So... Is Private Equity Collapsing Yet?

So, is private equity collapsing yet? Late last week, the industry publicly reported its second largest loss ever. Private credit markets that finance all the debt field speculation have seen massive withdrawals over liquidity concerns. A Bang Capital European loan tunch defaulted for the first time since 2008. Investor payouts have slowed to a multi-deade low, also not seen since the global financial crisis. People can't pull their money out fast enough. The few public assets that we do have information on are down by as much as 30%.

At the same time, the broader market is up by the same amount, and the number of unsold companies acquired by these firms has ballooned to over 32,000. It clearly doesn't sound great, but uh at the same time, last year the industry supposedly had its second best year ever, which kind of makes me look like a bit of an idiot, right? Private equity firms made almost a trillion dollars in new acquisitions and perhaps more importantly sold over $700 billion worth of businesses, which was only ever surpassed by 2021 when interest rates were significantly cheaper.

But this does raise the obvious question of how can both of these reports be true at the same time. Were the naysayers, myself included, just wrong about this industry, or was 2025 something of a going out of business sale? 70% of the nation's nursing homes are now owned by forprofit companies. Private equity getting into dentistry. How many losses there are so far throughout the private equity and private credit spaces over time. If a liquidity issue is extended, it can turn into a credit issue. Cascade Capital Group and its affiliate Legacy Healthcare bought the nursing home. A group led by Blackstone has agreed to take control of software group Medallia from Tama Bravo in a deal that will cement one of the largest wipeouts in the history.

Okay, so I have obviously been very critical of this industry in the past. Mostly because of the perverse incentives it gives financeers to inshitify products, lay off workers and separate themselves from the consequences, but also partially because it's just not a good business model. It's structured from the ground up to slowly eat itself while paying out huge bonuses for the privilege.

So yeah, late last month, Toma Bravo, a major private equity firm, publicly announced the industry's second biggest loss ever. Medallia was and still is a profitable, albeit boring business that makes software to track consumer feedback from online reviews and those little faces you poke when leaving a shop. You know how companies are always collecting your data from your smart fridge for some reason? Medallia is one of the programs they feed that data into to try to sell you stuff more effectively. Tommo Bravo acquired this business using a combination of their investors money and an additional estimated 1.8 billion in private credit loans coming from other big names in the space like KKR, Apollo, and Blackstone. After the acquisition, the company took on even more debt. And then when interest rates rose, it took on more debt again to maintain its interest payments. As a shock to absolutely nobody, this was not sustainable. And just over a week ago, it was announced that the company would be handed over to its debtors and that the original private equity firm in this whole arrangement would recognize a loss for the full $5 billion it had initially invested.

Now, the weird part is that the Medallia business itself is still profitable. It still has a long list of clients, and if it wasn't for all of the debt that the private equity company had piled onto it, it would still be making a decent amount of money. Tommo Bravo also wasn't short on cash. They could have just paid off this debt and kept the company, but they instead just decided to write it off entirely and hand the keys over to their lenders to make it their problem. This is literally the equivalent of someone putting 80% down on an investment property that is cash flow positive, borrowing 20% to complete the purchase and then letting the bank foreclose on the house as soon as interest rates went up on their adjustable rate mortgage. It sounds dumb, but it does kind of go to show that this industry isn't really behaving what you might call normally at the moment.

And there are three reasons why stuff like this is happening at the same time that on the surface at least business is as good as ever. The first reason is that 2025 was a little bit of a rush for the exits. On the top line, the year was the second biggest for private equity ever. Exit value hit $717 billion which is up 47% on 2024. And that sounds very impressive. But when you look at how that number was achieved, there are some problems. Deal count actually fell 6% to 3,18 total exits, which meant this growth was achieved by pushing the average deal size to a record $1.2 billion. And that average is being dragged up by a handful of absolutely enormous transactions. Just 13 of their sales accounted for almost a third of all transactions in total. And without them, the industry would indeed still be shrinking. The largest of these deals was the $55 billion Electronic Arts Take Private led by the Saudi public investment fund, which to be clear was a sovereign wealth fund buying a video game company with the assistance of some private equity partners. A lot of the small to middle market companies that have sort of defined this industry like the dentist offices, the plumbing companies, the regional healthcare chains, the uh YouTube channels, those are still struggling to find buyers.

2025 was also the first year interest rates came down meaningfully, which allowed a lot of funds to borrow again to shuffle their inventory of companies around. Again, this really is just someone flipping real estate investments. Even if they can manage their interest payments, selling activity tends to pick up when interest rates are lower because sellers know that buyers can borrow more to fund their purchases. The only difference is that instead of trading people's homes back and forth, they are trading people's livelihoods. on the almighty Excel spreadsheet. They are both just cash flow generating assets that are easy to get loans on.

Anyway, another big factor was that the regulatory environment also softened considerably. The FTC restarted early termination of merger reviews and granted over 100 requests by mid 2025. The new chairman of the commission, Andrew Ferguson, publicly said the agency must get out of the way quickly. So, basically, in 2025, for the first time in 3 years, funds had cheaper money and less regulatory friction. And a lot of them saw this as their chance to offload their winners and make major acquisitions while the window was open. Now, to play devil's advocate a bit, this was probably the correct call for these investment firms. But the big rush for the exit did create the image of activity that was really just making up for lost time.

Even before the recent news, there were some uh inconvenient details underneath. The one metric that was not making up for lost time was realized profits. Actualized payments back to investors who, you know, theoretically want a return on their investments remained extremely low. Distributions as a percentage of net asset value stayed flat at 14% in 2025, a level not seen since 2008 and 2009 during the actual global financial crisis. And this was back at a time when the industry was considerably smaller overall. and they have now lagged historical averages for four straight years running, which is a new record for the modern PE industry. So, the industry was reporting huge exit values while barely paying anyone back.

Now, maybe you could argue that all of this was getting reinvested, except that the number of new funds successfully raising capital has basically hdved over the last 4 years. If the industry was really firing on all cylinders, this probably shouldn't be happening. A lot of that record- setting exit volume was also just private equity funds trading companies to other private equity funds, which inflates both the acquisition number and the exit number simultaneously. This always happens a bit, but 2025 saw a massive uptick. Secondary transactions hit a record $226 billion with continuation vehicles alone reaching $115 billion, up 53% on the prior year.

Now, like a lot of things in this industry, that probably needs a bit of dejargoning. Private equity funds are supposed to have finite lives, usually 10 to 12 years. During that time, a private equity firm will launch the fund, market it to investors, raise money, buy assets, uh, improve them, flip them for a profit, and then distribute the profits out to investors. Again, in theory, if this goes well, the firm can usually launch multiple different funds all at the same time each with their own vintage, which is again just a douchy Finance Bro way of referring to the year the fund was launched. So to really stretch the lingo, the PE firm is the winery and the PE funds are the barrels which are again supposed to be used up within a set time period.

Now that self-imposed time frame exists for a reason. In theory, it forces managers to actually sell their companies and realize returns rather than just keeping a portfolio on the books, claiming it's worth billions and charging a 2% management fee on that hypothetical number indefinitely. Again, in theory, it forces them to prove what their holdings are actually worth, which was also a part of the reason why 2025 saw such an uptick, because a lot of the vintages were expiring. But when there are just not that many buyers and the self-inflicted clock is ticking, it creates some perverse incentives. The industry has started reluctantly building workarounds. Continuation vehicles are where a fund sells a company to a new fund run by the same manager. evergreen funds that never technically expire and net asset value loans where funds borrow against their own reported portfolio values to pay distributions to investors in the meantime. It's more extend and pretend that has sort of been enabled by slightly lower rates and much looser oversight.

And look, I'm trying to be more positive about things. So maybe this is all to say that the industry wasn't exactly dying. It was in the process of changing, although not necessarily for the better. But that was 2025. 2026 is shaping up to be a very different year, so it's time to learn how money works to find out if private equity can just go ahead and collapse already.

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Now, it's probably worth repeating in all of these videos that private equity is an extremely broad term. All it really means is any investment not listed on public stock markets. Typically, this means private non-listed companies, but these days, it more broadly means anything from non-listed real estate investments all the way to things like music royalties and even video game IP. If there is something that generates a cash flow, there will probably be a PE firm there to speculate on it.

Normally when people talk about private equity, particularly in the context of the harm it does, they are talking about buyout funds. These are the ones that go and acquire local businesses, load them up with debt, try to cut costs and flip them for a profit a few years later. This kind of private equity is indeed not doing well. The number of new funds raising money in the space has effectively hedged. They have underperformed the regular stock market over the last several years and they are running out of small to medium businesses willing to sell.

So the actual growth in PE broadly has mostly come from somewhere else entirely. Large funds buying large companies, often by specifically taking them off the stock market in a process called going private, which as you might have been able to piece together, is the opposite of going public. That $55 billion EA deal is an extreme example, but the trend is much broader than that. Wealthy individuals and institutions already own most of the stock market and these same groups are allowed to invest in private equity. In the past, I have often repeated the statistic that the top 10% of households own 93% of the stock market. That is actually not true anymore. Today, it's down to only about 87%. The top 1% has also fallen from controlling 52 to 50%.

Now, on the surface, this might look like a step in the right direction, making asset ownership more equitable, even if it is still very topheavy. In reality, what is actually happened is that these groups have just transitioned into private markets that regular investors don't have access to. If you look at all financial assets, including these gated private markets, it is in fact more concentrated than ever.

So, for a lot of companies, the only real reason to go public anymore is if there's enough retail hype around the business to get them a better price than they could negotiate privately. A lot of companies have figured out it's just easier to sell in private markets. they can avoid the regulatory overhead of being publicly listed and still raise the same amount of money from the same institutional investors anyway, which means that a lot of PE funds have basically become glorified index funds filled with boring conservative businesses that would have previously gone onto the S&P 500 or the Russell 2000.

Now, that's probably not great for the average retail investor because it means that more of the public stock market is going to be filled with either mega cap tech companies that already have huge index weights or companies that are only going public because they know retail hype will get them better pricing than they could in private markets. Put another way, if a company could sell itself for a higher price to sophisticated institutional investors who spend months doing due diligence, there should probably be a pretty good reason why they'd choose to instead sell that valuable asset to you. Major institutional investors are naturally wary of stretched valuations in mega cap tech. So if they want broad exposure to companies outside of that space, private markets have kind of become the place to do it. And well, even if they do want the exposure, it's also worth pointing out that a huge amount of recent deal value and PE has come from financing data center construction or buying the land to build them on, which helped drive up the headline numbers, but is again not really what most people picture when they hear private equity.

So, if we are being generous, my predictions of their imminent demise had been greatly exaggerated outside of one particular niche. It has instead mostly been replaced with a private stock market for rich people as opposed to the well public stock market for rich people. The traditional leverage buyout model is shrinking and struggling. It sounds good, but it gets better.

But even for the investors on the inside, there's still a growing problem. A lot of the money that made all of this possible is starting to dry up. We have already made a video about it, but in brief, private credit funds stepped into the gap left by banks after 2008, offering riskier but higher interest rate loans to companies that couldn't get traditional financing. And for a while, that worked well, especially when rates were lower. But when rates went up and stayed up, a lot of these borrowers found themselves stacking new debt on top of old debt just to keep up with their interest payments. Exactly what happened with Medallia.

A lot of these private credit loans were packaged into CLLOs's, collateral loan obligations, which is basically the same concept as the collateralized debt obligations from 2008, except instead of home loans underneath them, they're backed by corporate debt. Now, just a few weeks ago, a CLL trunch managed by Bank Capital defaulted for the first time in Europe since the global financial crisis. Now, to be fair, a junior CLLO trunch defaulting is literally what the risk structure is designed for. The junior tranches absorb losses so their senior tranches stay protected. That is the whole point. But it also does sound familiar, right? Fitch has suggested this might not stay isolated and that this could be the first of a small cluster rather than a one-off.

On the retail side, investors have been trying to pull their money out of private credit funds about as fast as their agreements will allow. In Q1 2026, five of the six major private credit funds gated investor withdrawals to effectively stop the private equivalent of a run on the bank. Non-listed BDC's returned about $7 billion to investors during the quarter while only raising $5 billion, marking the first time these private credit vehicles saw more money going out than coming in. Across the entire industry in the first half of 2026, deal volume dropped 34% compared to 2025 with the total number of PE transactions down 67%. Which in my defense means I wasn't wrong about the industry so much as I was wrong about the timing, which I guess is basically the same thing.

Anyway, there are two other external variables that have contributed to this boom and bust. The first is that a lot of funding for these private markets came from countries in the Persian Gulf. In the past, they had been using their oil revenue to make major acquisitions across a range of industries. But obviously, this year, their revenue has been cut off. So, this particular source of new funding has been a lot slower on top of an already shrinking market.

The second thing is that one of the biggest target industries for broader private equity has been having its own problems. Over the past decade, PE firms really like software as a service businesses because they were relatively capital-like and they worked well when rolled up together with other similar companies to expand their product suites. So instead of a SAS company selling one product, they could become a portfolio of companies selling in one solution, mostly as big software packages targeted at other businesses. Again, to use the recent example, Tommo Bravo was one of the biggest players in the space and Medallia was just one of the dozens of similar holdings they had previously acquired.

But 2026 has not been a kind year for SAS companies. A lot of businesses have started to believe they can now vibe code workable alternatives to the enterprise software they've been paying annual subscriptions for. And even if that's not actually true for most companies yet, investors think it is. And that's what matters for valuations. The industry is calling it the SAS apocalypse. Roughly a trillion dollars in aggregate SAS market capitalization was erased in Q1 of 2026 alone. The median public SAS company revenue multiple fell from 6.2x at the end of 2024 to 3.3x March 2026. Of course, private companies don't get constantly updated pricing information until they are forced to sell or be forclosed on. Secondary market buyers are now demanding discounts of 20% or more to take SAS heavy PE portfolios off managers hands up from around 5% just a few weeks before that.

This is why Tomo Bravo decided to hand Medallia over to its creditors. In theory, it had $5 billion in equity. But after these adjustments, it was underwater on its loans, even with a very modest leverage ratio. So, it just made more sense to walk away and record the loss. Bravo's general partner, uh, Mr. Bravo himself said at a conference shortly after, "We were moving really fast during that time. We underwrote really fast growth, and in hindsight, we paid too much because that growth didn't materialize."

Now, I know that this is just one example, but it is a big one and probably the first of many to be exposed pantsless as the tide goes out. According to an industry report from Oliver Weineman, 80% of PE buyers now site AIdriven commoditization as the number one risk to SAS valuations.

Now, the other thing about all of this is that we genuinely don't know how good or bad things really are yet. The private credit industry is private. Disclosures are few and far between. We can only estimate what's actually going on based on the rare moments things go so publicly wrong that they become impossible to hide or from the handful of metrics that do get reported.

Now, to be fair, private equity becoming a boring walled garden of equally boring companies only accessible to accredited investors would actually be preferable to the old model of leverage buyout funds strip mining local businesses. But more broadly, the market can stay irrational longer than any fund can stay solvent or some dumb YouTuber can maintain their ego. But there is one element to this that won't wait around. We've mentioned it briefly, but go and watch this video next to find out how private credit might bring the find out stage sooner than would otherwise be expected. And don't forget to like and subscribe to keep on learning how money works.