Private equity’s struggles may be harbinger of a bigger economic crash

Investors in private equity firms are in a bit of a bind. Maureen Farrell reported in The New York Times this month that they are sitting on 33,575 companies they have not been able to sell or list at prices their investors will accept. This is up from 32,451 at the end of last year and roughly double the 15,923 they held a decade ago. It is the third consecutive year the pile of unsellable assets has grown. And the way PE firms like to exit their holdings, by selling their companies to a buyer for a rich premium, is just not happening.

Eric Juergens, a partner at the law firm Debevoise & Plimpton, in a recent Wall Street Journal article, observed with respect to such firms, “They’d still always prefer an M&A exit to the extent that they can find one, but IPO has become more of a viable option given the IPO market this year. I’m not sure it’ll ever be the No. 1 option.”

Indeed, the deal and IPO boom that was widely anticipated has now shown up. SpaceX just set the record for the largest IPO in history. David Ellison is chasing a $110 billion combination of Paramount and Warner Bros. NextEra struck a deal for Dominion Energy at north of $120 billion. By volume, the first half of 2026 was the second-busiest stretch for initial public offerings in more than a decade. Facing the possibility that a new administration may limit megamergers, many “perceive they have a window in which to attempt to affect something transformational, and now is really the time to try to do it,” Matt McClure, a global cohead of investment banking at Goldman Sachs, said in an interview reported by The New York Times.

Private equity firms may need to hold their noses and try to get an exit via the IPO route. This won’t be a walk in the park either. Since 2022, roughly 70 private-equity-backed companies have gone public on U.S. exchanges, according to Dealogic. Between 2017 and 2021, the figure was 424.

This could signal that the machine that makes its money through making bets on financial engineering is starting to sputter. Since the logic of financialization, with its attendant worship at the altar of shareholder returns, has organized capital allocation for roughly 40 years, this is a big deal.

Technological revolutions and the early warnings that are easy to miss

An account of technological revolutions from Carlota Pérez, an internationally prominent economist of innovation, suggests that they have a recognizable pattern. Each opens with an “irruption” in which a new general-purpose set of technologies promise to transform the economy, followed by a frenzy in which investors pour money into the new area, often in fear of missing out. This is the installation phase. Financial capital runs the show. It creates a bubble in which investment levels are wildly out of whack with sober valuation estimates (See: anybody concerned about an AI bubble). During installation, the infrastructure for the next revolution is established, paid for by the irrational exuberance of the investing class. Think of rails for the railroads, assembly lines for cars, and cable, server, and network infrastructure for the internet. Fortunes are made. The general public, however, gets squeezed as wages from the previous technological regime are compressed. Income inequality soars, as does populism. Eventually, the music stops and there is a crash.

If institutions—government, corporations, civil and cultural—effectively shape the postcrash context, we have a turning point in which capital comes out of the casino and starts to align with the real economy, bringing about the deployment phase in which the new technologies are put to productive use, a golden age. The post-WWII consensus on how the economy should operate is an example of such a period. Business, workers, and governments agreed to support policies that yielded home ownership, the suburbs, shopping malls, and the expectation of a decent standard of living on a middle-class wage.

Greed and fear: Leading indicators of a shift away from the casino

When investors are still in greed mode (which a recent analysis suggests they are), the party continues. Once fear takes over, bubbles deflate.

The number that struck me from The New York Times piece was not the 33,575 businesses sitting in inventory. It is 6.4%. That’s the annualized return that U.S. private equity generated from mid-2022 through March 2026, per the research firm MSCI. Over the same period the S&P 500 returned 15.2% annualized and the Nasdaq 19.3%.

Let me get this straight. An asset class involving premium fees, illiquid capital held for up to a decade, and demanding, specialized diligence, has trailed an index fund by 9 points a year for four years. No wonder prospective buyers are skeptical.

If private equity firms can’t get to an exit on their preferred terms, a behavior we can expect to see is that they will try to postpone the reckoning in the hope that they’ll figure something out before everyone notices. One way this happens is by pushing out debt maturities, effectively buying time.

For example, Thoma Bravo bought the cybersecurity company Proofpoint for $12 billion in 2021; it has since renegotiated with lenders to push out the loan by two years, at higher rates. Blackstone bought Ancestry.com for $4.7 billion in 2020 and, six years on, has also extended debt maturities. Vista acquired Solera for $6.5 billion in 2016 and filed to take it public in 2024; the offering was never realized.

The ABF Journal (which stands for asset-based financing) doesn’t mince its words. “The private equity industry faces a structural liquidity crisis. Five-year DPI (distributions to paid-in capital) has fallen to its lowest level in over a decade, with the last U.S. vintage year to achieve 1.0x DPI being 2016. For 2018 vintage funds, historical benchmarks suggest DPI should approximate 0.8x, yet actual performance stands only slightly above 0.6x. With more than $1 trillion of NAV (net asset value financing) trapped in older vintages and traditional exit routes constrained, sponsors and their capital partners have engineered increasingly sophisticated solutions to bridge the GP-LP [general partner-limited partner] liquidity gap. At the center of this innovation: continuation vehicles and the hybrid capital structures that enable them.”

Exits without an actual exit

But notice exactly what this accomplishes. A continuation vehicle is a firm selling a company to itself through a fund it also manages. A NAV loan is borrowing against the portfolio in order to provide investors with a distribution. Both manufacture the appearance of an exit without an exit.

Apollo, reporting weak private equity results last week, described its exits as “prudently delayed.” Hmmmm. When the delay is now three years and the IPO market is running near a decade high, what conditions would better suit a prudent owner?

This is what happens at turning points and how systems respond. When real returns dry up, financial capital gets inventive about producing the appearance of returns. Pérez, the economist, traces the pattern through Canal Mania in Britain in the late 18th century, the investment trusts of the 1920s, and the securitization apparatus of the 2000s. Financial innovation late in an installation period is about unproductively trying to show that the incentives haven’t really changed and that the casino continues. For the broader public, the struggles of PE are a sign that the assumptions of the boom years may be drawing to a close. That in turn implies that stocks may well drop, perhaps slowly and perhaps precipitously, if enough investors become convinced that they are too uncertain to justify high valuations.

Among the biggest challenges for the PE firms is that many of their holdings were taken on in the pre-ChatGPT software boom. A SaaS (software as a service) multiple was underwritten on the premise that software is expensive to build and painful to replace. If AI makes software easy to swap and cheap to build, this is classic disruption in the sense intended by Scott Anthony, the Dartmouth business school professor and innovation strategist. It potentially invalidates the business models of those companies.

Meanwhile, as Farrell points out in The New York Times, the casino rocks on in the venture capital sector. The AI leaders and SpaceX are throwing off returns of a kind that arrive maybe once in a career. But the storm clouds over PE suggest we may be looking at the beginning of a structural shift away from the idea that financialization is a better route to riches than creating new value. Even the Bank for International Settlements used its June annual report to flag how little visibility anyone has into how the AI buildout is actually being financed.

Back in the “real” economy, Mark Zandi, chief economist at Moody’s, has concluded that “the only reason why the economy isn’t in complete shambles is because of AI.” As Quartz reports, a “boomcession” is when “the economy is doing well and households still can’t pay their bills, when GDP grows and stocks rise while inflation eats up the average earner’s paycheck.” If the air goes out of the AI boom, it’s likely to take a fragile consumer economy with it. PE’s struggles are a potential early warning that this process might be starting.

The price we pay for great advances?

As Pérez observes, crashes are “the price we’ve historically paid for our ability to reach great booms. The collapse has to be disastrous enough to make it clear to everyone that the time when the stock market drives the growth of the economy is finished. Finance capital has done its job; it’s brought forth the resources to pave the way for the next wave of technology.”

Myself, I’m optimistic that we could begin to see the weak signals of the conditions for a golden age emerging. And trust me, I think the limited partners in the PE firms are going to be just fine.