Why private equity could be falling out of touch in 2025.

20 years ago, private equity was a small, unglamorous, and undesirable side of finance. Today, that narrative has completely changed as a result of changes in regulations, investor preferences, and the availability of cash, all of which have brought PE into the forefront of the media and the finance world, with firms like Blackstone and KKR being household names. The industry has grown by over 2000% since 2000. Because of this growth, PE firms have built a bad reputation among consumers for their destruction of companies in pursuit of monetary gain. The thing that originally drove wealthy investors in 25 years ago was PE's small size and understated investments, but now PE has simply grown too large. For many PE firms, deals are getting harder to find, fees are getting harder to justify, and for too many wealthy investors, the returns are not worth the risk.

Will this affect you?

Many may think private equity and its future possible failures will only affect extremely wealthy investors and asset managers, but that couldn't be further from the truth. Much of PE firms' equity comes from loans from large banks using the average American consumer's money. These loans bank on the fact that the economy will continue to prosper, but if it were to fail because of the recent AI skepticism, there are hundreds of billions in loans that top firms could default on.

What is Private Equity?

Private equity simply means any investment in businesses that are not listed on public securities markets

markets. Dedicated PE funds raise money from a pool of high-profile investors or so-called buy-out funds. These firms will put up a small amount as a down payment and borrow the rest, giving them equity to buy companies. Using these companies, they take out large high-interest loans in the company's name, paying the firm back through dividends while the company fails internally. In this system, the PE firms are not responsible for any of the loans taken out by their portfolio companies. Firms also use net value loans when going to banks, using their portfolio companies as security to take on more debt. The original money they put up to achieve the loan to buy companies is also acquired from a loan through secondary funds. Basically, the entire cycle runs off large amounts of borrowed money, and because of this, some private credit firms even specialize in just lending money to large firms. And the money that the private credit firms use is also borrowed from banks, only continuing the cycle. This cycle is key to why PE has been able to scale so rapidly.

Why could PE become worse?

In the beginning, private equity was very much a smart and competitive investment, and could beat the market and commonly did. This is because the investment was not associated with the market. Because the companies were not traded publicly, PE firms did not have to compete with large firms on Wall Street and were able to add value to small local companies, overall boosting these small companies, driving up profits. Now this idea has changed because the popularity of PE has grown substantially, causing the availability of businesses worth buying to become much lower. Originally, private equity consistently made returns because small businesses would traditionally take two to three times their yearly earnings because of the lack of competition PE firms faced when buying, allowing firms to make stable returns just a few years after buying the company. But as popularity increased, a large number of firms were created, increasing competition for these small companies, raising offer prices. This has led to small HVAC companies selling for much more in 2025, in the range of 5-10 times their yearly earnings. Because of this high price, a company that takes 10 years to pay off its purchase value is no longer beating the market, forcing firms to maximise as much profit as possible in a short amount of time and flip them for large capital gains. This strategy can only work in a bull market because, in a bull market, there is an influx of investors, allowing companies to take on more debt, which enables them to acquire more companies, driving up prices and creating strong returns that incentivize even more investors. This loop created incredible returns, but this created another problem; once firms ran out of smart companies to buy, they had to turn to riskier options to use the same cycle. This led them to either pick much more expensive companies in larger industries or riskier companies in smaller industries, causing much higher possible volatility for the future returns of PE. In recent years, conditions have been perfect for PE with lower interest rates, lots of businesses to acquire, and many wanting an alternative to real estate when investing. Now, a multitude of factors are hurting PE; the large US elderly population is aging out of the market, hurting the availability of companies for firms to buy. Many small business owners are much more informed in this era and do not need the mentorship from a large firm to run their business, and much of the general population is becoming much more skeptical of the industry, causing new fundraising into PE to drop thirty-five percent this year. If people stop fundraising, firms will lose their biggest buyer, other PE firms, because they will lack the capital to continue buying companies. And this problem could ruin many firms, as they need to be able to flip companies quickly because of the large amount of debt payments they must pay as a result of the money they were loaned originally to buy the company.