A traditional business is run to provide superior goods and services to customers at a profitable price (returning value to the shareholders) and to maintain customer service and plant maintenance to continue the business for the long term.
The private equity model is different. Private equity borrows money, buys a business, pays the equity partners hugely, strips the business (often firing workers who built the business in the first place), reduces customer service and maintenance, and then sells the stripped business after a short time to a sucker for a profit. Many good businesses have been destroyed this way.
This model only works when interest rates are low and money is so easy that the turnover goes smoothly. If no sucker can be found who will pay enough to provide the returns the private equity group needs they will be forced to continue to operate a business they never cared about in the first place. For private equity, it was never about operating a business - it was only about stripping other people’s work and money.
https://www.nytimes.com/2026/08/10/business/private-equity-unsold-businesses.html
Private Equity Is Stuck With 33,575 Unsold Businesses
Even amid a booming deal-making environment, private equity firms are unable to exit a growing number of investments at values their investors require.
…
For the third consecutive year, private equity firms are saddled with a rapidly increasing number of companies that they cannot sell or take public at the returns their investors expect.
As of June 30, private equity firms had 33,575 unsold companies in their portfolios, according to PitchBook, an industry data firm. That’s up from 32,451 companies at the end of last year and 15,923 companies a decade ago.
The growing backlog is a challenge for private equity’s core business model. Typically, such firms aim to buy a company, often add large amounts of debt to its balance sheet, improve its financial performance and then sell it for a profit, usually within five to seven years.
The state of limbo has been difficult for large investors like pension funds and endowments that have spent decades paying steep fees to private equity firms promising market-beating returns. Some investors and industry professionals are worried that the firms won’t be able to sell companies without taking big losses…
Higher interest rates have made it difficult for private equity firms to find buyers that rely on cheap debt to finance acquisitions…[end quote]
Private equity firms whose low-interest debts are maturing in a higher-interest rate environment often make PIK (payment in kind) deals which add to and extend the debt at a higher interest rate. Some try to take the companies public but not necessarily successfully.
Who provides the money for the private equity buyouts?
Private credit. Huge buckets of money loaned by insurance companies and pension funds as well as wealthy investors.
Private Credit Is Under Growing Strain, Despite Industry’s Upbeat Tone
Default rates are hitting recent highs, and internal reviews of loan health point to tougher times ahead, a WSJ analysis shows
By Matt Wirz, The Wall Street Journal, Aug. 9, 2026
- A Wall Street Journal analysis found private-credit loan defaults at Ares, Blackstone, Blue Owl and Golub reached their highest since at least 2021.
- Funds managed by Ares, Golub and KKR reported increases this year in the number of borrowers on watch for deteriorating performance.
- Returns for private-credit funds are suffering, with even stronger funds struggling to deliver 7% in annual return compared with 10% or more in years past.
Private-credit funds invest money from clients in high-interest loans to heavily indebted companies, a strategy called “direct lending.” Until recently, the hefty returns the funds delivered made them one of the hottest flavors on Wall Street.
Then, investors grew alarmed by several high-profile defaults caused by alleged frauds, and by loans made to software companies at risk of disruption by artificial intelligence. Many individuals who had been sold the funds asked for their money back…
While default rates are rising, they remain below previous periods of heavy stress, such as the height of the Covid pandemic or the oil-price crash in 2015. Losses could abate if interest rates decline and economic activity remains robust without pushing inflation higher… [end quote]
A lot of money is involved here. For perspective, U.S. GDP is $32 Trillion.
According to Gemini AI:
Across the global financial system, the total amount of money tied up in Private Equity (PE) and Private Credit sits at $10 trillion to $12+ trillion.
The total capital committed across the entire alternative asset space (which includes PE, Private Credit, Real Estate, Infrastructure, and Venture Capital) is roughly $15 Trillion to $17 Trillion.
these two markets are tightly coupled:
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PE firms rely on Private Credit funds (rather than traditional public bond markets or commercial banks) to fund their high-leverage corporate buyouts.
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Because higher interest rates have choked off standard exit paths (selling to another buyer or going public), PE firms are sitting on a massive $4+ Trillion stock of unsold assets.
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To avoid taking write-downs, PE firms rely on Payment-in-Kind (PIK) deals and debt extensions, effectively borrowing more high-cost capital from Private Credit funds to keep companies afloat—placing both the $8+ Trillion PE market and the $2+ Trillion Private Credit market under synchronized strain.
What will happen if the economy slows and/or long-term interest rates rise?
Macro Implications: Main Street & Policy Risk
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Corporate Investment & Hiring Freeze: High interest expense combined with lower consumer demand forces PE-held businesses to slash R&D, cancel capital expenditures, freeze hiring, and lay off employees to preserve cash.
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Systemic Spillover to Insurance & Pensions: Because insurance companies and pension funds are heavily exposed to private credit and PE commitments, sustained losses in these asset classes directly impact annuity yields and institutional funding ratios. [end Gemini quote]
Because private equity and private credit funds are private, they aren’t required to report marked-to-market values of their assets. Many of the assets are on the books with valuations that are much higher than the assets would realize if actually sold (marked-to-market).
Zombie company defaults are already rising.
Currently, junk bonds yield over 10% and rising. Private credit yields would be higher than this.
Even though the amount of money is large it’s not likely to cause a financial crisis. The investors are locked in for years. Even if they need the money, the private equity and private credit funds can and do limit the amount they distribute to investors who want to withdraw their funds.
Wendy