recently because of the unbelievable returns that these investments have realized. Typically, investors flock to outperforming assets, and in this case, investors are piling their money into PE because of its outperformance. Cambridge Associates collected a sample of around 1,700 realized buyout and growth equity companies acquired from 2000 to 2020. The gross internal rate of return (IRR) for these companies was 18.6% (Cambridge Associates 2022). This significantly beats the performance of public markets. The S&P 500 historically returns around 10% per year. The influx of capital resulted in a record high amount of dry powder (undeployed capital) among PE firms. The $3.7 trillion in ready-to-use capital gives firms the ability to pursue deals even when public markets are volatile (McKinsey 2024). This can give private investments like PE an advantage over the public markets, as they have had growing returns and provide diversification for investors. In 2024, deal‑making rebounded strongly after two years of decline (McKinsey 2025). Buyout investment value rose about 37% year over year, reaching roughly $602 billion globally. Also, global exit value increased by 34% to about $468 billion, suggesting renewed liquidity for investors (Bain 2025). This positive news has continued the PE frenzy and resulted in the continued interest of investors.
Despite the attractive returns and unmatched growth, several indicators suggest the private equity market may be showing some warning signs. Analysts from Bain and McKinsey highlight elevated entry multiples, meaning firms are paying historically high prices for companies, while the volume of dry powder remains at near record levels (McKinsey 2025, Bain 2025). The excess cash can make PE firms more aggressive in their investments and can lead them to overvaluing and overpaying for portfolio companies. In addition, exiting investments is becoming more challenging, with longer holding periods and fewer IPO or strategic sale opportunities for older assets. These factors are potential signs of an overheated market.
Private equity firms are paying historically high prices for companies, often measured by EBITDA multiples. While this can reflect strong underlying business fundamentals, high entry multiples leave less room for future upside and make achieving targeted returns more challenging. Consistently high multiples can signal a crowded market with intense competition and risk. If earnings growth slows or the economic environment shifts, firms may struggle to meet their expected exit valuations. Private equity firms simply paid too much for companies they bought out in 2021 during a period of low rates (CNBC 2025). This will likely cause difficulty exiting investments at the end of the lifecycle of these funds.
Private equity firms have a record high amount of dry powder. While this provides flexibility to pursue deals, it can lead to risky investment decisions. A high amount of dry powder is typically not a positive sign, even though it does mean that investors are trusting PE firms with their money. Sponsors need to invest the money in their fund in order to generate a return for their investors. If the money is not being used, it is losing value. For investors, an environment of excessive dry powder raises the risk that deals are done at inflated valuations, which may compress future returns and increase the potential for underperformance.
Exiting investments through IPOs or strategic sales is a key way private equity firms realize returns for their investors. However, exits are becoming more difficult. The IPO market has been slowing (although it has been showing strong signals in 2025), strategic buyers have been selective, and older assets are accumulating on balance sheets. Longer holding periods tie up investor capital and delay liquidity, which makes it harder for investors to generate a return and reinvest. In 2024, the average buyout holding period was 6.7 years, much higher than the 20-year average of 5.7 years (CFA 2025). PE firms are holding portfolio companies for longer periods because they are having difficulty exiting and receiving the desired return on investment. Buyers and sellers are not agreeing on the valuations of companies, which is likely the case because the seller purchased the company at too high a price and is having difficulty making a profit (S&P Global 2025). One strategy that private equity firms have resorted to is continuation funds. This is when a firm transfers assets in a portfolio to another portfolio. This creates a new investment vehicle and gives investors the option to cash out or continue into the new structure. Analysts at Greenhill & Co. believe that 20% of private equity portfolio company exits could come from this strategy of continuation funds (CFA 2025). Continuation funds give the PE firm more time to exit a portfolio company because it could not exit within the ten-year lifecycle of the fund.
Private equity has experienced extraordinary growth over the past several years, fueled by strong returns, abundant capital, and increasing investor interest. Yet, the same factors that have driven this boom, such as high valuations, record levels of dry powder, and more challenging exit conditions, also serve as cautionary signals for investors. These warning signs do not guarantee any sort of bubble, however. The industry could cut back to more reasonable valuations without a major crash-like event. Entry multiples for the industry declined for the first time in nearly a decade in 2022 from 11.9 to 11 times EBITDA (McKinsey 2024). John Romeo, Managing Partner at consulting firm Oliver Wyman, believes that private equity could go through a period of difficulty because of the high valuations during the COVID-19 pandemic and recovery, but he is confident that this will only be a temporary setback and private equity will thrive long-term (CNBC 2025). This could be a signal that the private equity boom is temporarily slowing down to more reasonable levels and could continue its growth in the future. Regardless, investors should be wary and keep an eye out for signs of a potential drawback of private equity returns in the current, evolving private market environment.
References
Bain & Company. (2025, March 3). Dealmaking rebound sees private equity recovery taking shape — Bain & Company Global PE Report. https://www.bain.com/about/media-center/press-releases/20252/dealmaking-rebound-sees-private-equity-recovery-taking-shape-bain-global-private-equity-report/
Cambridge Associates. (2022, November 3). US Private Equity Looking Back, Looking Forward: Ten Years of CA Operating Metrics. https://www.cambridgeassociates.com/insight/us-private-equity-looking-back-looking-forward-ten-years-of-ca-operating-metrics
CFA Institute. (2025, October 29). Private Equity’s New Exit Playbook. https://blogs.cfainstitute.org/investor/2025/10/29/private-equitys-new-exit-playbook/
CNBC. (2025, June 6). Peak private equity? Sector gets defensive about its ability to generate top returns. https://www.cnbc.com/2025/06/06/private-equity-swelled-into-a-bank-rivaling-behemoth-challenge-ahead.html
McKinsey & Company. (2024, March 28). Global Private Markets Report 2024: Private markets in a slower era. https://www.mckinsey.com/industries/private-capital/our-insights/global-private-markets-report-2024
McKinsey & Company. (2025, May 20). Global Private Markets Report 2025: Braced for shifting weather. https://www.mckinsey.com/industries/private-capital/our-insights/global-private-markets-report
S&P Global Market Intelligence. (2025, January 15). Private equity exit value falls to 5-year low.https://www.spglobal.com/market-intelligence/en/news-insights/articles/2025/1/private-equity-exit-value-falls-to-5year-low-86896433