Private equity, once the darling of Wall Street, is facing a downturn as fund returns disappoint and investors withdraw. The industry is now grappling with a backlog of 31,000 pending exits, further increasing from last year.

Harvey Schwartz, CEO of Carlyle Group, one of the world’s top private equity firms, had predicted a banner year for the industry. At the beginning of 2025, executives were optimistic, anticipating a golden era of dealmaking after years of high interest rates and stringent regulations that froze mergers and acquisitions.

However, despite a modest recovery in deal activity in the second half of 2025, the industry’s core challenges remain unresolved. Many firms are underperforming the stock market, fundraising has become increasingly difficult, and a glut of companies acquired years ago remain unsold due to concerns about meeting promised investor returns.

Private equity firms, which manage over $7 trillion in investor capital, typically profit by acquiring companies with low-cost debt and later selling them. Their investors—such as pension funds and university endowments—lock up large sums for years in exchange for market-beating returns. Exits usually occur through sales or initial public offerings (IPOs).

Bain & Co. data shows that despite lower interest rates and a recent uptick in IPOs, the backlog of unsold assets has worsened. The industry now holds at least 31,000 companies valued at $3.7 trillion, surpassing last year’s record of 29,000 companies worth $3.6 trillion.

Recent attempts to exit investments have faltered. For instance, private equity firm Thomas Bravo has struggled to sell consumer analytics firm J.D. Power and software company ConnectWise, acquired in 2019. Similarly, Roark Capital, owner of Dunkin’ Brands, has delayed plans to take its restaurant holdings public since 2024.

The sluggish deal market has led to an unprecedented trend: private equity returns have consistently lagged behind the S&P 500. According to MSCI, U.S. private equity annualized returns (including fees) from 2022 to September 2025 were just 5.8%, compared to the S&P 500’s 11.6%.

The industry’s troubles began in 2022 when the Federal Reserve aggressively raised rates to combat inflation. Higher borrowing costs dampened dealmaking and discouraged buyers, including other private equity firms, which historically accounted for a third of exits.

Investors, too, are stuck as prolonged holding periods delay capital distributions. Preqin data reveals that distributions from funds older than four years have hit decade lows. Moreover, without exits, reported returns rely on estimated valuations, raising concerns about transparency.

Some institutional investors, like large pension funds, are now consolidating their private equity allocations toward top performers. KKR co-CEO Scott Nuttall noted that his firm achieved record fundraising this year, while others struggle.

Yale University’s endowment and New York City’s pension fund recently sold private equity stakes at discounts to free up cash. Secondary market transactions are expected to exceed $100 billion in 2025, far surpassing 2019’s $53 billion.

With weak returns and shrinking distributions, fundraising has become arduous. Preqin reports that private equity firms raised just $320 billion by September 2025, down sharply from $650 billion in 2023—potentially marking the worst year in a decade.

A grim joke circulates in the industry: many firms may have already raised their last fund without realizing it. Consolidation appears inevitable.

Marco Masotti, a partner at law firm Paul Weiss, predicts fewer firms in the future but notes the decline will be gradual. Meanwhile, recent IPO attempts by private equity-backed companies have largely underperformed.

Despite the challenges, bankers and lawyers see glimmers of optimism. Dealogic reports that 2025’s IPO activity, raising $170.6 billion, has improved from the past two years—though still far below 2021’s $606.4 billion.

Schwartz of Carlyle remains hopeful, citing the IPO rebound as a positive signal heading into 2026. Last week, Blackstone and Carlyle jointly took medical distributor Medline public in a $50 billion IPO—a 40% pop in early trading—offering hope for thousands of backlogged exits.