Deep Dive: Why Private Equity Firms Are Struggling to Exit Investments

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Hey {{first_name}} 👋!

Earlier this week, I asked readers to vote on what they wanted the next deep dive to focus on.

And the winner was…

…Why private equity firms are struggling to exit investments.

I like this one because it’s the type of topic finance professionals genuinely talk about behind closed doors, but most students never really come across.

Everyone talks about stock markets, AI, and interest rates.

Very few people talk about what’s happening in private markets.

But behind the scenes, there’s a pretty interesting situation developing.

Private equity firms are sitting on portfolio companies for much longer than expected. IPO markets haven’t fully reopened. Deal activity has been slower. Financing has become more expensive. And firms are increasingly turning to more creative solutions just to generate liquidity.

The interesting thing is this isn’t really a headline story.

It’s more of a structural shift happening underneath the surface.

And if you understand it properly, you’ll understand a lot more about how private equity works, how investment cycles work, and how higher interest rates ripple through finance.

By the end of today’s issue, you should understand:

Let’s get into it.

Before getting into the problem, it helps to understand what private equity firms actually do.

At a very simple level, private equity firms raise money from investors and use it to buy companies.

Those investors are usually large institutions like:

The goal is straightforward: Buy a company, improve it, grow it, and eventually sell it for more than you paid.

That improvement could involve:

Private equity firms usually hold companies for a few years before exiting.

And this is important:

Private equity only really works if firms can eventually sell those businesses.

That exit is where the money gets made.

Traditionally, there are three main ways to exit:

1. IPO (Initial Public Offering): Taking the company public.

2. Strategic sale: Selling the company to another business.

3. Secondary buyout: Selling to another private equity firm.

Simple enough.

The issue is that over the past few years, all three became much harder.

For most of the 2010s and into the early 2020s, interest rates stayed very low.

Money was cheap.

And when money is cheap, private equity tends to do very well.

Why?

Because private equity firms often use debt to finance acquisitions.

This is known as a leveraged buyout, or LBO.

An LBO is simply: Buying a company using a mixture of investor money and borrowed money.

If interest rates are low:

That created a very strong environment for deals.

Private equity firms bought businesses aggressively because financing was abundant and asset prices kept rising.

There was also a broader assumption: If we buy a company today, we’ll probably be able to sell it later at a higher valuation.

And for a long time, that worked.

When inflation surged globally, central banks raised interest rates aggressively.

And suddenly, the environment changed.

Higher rates created multiple problems at once.

Borrowing became more expensive.

Financing large acquisitions became harder.

Valuations started falling.

And buyers became much more cautious.

That matters because private equity relies heavily on healthy deal activity.

When financing costs rise sharply, it becomes harder to justify paying high prices for businesses.

Think about it this way:

If borrowing used to cost 2% and now costs 6–8%, the economics of a deal can change very quickly.

So many buyers stepped back.

And fewer buyers means fewer exits.

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One of the biggest exit routes for private equity has traditionally been IPOs.

But IPO markets slowed significantly once rates rose.

Why?

Because higher rates tend to reduce stock market valuations.

Growth companies were hit particularly hard.

And when valuations fall: Companies don’t want to go public at lower prices.

So many firms delayed listings.

That created a backlog.

There are now large numbers of companies waiting for better conditions before pursuing IPOs.

Which means private equity firms have portfolio companies sitting on their books for longer than originally planned.

Instead of holding businesses for four or five years, some firms are holding assets for considerably longer.

This is where things become really interesting.

Private equity firms do not just buy and hold businesses forever.

Eventually they need to return money back to investors.

Remember:

Pension funds and institutional investors expect distributions.

In simple terms: They want cash back.

That’s where liquidity becomes important.

Liquidity simply means: The ability to convert an investment into cash.

If exits slow down:

→ firms can’t sell companies
→ firms struggle to generate cash
→ investors wait longer to receive returns

And that starts creating pressure across the system.

This liquidity issue has quietly become one of the biggest discussions inside private markets.

Because traditional exits slowed down, private equity firms started becoming more creative.

One increasingly popular solution is a continuation fund.

A continuation fund sounds complicated but the idea is simple:

Instead of selling a company externally, a firm moves the asset into a new fund structure so it can keep owning it for longer.

This buys time.

Secondary deals have also become much more common.

These involve investors selling stakes in private equity funds to other investors.

Again:

The goal is liquidity.

These solutions are becoming more common because firms still need ways to generate returns while waiting for traditional exit markets to improve.

This isn't just a private equity story.

It says something much broader about markets.

It shows how higher interest rates affect finance in ways that are not always obvious.

Higher rates:

And all of this eventually feeds through into investment banks, capital markets, and broader financial activity.

This is a good example of how one macroeconomic change can create ripple effects throughout the system.

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Most students talk about:

Very few bring up private market liquidity or exit dynamics.

Which is why this topic stands out.

Because it shows:

And that’s ultimately what commercial awareness is.

Not memorising headlines.

Understanding what’s happening underneath them.

If an interviewer asks:

A strong answer could be:

One of the reasons I like this topic so much is because it’s a reminder that finance is usually much deeper than whatever headlines are trending that week.

Most people look at markets through the lens of:

But underneath all of that, there’s an entire private markets ecosystem dealing with its own pressures and challenges.

And right now, one of the biggest challenges is liquidity.

Private equity firms bought many businesses during a period where money was cheap, valuations were high, and exits felt relatively straightforward. Then interest rates rose sharply, financing became more expensive, IPO markets slowed down, and suddenly the entire environment changed.

That’s why this story matters.

It’s not just about private equity firms struggling to sell companies. It’s about understanding how changes in interest rates ripple through the entire financial system and affect:

This is also a really good example of what strong commercial awareness actually looks like.

It’s not memorising random headlines from the Financial Times.

It’s understanding:

If you can talk clearly about topics like this in interviews, you immediately sound more commercially aware and much closer to how professionals inside the industry actually think.

Next week, I’ll be back with another deep dive based on whichever topic readers vote for in the next commercial awareness update.

Until then, keep up the hard work!

Afzal