Given my background, people assume I’m a big private equity investor. I’m not.*
For decades, the industry had the wind at its back: investors upping their allocations, rising valuations, and falling interest rates. That started to change in 2021-22. For most investors today, PE just isn’t that interesting anymore. The good money has already been made (for investors, at least).
There are great firms and a real role for private equity (more on that later). But the best firms only want to work with top-tier institutional investors. Several industry pioneers—including Yale and Harvard—have offloaded parts of their PE portfolios. Others are tapped out or being more selective.
PE is moving aggressively to find new investors: family offices, the wealth channel, the trillions in 401(k) plans. The smart money is exiting (mostly quietly) through the backdoor while retail is rushing in through the front.
I had a front-row seat as a PE investor for much of the last 20 years. I focused on middle market buyouts, companies with $20 million to a few hundred million in revenue. A junior associate in 2006, I caught the tail end of the mid-2000s boom. Good middle market companies occasionally traded for double digits, but that wasn’t the norm. By 2015-16, double-digit multiples were common. Even before submitting a final bid, 3-4 firms would each spend six figures on diligence and lawyers—just to have a chance at being selected.
Even so, money continued to flood into the asset class. Because returns had been good. Because it’s less “volatile” (really?). Because the illiquidity premium must exist. Because everyone else is doing it. Because… Fundraising peaked in 2020-21, at over twice the levels raised in 2007 (the prior peak).
Underneath the rationalizations, there have been three shifts over the last few decades:
1) The big money moved into private equity. Other endowments emulated Yale and upped their allocations to PE, many reaching their illiquidity caps in the frenzy of 2020-21. Endowments now hold roughly 30% in PE and venture capital. Sovereign wealth funds and public pensions saw Yale’s returns and said “we’ll have what they’re having.” They pushed their allocations higher and some built in-house PE teams. Many public pensions now allocate 10%+ to PE, up from low single digits in 2006.
2) Far more capital and more firms chasing deals. Twenty years ago, it was still possible to find the occasional proprietary deal at a reasonable valuation. It’s close to impossible today, even for companies with as little as $3 or $4 million in earnings. I know. I’ve tried. And even smaller companies have independent sponsors and Stanford MBAs chasing after them.
3) The industry shifted from investing to asset gathering. Management fees were originally meant to cover expenses; carry was where firms made real money. As funds grew, that flipped. 1.5-2% annual fees on billions became the prize. Blackstone, KKR, and Carlyle went public between 2007 and 2012, and public markets value steady fees over lumpy carry. Firms raised bigger funds and pushed into real estate and private credit. Assets under management became the industry lodestar, not returns.
Most see these changes. But only insiders understand the full implications. Companies with $3-4 million in earnings that get 40-50+ first-round bids. Businesses that aren’t for sale getting multiple calls every month from prospective buyers. PE firms “manufacturing” larger businesses by rolling up 1-2 doctor dermatology practices (even my 1-doctor dermatologist received several inquiries from private equity roll-ups). Private equity has pushed its way into nearly every corner of the economy.
The industry has every reason to spin its story (don’t we all). Individual firms tout their proprietary deal flow, sector expertise, and operational nous. It’s how they raise their next (bigger) fund. The industry touts its outperformance vs. public markets, using favorable benchmarks and flawed metrics (IRR especially). It’s all in service of the fees.
Fees have been ground down in the public markets by competition from indexing; alternatives are where the money is now. For PE, the fees are much higher than most realize: typically consuming 4-6% of commitments a year when you add up all the layers.
Globally, buyout AUM has tripled over the last decade to roughly $5 trillion. 32,000 portfolio companies. The model that worked for decades is showing strain.
For years, distributions exceeded capital calls. Invest $20 million, get $25 million back (from investments made in prior years). The asset class was only illiquid on paper. Now more dollars are going in each year than coming back. Distributions have been below 15% of net asset value for four years, levels last seen during the global financial crisis.
With exits stalled, many PE firms are engineering their own liquidity: moving a company from one fund to another in continuation vehicles. Secondaries used to be a sleepy backwater. Now $200 billion a year changes hands. Many PE firms have sold off minority stakes in themselves.
Even though I think the industry and ecosystem around PE oversell its benefits, I believe PE still has important roles to play. To provide capital to smaller, growing businesses and liquidity to families and founders who have built something. There are PE firms that are still investors first. But they tend to be small and hard to find (and access). They won’t be the firms available in your 401(k).
There will always be stories about a fund or a deal that made someone fabulously wealthy. That’s what pulls retail in. For everyone else, recent vintages will disappoint. They just don’t know it yet.
*I’ve made two personal investments. In 2015, I invested in a friend’s startup, which was subsequently sold to PE (I’m still an investor). In 2021, I also co-invested alongside a family office I consulted with.
Originally published in 2026