The Great PE Shakeout Has Begun

The fundraising environment has become challenging. Fund closes are hitting multi-year lows and first-time funds are barely getting off the ground. Middle-market firms are struggling while mega-funds vacuum up the lion’s share of LP commitments.

But most of the headlines miss the real story.

Capital Is Concentrating, Not Disappearing

LPs aren’t leaving PE. They’re consolidating with managers they trust to generate returns in a fundamentally different environment. The flight to quality is accelerating, and firms without a differentiated value creation story are getting left behind.

The Strategy Mismatch Problem

Many middle-market firms expanded upmarket during the 2021-2022 fundraising boom. The logic seemed sound: bigger funds, bigger fees, bigger carry.

The problem? Most of these funds don’t really have a sustainable competitive advantage.

Smaller PE funds built their track records on proprietary deal sourcing. Direct relationships with founders. Negotiated transactions at attractive valuations. When they moved upmarket, they found themselves in bank-run auctions competing against better-capitalized firms for the same assets. Now they’re stuck: too big for their original strategy, too small to compete effectively in the upper market.

The Exit Crisis Compounds Everything

PE firms are investing multiples of what they’re returning to LPs. The ratio is the worst it’s been in over a decade.

Without distributions, LPs can’t re-up. Without re-ups, fundraising collapses. The flywheel is broken.

Also, there are 15,000 PE firms worldwide and $9 trillion in global assets, private equity is now mainstream and there are too many PE firms and too much capital/AUM chasing few high quality deals. There are are also $1 Trillion in unsold assets with 31,000+ companies awaiting exit (source: PwC’s $1 trillion in unsold assets – https://www.cnbc.com/2025/11/12/why-private-equity-is-stuck-with-zombie-companies-it-cant-sell.html).

The Real “Operational Alpha” Imperative

Here’s what separates the PE firms that will thrive from those that won’t:

In a high-multiple, high-rate environment, financial engineering is largely neutralized. You can’t lever your way to returns when debt costs 10%+. You can’t rely on multiple expansion when you bought at 12x EBITDA.

The only path to returns is not only operational improvement but GTM improvement which drives equity value creation and TEV growth.

This is where deep Portfolio Operations teams focused on GTM and growth become the differentiator. Firms with in-house expertise in sales force effectiveness, pricing optimization, customer acquisition, and revenue operations can unlock capital-efficient growth that purely financial sponsors simply cannot.

Consider what “GTM Improvements” mean practically:

  • GTM improvements can drive additional 10-30% revenue growth without proportional cost increases
  • GTM strategy refinement can compress sales cycles and improve win rates
  • Pricing and packaging optimization can expand margins without customer churn
  • Revenue operations infrastructure can enable data-driven decision-making that compounds over the hold period

These aren’t consulting engagements that produce decks. They’re embedded capabilities that drive measurable EBITDA growth quarter over quarter.

The Bifurcation Ahead

The next few years will separate two types of PE firms:

Financial sponsors who built their franchises on leverage, multiple arbitrage, and market timing. They’ll struggle to differentiate in fundraising and face pressure on returns as their traditional playbook fails to work.

Operational sponsors with deep bench strength in value creation. They’ll demonstrate to LPs that they can generate returns regardless of rate environment or entry multiples, because their edge comes from making companies genuinely better.

The shakeout is already happening. LPs are voting with their capital. The question for every PE firm is simple: what is your unique differentiation and competitive edge?