The “Mega-Buyout” & Current State of Private Equity

In 2006, the private equity industry was in its “mega-buyout” phase. Low interest rates on borrowed funds, loosening lending standards by banks, and regulatory auditing legislation such as the Sarbanes-Oxley Act greatly increased investor confidence, leading to the biggest boom in the private equity industry since its inception. That year, private equity firms bought 654 U.S. companies for $375 billion, 18 times the number of transactions closed three years earlier. U.S. based private equity firms also raised $215.4 billion in investor commitments, 33% higher than 2005. Marked by buyouts of well known companies such as Toys “R” Us, The Hertz Corporation, and Metro-Goldwyn-Mayer, this period of huge returns for investors began to slow down in the second half of 2007. Eventually, banks UBS AG and Citigroup announced major writedowns(decreased balance sheet valuations) of their assets, due to credit losses. As 2008 began, lending standards by banks had tightened and the “mega-buyout” era of private equity had ended. 

However, this period of big investor returns vaulted private equity into mainstream pop culture, with the practice of investing in startups and flipping them for profit(“exiting”), the go-to business strategy during the social media and mobile tech boom of the 2010s. 

Being a founder or investor in Silicon Valley with plans of starting a company and selling it as soon as it showed growth potential, became a sought after way to get rich.

Unfortunately, this business model has not adapted well to a changing industry. According to McKinsey, the backlog of private equity owned companies still on the books has never been greater. McKinsey estimates more than 16,000 companies around the globe have been held by private equity firms for more than four years, 52% of total global private equity backed inventory. This trend continues in venture capital, with the typical company in the portfolio of a general partner(GP) now being held on average six and a half years. Why are these companies being held for so long? GPs are unwilling to part with portfolio companies because management fees charged to investors cover the GPs firms operating costs. These fees, while usually only 2%, can amount to millions of dollars due to the size of the funds. 

That’s not the only market force causing GPs to hold onto their portfolio companies. Returns from private equity are down, with the three-year annualized average returns of the Cambridge Associates Private Equity Index at 7.4% as of June 2025, 11 percentage points lower than the MSCI World Index and less than half the average returns of the S&P 500(18%). Low returns provide little incentive for GPs to sell their companies, because the fund didn’t clear an 8% hurdle rate, which would result in a 20% performance fee paid to the GP at sale. Since selling doesn’t mean a huge payday, the GP elects to hold onto the fund, ensuring management fees are charged and their firms operating costs are covered. Low returns can be traced back to 2022, when the Federal Reserve raised interest rates on loans. This made borrowing from banks more expensive for private equity firms, resulting in lower profit margins on leveraged investments.  

This rise in interest rates, along with the trends mentioned earlier, have led to the last market force that is perpetuating this vicious cycle in the private equity industry; a significant decrease in fundraising. In 2025, while total fundraising in North America increased 8% to $432 billion, Asia-Pacific struggled, with a 49% decline in total funds raised, and Europe, with a 41% decline in fundraising totals. The pace of firms reaching their fundraising goals has also slowed, with the average fund that closed in 2024 spending 27 months fundraising, a significant increase from 16 months in 2021. 

All of these trends taken together can make it seem like the private equity industry is heading towards its end. However it is more likely a sign of an industry maturing, with competition increasing and stakeholders becoming more sophisticated. As Hank Tucker for Forbes states “In an industry whose lifeblood is fresh capital, there are simply too many funds and not enough dollars in pensions, endowments and other institutions to satisfy all of them.”

How should private equity approach this changing industry? As McKinsey states, “In this environment, outcomes are increasingly shaped less by exposure to the asset class and more by deliberate choices about how firms source deals,…create value from operational improvements, build leadership, and operate through longer and more complex holding periods.” In essence, Rising Tiger’s approach. To find out how our unique approach helps founders successfully navigate a changing industry, schedule a call.