Is Private Equity becoming a victim of its own success?

Let us be deliberately provocative for a moment. Sometimes pushing an argument to its limits is the best way to understand what may really be changing.

Private equity was built around a demanding proposition: identify an attractive company, acquire it at the right price, create significant value and realise that value within a limited period of time.

It was not supposed to be easy. Quite the opposite.

Leverage, ambitious return expectations and a finite investment horizon created risk, but also extraordinary discipline. To succeed consistently, managers had to be very good at selecting assets, transforming companies and ultimately exiting them.

And the best, by definition, are few.

What happens when an exceptional model becomes mainstream?
Private equity's extraordinary success attracted capital, and capital attracted managers.

The scale and persistence of that expansion are remarkable. Preqin data provide a useful perspective on the magnitude of the change:

What was once a relatively specialized investment activity has become a vast global industry. That success raises an uncomfortable question: can investment talent expand at the same speed as capital?... probably not. If an activity requiring exceptional skills expands dramatically, it seems reasonable to assume that average skill will eventually be diluted. At the same time, more capital and more managers compete for a finite number of genuinely attractive companies.

This creates an awkward combination: greater competition for assets, higher entry valuations and less room for error, precisely when the average investor may be less exceptional than before.

The pressure on entry prices is equally visible. According to McKinsey, the median global buyout entry multiple increased from 6.5x EBITDA in 2009 to 11.9x in 2024, having reached 12.0x in 2022. In other words, the industry is being asked to create more value after paying substantially more to acquire the same EBITDA. In other words, value creation becomes harder at exactly the same time as more value creation is required.

This matters even more when we consider where private equity returns have historically come from. McKinsey estimates that roughly two-thirds of total returns from buyout deals entered in 2010 or later and exited by 2021 were attributable to market multiple expansion and leverage. With those tailwinds harder to rely on, revenue growth and margin expansion have to play a greater role in value creation.

Private equity has certainly not stopped generating attractive returns. But the extraordinary returns that attracted capital into the industry have inevitably made those same returns harder to reproduce. Success attracted competition, and increased competition inevitably eroded part of the opportunity that had made private equity so attractive in the first place.

Perhaps this is simply what happens when an exceptional investment model becomes an industry.

Then the clock starts working against you
Higher entry prices do not eliminate return expectations. Something has to compensate.

Operational improvement, international expansion and buy-and-build strategies can create enormous value, but they require both skill and time. And the exit market does not necessarily cooperate when the original investment plan says it should.

The evidence is visible in holding periods. McKinsey estimates that the average holding period for PE portfolio companies reached a historic 6.6 years in 2025, compared with approximately 4 years a decade earlier. At the same time, some 16,000 buyout-backed companies, 52% of total buyout-backed inventory, had already been held for more than four years.

The industry has responded with characteristic ingenuity.

Continuation vehicles and the rapid development of GP-led secondaries allow sponsors to provide liquidity to existing investors without necessarily selling an asset at an inconvenient moment.

This is no longer a niche solution. According to Jefferies, GP-led secondary transactions reached $115 billion globally in 2025, up 53% in one year. Nearly 80% of the world's top 100 sponsors have now completed at least one continuation vehicle transaction. More strikingly, GP-led secondaries already represented approximately 14% of all sponsor-backed exit volume in 2025. We are no longer talking about an occasional escape valve. We are witnessing the emergence of an alternative exit mechanism of meaningful scale.

There is considerable logic in this as nobody should be forced to sell a good company at the wrong price simply because the clock says so.

Moreover, the ability not to sell can improve the conditions under which you eventually sell. A credible alternative to an exit reduces the negotiating weakness of becoming a forced seller.

But... what if the clock was part of the point?
The finite holding period was not simply an inconvenient feature of traditional private equity. It was also one of its disciplines.

Management teams had to execute. Sponsors had to make decisions. Value-creation plans needed deadlines. And ultimately, an external buyer or the public markets had to validate the value supposedly created.

If we progressively remove that pressure, don’t we also change the behavior that was once designed to encourage?

Everlasting holding periods cannot be the answer.

The ability to move assets into new vehicles is extremely valuable when it prevents a good investor from making a bad sale. But a mechanism designed to prevent good investors from becoming forced sellers should not become a mechanism allowing poor investors to avoid becoming sellers at all.

Once time pressure diminishes for everyone, exceptional and average managers alike, we should at least ask whether some of the competitive intensity and urgency that distinguished private equity ownership diminishes with it.

Are we improving the model by gradually removing the constraints that made it work?

Or have we created something else... different, yet perhaps better?
There is, however, another way of looking at exactly the same evolution.

The mechanism that may be diluting private equity's exceptional returns may also be distributing the benefits of private capital more broadly.

Exceptional returns attracted capital. Capital created competition. Competition increased the prices paid for good companies and dramatically expanded the availability of private financing.

What looks like a deterioration of the model from the investor's perspective may therefore look rather different from the entrepreneur's perspective.

Private equity today provides much more than a route towards exceptional investment returns. It provides growth capital, acquisition financing, liquidity for founders and families, professional ownership, succession solutions and an increasingly credible alternative to both public markets and traditional corporate buyers.

In economic terms, part of the benefits once captured by a relatively small group of exceptional investors may simply have shifted towards founders, management teams and companies. 

Perhaps the democratization of private equity is simultaneously weakening the exclusivity that made the original model so profitable and extending its benefits to a much broader part of the economy.

If so, continuation vehicles and longer investment horizons may not simply be patches designed to repair a model under strain. They may be part of the infrastructure of an entirely different and much larger private capital market.

Which leaves us with two deliberately uncomfortable questions.

1. Do we want to recover the essence of the original private equity model — accepting again the risk, scarcity, time pressure and discipline that came with it?
2. Or should we accept that some of that essence has been the price paid for transforming private equity into a much larger and more accessible capital market — one that may generate less exceptional returns for investors, but distributes capital, liquidity, professional ownership and opportunities for growth across a far broader universe of companies and entrepreneurs?The second path may well be the one the industry is already taking and perhaps there is no reason to resist it. 

But, while evolution is inevitable, drift should not, the challenge may therefore be not to preserve private equity exactly as it was, but to make sure that, as it evolves, it does not lose the discipline, selectivity and intensity that made it successful in the first place.

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By: Eduardo González-Gallarza