Private equity has been an important part of many long-term investment portfolios, offering access to businesses and opportunities beyond the public markets. But the environment surrounding private equity has changed considerably in recent years.

Higher interest rates have made financing more expensive. Companies are taking longer to sell. Cash is returning to investors more slowly. And some of the forces that supported private equity returns for much of the past decade are no longer as powerful.

These challenges do not mean the private equity model is broken. They do, however, make selectivity, patience, and disciplined evaluation increasingly important.

For long-term investors, understanding what has changed can provide helpful perspective on both the risks and opportunities ahead.

1. Private equity activity is improving, but liquidity remains constrained

One of the most important developments in private equity today is the growing number of investments that managers have held for longer than originally expected.

Private equity funds typically acquire companies, work to increase their value, and eventually sell them. That sale is particularly important for investors because it turns the value reported on a fund statement into cash that can be distributed.

There were encouraging signs in 2025. Global buyout-backed exit value increased significantly, according to Bain & Company. But the improvement was concentrated among a relatively small number of large transactions, while the overall number of exits declined slightly.

Meanwhile, private equity funds were holding approximately 32,000 unsold companies representing $3.8 trillion of unrealized value, and nearly 40% had been held for more than five years. Cash distributions to investors also remained well below their historical average.

That distinction matters. A private equity investment can increase in reported value, but investors in traditional private equity funds do not fully realize that value until the underlying company is sold or another transaction generates liquidity.

Longer holding periods are not necessarily a sign of trouble. In some cases, giving a strong business additional time to grow may be preferable to selling into an unfavorable market. But today's backlog means investors should pay close attention to a manager's ability to translate reported value into realized results over time.

2. Managers may have to work harder to create value

For much of the period between the 2008–2009 global financial crisis and the rise in interest rates beginning in 2022, private equity benefited from unusually favorable conditions. Low interest rates made debt relatively inexpensive and supported acquisitions, while rising valuations often allowed managers to sell businesses at higher multiples.

That environment began to shift in 2022. Financing costs rose sharply, and business purchase prices remained elevated. As a result, managers have less ability to rely on inexpensive debt and rising valuation multiples to support returns.

The practical implication is straightforward: Fundamental business performance matters more than financial engineering.

In the years ahead, successful managers may need to generate more results by improving the companies they own—growing revenue, strengthening margins, making thoughtful acquisitions, developing management teams, and executing sound business strategies.

That puts greater emphasis on the quality of the manager. Disciplined purchasing, sector expertise, prudent use of debt, and a repeatable approach to improving businesses may become increasingly important differentiators.

3. Not all private equity managers will experience this environment equally

“Private equity” describes a broad universe of managers, strategies, industries, and individual companies. The current environment is likely to create a clearer distinction between stronger and weaker managers.

Some managers entered recent years with experienced teams, disciplined investment processes, and portfolios of healthy businesses. Others may be managing companies purchased at high valuations or with capital structures that are more difficult to support in a higher-rate environment.

At the same time, private equity firms have developed additional ways to provide liquidity when a traditional sale is not attractive. These can include secondary transactions and continuation vehicles, which may allow investors to sell an interest while giving a manager additional time to own a company.

These tools can serve a legitimate purpose, but they also add complexity. Investors should understand how a transaction is structured, how a company is valued, what conflicts may exist, and whether the transaction supports long-term value creation.

The broader lesson is not that one structure is inherently good or bad. It is that disciplined evaluation matters.

What should long-term investors take from this?

The current environment does not make a case for abandoning private equity. Instead, it reinforces the importance of understanding the role private investments can play within a broader financial plan, including their potential to provide additional diversification.

Most importantly, private equity decisions should not be made in isolation. The appropriate allocation depends on an investor's broader portfolio, liquidity needs, goals, time horizon, and financial plan. Furthermore, exposure across managers, industries, investment years, company sizes, and structures can help reduce dependence on any single market environment.

A harder market, not necessarily a broken model

Private equity is moving through an important transition. The industry continues to own many strong businesses, and improving transaction markets could create opportunities for managers to realize value. At the same time, the backlog of aging investments is significant, and the conditions that helped support returns during the era of inexpensive capital have changed.

For long-term investors, that calls for neither excessive optimism nor pessimism. It calls for discipline. Manager quality, the source of investment returns, liquidity, diversification, and alignment with an investor's overall plan all deserve careful consideration. In an environment where the margin for error may be narrower, understanding how value is being created can be just as important as the return being reported.

For a deeper look at the data behind these trends—including private equity exits, distributions, holding periods, valuations, secondary transactions, and considerations for portfolio construction—read our full report The State of Private Equity: A Harder Market, Not a Broken Model. At Blue Trust, we believe private equity should be evaluated as one possible component of a diversified, long-term financial plan and investment portfolio. Contact a Blue Trust advisor to learn more.

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Private funds are speculative investments and are not suitable for all investors, nor do they represent a complete investment program. Private funds are available only to qualified investors who are comfortable with the substantial risks associated with investing in private funds. An investment in a private fund includes the risks inherent in an investment in securities. CAS00003011-08-26

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