The "Darwin Moment" Has Arrived! Analysis Warns: Some PE Firms Face the Risk of Extinction

The private equity industry stands at a brutal crossroads.

According to the latest report from Bain & Company, the private equity sector has returned less profit to investors for the fourth consecutive year, with the distribution rate in 2025 at only 14%, the lowest level since the 2008–2009 global financial crisis. At the same time, the industry is burdened with a backlog of around 32,000 unsold companies, corresponding to $3.8 trillion in assets, with the exit dilemma continuing to worsen.

This pressure is reshaping the industry landscape. Fundraising is highly concentrated among leading 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 that some smaller, undifferentiated fund managers will face "extinction."

Meanwhile, warning signals are also emerging in the private credit market. Fourier Asset Management CIO Orlando Gemes issued a stern warning: "The danger signs we see in private credit today are eerily similar to those in 2007." Deutsche Bank characterized the current situation as "lots of smoke, but no clear fire."

Returns Hit Crisis Lows, Exit Dilemma Worsens

Bain & Company data shows that in 2025, private equity distributions as a percentage of net asset value remain at 14%, the second lowest level since the worst of the 2008 financial crisis, and the fourth consecutive year at such lows.

Exit-side pressure is also significant. The report shows that exit deal volume in 2025 declined by 2% year-on-year, and the average asset holding period has lengthened from five to six years between 2010 and 2021 to about seven years now.

Rebecca Burack, global head of private equity at Bain & Company, pointed out that firms have already sold their "gem" assets, but it's much harder to offload assets with less certain prospects. "When companies are held for more than five or six years, internal rates of return start to look less attractive," she said.

Fundraising is also under pressure. In 2025, leveraged buyout fund fundraising fell by 16% year-on-year to $395 billion, and the number of funds completing fundraising fell by 23%, declining for the fourth consecutive year. Burack also noted that the uncertainty brought by Trump tariffs abruptly halted deal activity at the start of 2025, while in January of that year, deal momentum still "looked extremely strong."

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

Although global M&A deal value in 2025 surged 44% year-on-year to $904 billion, this impressive number masks significant structural divergence.

Bain's report shows that just 13 mega-deals exceeding $10 billion contributed about 30% of total deal value, and these were mostly concentrated in the U.S. market. Meanwhile, the overall number of deals fell 6% to 3,018, and large privatizations such as Electronic Arts did little to relieve the industry's $3.8 trillion in unsold assets.

PitchBook senior analyst Kyle Walters noted that large institutions, thanks to their diversified strategies and massive capital pools, have stronger buffers when deals and exits slow.

"This pressure hits mid-market managers harder, especially emerging managers trying to stand out among peers."

Walters further warned that, "Given the current environment, many funds large and small are struggling to raise capital, and many managers have already raised their last fund—they just don't know it yet." He added that underperforming managers "are likely to quietly wind down, and that's all the outside world will see or hear."

"Darwinian" Elimination: Consolidation, Zombie Funds, and Extinction

As the industry reshuffles, opinions on the way forward are diverging. Some industry leaders expect consolidation to accelerate, but GP Score’s Bégramian is cautious.

He pointed out, "Not every PE firm can be acquired by BlackRock or Apollo; they're not interested in buying everyone," especially when the management fee income on offer is essentially tied to "grey area" assets that are hard to exit or value, making mega-platforms less eager to acquire.

Mergermarket head Lucinda Guthrie pointed to another path—'zombification.' Some managers choose to transfer assets into continuation vehicles, providing liquidity to investors while continuing to hold the assets, essentially buying time.

But she warned that if funds can no longer continue distributing capital to investors, this model is unsustainable. Guthrie expects 2026 to be the key year distinguishing managers who can deliver on their promises from those who cannot, and characterizes this industry reset as an "absolute Darwinian elimination."

Old Playbook Fails, "12% Is the New 5%"

Even institutions that survive this round of reshuffling now face much greater challenges in making profits.

According to Bain & Company, in the 2010s, thanks to ultra-low borrowing costs and rising valuation multiples, buyout funds could often double or more their returns within five years with only modest profit growth at portfolio companies.

Today, those tailwinds have disappeared. Leverage costs are now around 8%–9%, valuation multiples have stagnated, and Bain summarizes this shift as "12% is the new 5%"—meaning portfolio companies now need EBITDA annual growth rates of 10%–12%, up from around 5%, to achieve the same 2.5x investment returns.

Rebecca Burack said that in the past, maintaining an EBITDA annual growth rate of 5% before exit was enough. "Given current interest rates and entry/exit multiples, you now need to grow 12% per year for five years to get the same returns."

Walters also noted, "The current environment is a true test of how much operational value managers can create, rather than relying on financial engineering to generate returns"—meaning fund managers must now drive portfolio company profit growth through substantive measures such as pricing discipline, working capital improvement, and management upgrades, rather than simply chasing valuation multiples with cheap debt.

Is Today’s "PE Private Credit Crisis" a New Subprime?

The woes of private equity are not isolated. The private credit market is also showing worrying warning signs.

Fourier Asset Management CIO Orlando Gemes warned, "The danger signs we see today in private credit are eerily similar to those of 2007," specifically pointing out the deterioration of lender protection covenants and risks of asset-liability mismatches masked by complex liquidity terms.

A February report from Deutsche Bank shows that the discount of S&P BDC Index component funds’ stock prices to their net asset values has reached its highest level since the COVID-19 pandemic. Incidents such as Blue Owl imposing redemption restrictions on one of its funds and Breitling private equity holders halving the value of their investments have further fueled market panic.

Nevertheless, Deutsche Bank is relatively cautious about systemic risk, characterizing the current situation as "lots of smoke, but no clear fire," and believes that conditions for widespread market contagion have not yet materialized. The bank points out that over $3 trillion in private capital "dry powder" may provide a key buffer.

Deutsche Bank also listed four key trigger indicators that deserve close attention: a sharp rise in credit spreads, a substantial contraction in corporate profits, stress in the Treasury market, and changes in bank regulation or capital requirements for private market exposures. Currently, none of these indicators have reached dangerous levels.

Nonetheless, Bain & Company's Rebecca Burack still believes that private equity is overall a strong investment choice, providing diversified allocation no longer available in public markets. "It's just a bit stuck at the moment," she said.