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

The private equity industry is standing at a brutal crossroads.

According to the latest report from Bain & Company, the private equity industry has returned less profit to investors for the fourth consecutive year, with the distribution ratio in 2025 being only 14%, the lowest level since the global financial crisis of 2008 to 2009. Meanwhile, the industry is burdened with approximately 32,000 unsold companies, corresponding to an asset scale of up to $3.8 trillion, and the exit dilemma continues to worsen.

This pressure is reshaping the industry landscape. Fundraising is highly concentrated among top institutions, while small and medium-sized funds are struggling; GP Score managing partner Romain Bégramian bluntly stated, "The long-awaited Darwinian survival of the fittest is happening," and some smaller, less differentiated fund managers will face "extinction."

At the same time, according to news from the Chase Trading Desk, there are also alarming pressure signals emerging in the private credit market. Fourier Asset Management Chief Investment Officer Orlando Gemes issued a stern warning: "The danger signals seen today in the private credit space are strikingly similar to those in 2007." Deutsche Bank characterized the current situation as "heavy smoke, but the fire is unclear."

Returns Hit Crisis Low, Exit Dilemma Continues to Worsen

Bain & Company's data shows that the proportion of private equity distributions to net asset value will remain at 14% in 2025, the second-lowest level since the most severe period of the 2008 financial crisis, and it has been at a low level for four consecutive years.

The pressure on exits is also significant. The report indicates that the volume of exit transactions will decrease by 2% year-on-year in 2025, with the average holding period for assets extending from five to six years between 2010 and 2021 to about seven years.

Rebecca Burack, head of Bain's global private equity business, pointed out that management companies have sold "gem" quality assets, but it is difficult to offload assets with less certain prospects. "When the holding period exceeds five or six years, the internal rate of return looks less ideal," she said.

Fundraising is also under pressure. The fundraising scale for leveraged buyout funds will decrease by 16% year-on-year to $395 billion in 2025, with the number of funds completing fundraising dropping by 23%, marking the fourth consecutive year of decline. Burack also noted that the uncertainty brought by Trump's tariffs abruptly halted trading activity at the beginning of 2025, while just in January of that year, the trading momentum looked "extremely strong."

Large Transactions Mask Structural Weakness, Small and Medium Funds Bear the Brunt

Although the global M&A transaction value in 2025 increased significantly 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 super-large transactions exceeding $10 billion contributed about 30% of the total transaction value, primarily concentrated in the U.S. market. Meanwhile, the overall number of transactions decreased by 6% to 3,018, and large privatization deals like Electronic Arts have limited impact on digesting the industry's backlog of $3.8 trillion in unsold assets Kyle Walters, a senior analyst at the private market data provider PitchBook, stated that large institutions have stronger buffering capabilities during slowdowns in transactions and exits due to their diversified operational strategies and management of large capital pools.

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

Walters further warned that "given the current environment, many funds, large and small, are struggling to raise capital, and many managers may have already raised their last fund without even realizing it." He added that underperforming managers "are likely to quietly wind down, which will be all that the outside world can see and hear."

"Darwinian" Elimination: Integration, Zombie-ization, and Extinction

In the face of industry reshuffling, opinions on the way forward are becoming polarized. Some industry leaders expect integration to accelerate, but Bégramian from GP Score holds a reserved attitude towards this.

He pointed out that "not all PE firms can be acquired by BlackRock and Apollo, and they are not interested in buying everyone," especially when the assets for sale are essentially tied to management fee income linked to "gray" assets that are difficult to exit or value, limiting the acquisition willingness of super-large platforms.

Lucinda Guthrie, head of Mergermarket, pointed to another path—"zombie-ization." Some managers choose to transfer assets into continuation vehicles to provide liquidity to investors while continuing to hold assets, essentially buying time.

However, she warned that if funds cannot continue to distribute capital to investors, this model will be unsustainable. Guthrie predicts that 2026 will be a key year for distinguishing between managers who can "deliver on promises" and those who cannot, characterizing this industry reset as "absolute Darwinian elimination."

Old Strategies Fail, "12% is the New 5%"

Even institutions that can survive this round of reshuffling find profitability much more challenging than before.

According to an article from Wall Street Insight, Bain & Company pointed out that in the 2010s, with ultra-low borrowing costs and rising valuation multiples, acquisition funds often only needed portfolio companies to achieve modest profit growth to obtain two times or more returns within five years.

Now, this tailwind has dissipated. Current leverage costs are close to 8% to 9%, and valuation multiples are relatively stagnant. Bain summarizes this shift as "12% is the new 5%"—meaning that the EBITDA annual growth rate of portfolio companies needs to increase from about 5% to 10% to 12% to achieve the same level of 2.5 times investment returns.

Rebecca Burack stated that in the past, it was sufficient to maintain an EBITDA annual growth rate of 5% before sale, "Given the current interest rate levels and the valuation multiples at entry and exit, you need to grow 12% annually over five years to achieve the same returns." Walters also pointed out that "the current environment is truly testing how much operational value managers can create, rather than relying on some form of financial engineering to generate returns" — this means that fund managers must drive profit growth in their portfolio companies through substantive measures such as pricing discipline, working capital improvement, and management upgrades, rather than simply relying on cheap debt to chase valuation multiples.

Is the current "PE private credit crisis" a new round of "subprime"?

The predicament of private equity is not isolated. According to reports from the Wind Trading Desk, there are also alarming pressure signals emerging in the private credit market.

Orlando Gemes, Chief Investment Officer of Fourier Asset Management, warned that "the warning signs we see today in the private credit space are strikingly similar to those in 2007," specifically pointing out the deterioration of lender protection clauses and the asset mismatch risks obscured by complex liquidity terms.

A report released by Deutsche Bank in February showed that the discount of the S&P BDC Index component funds' stock prices relative to net asset value has reached the highest level since the COVID-19 pandemic. Events such as Blue Owl implementing redemption restrictions on one of its funds and Breitling private equity holders cutting their investment value in half have further exacerbated market panic.

However, Deutsche Bank's assessment of systemic risk is relatively cautious, characterizing the current situation as "heavy smoke, but unclear fire," believing that the conditions for large-scale market contagion are not yet in place, and noting that over $3 trillion in private capital "dry powder" reserves could serve as a critical buffer.

Deutsche Bank also listed four key trigger indicators to watch closely: a sharp rise in credit spreads, substantial contraction in corporate profits, pressure in the government bond market, and changes in bank regulatory or capital requirements regarding exposure to the private market. Currently, none of these four indicators have reached dangerous levels.

Nevertheless, Rebecca Burack from Bain & Company still believes that private equity is overall a strong investment choice, capable of providing diversification that the public markets no longer offer. "It's just a bit stuck at the moment," she said.

Risk Warning and Disclaimer

The market has risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investing based on this is at one's own risk