"The Pulse" -- #131 / How Crowded is Private Equity?

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Market Update:

How Crowded is Private Equity?

Private equity is fucking packed (in terms of # of firms and $). There is a massive amount of money waiting to be invested, but only so many decent companies worth buying. As of mid‑2025, global dry powder was about 2.515 trillion dollars. That is a little below the 2023 high of 2.725 trillion dollars, but still far above what was considered normal before the 2020s. With that much cash on the sidelines, every interesting deal becomes extremely competitive.

At the same time, there are a huge number of private equity firms in the world chasing those deals. There are literally tens of thousands of PE firms out there. That means thousands of firms, from giant players to smaller shops, are all competing for the same pool of companies.

A big reason there are so many firms is that over the past decade, large investors such as pension funds, endowments, and wealthy families dumped capital into private markets, hoping for big returns. That created a ton of new funds and firms, each trying to find their own slice of the pie.

Though deal-making seems to be picking up, selling companies has been hard over the last few years. In 2024, global PE exits hit a multi‑year low compared with past peaks, meaning fewer firms are able to sell their investments and return money to investors. When exits slow, funds get stuck holding companies longer than expected. That reduces new deals and adds to competition for the best companies.

Because of the slow exit environment, some firms have turned to alternative strategies to manage their portfolios. One such strategy is the use of continuation funds. As discussed in previous write-ups, continuation funds let a firm move one or more companies from an older fund into a new vehicle. Original investors in the old fund can choose to take their money out or stay invested, and new investors can join in too. This provides some liquidity and buys time. In 2024, continuation‑fund deals amounted to about 63 billion dollars globally. That shows how shitty the environment was.

The main problem is the backlog: many firms are holding companies they cannot yet exit cleanly, and there are thousands of firms competing for too few good targets. This makes fundraising and dealmaking harder, especially for smaller or mid‑sized firms. Big, well‑known firms with strong track records still manage to raise new funds because investors trust they can navigate the situation, but smaller players are often stuck fighting over leftover opportunities. For those of you interested in a career in PE, the extended exit timeline means seeing carry materialize is much more of a question mark.

Looking ahead, there is room for optimism. If interest rates drop, credit gets cheaper, and the market for acquisitions or IPOs picks up, exit activity could continue to increase. That would free up capital, reduce the backlog, and ease competition for deals. However, if exit markets are weak, competition will remain tough. Only firms that consistently show good results by picking the right deals, managing companies well, and eventually exiting will stand out.

Disclosure: Nothing written here is financial advice or should be used for investment decisions.

A Capital Structure Problem


Problem:

A fintech lender has $100mm of EBITDA and trades at 4-6x EV / EBITDA.

In no particular order, the capital structure is:

At a 4x multiple, who gets paid back? What happens at a 6x multiple? 🧐

To answer this question, follow the steps below:

1. Block out the noise 🚫

-We don't care that this is a fintech business

and

-We don't care about the dividend payment or loan maturity because timing of obligations does not dictate priority in the capital structure ✅

2. We need to put together the appropriate capital structure

-This requires understanding of different securities. When ranking this example from most senior to most junior:

-$300mm 1st lien term loan ✅
-$200mm 2nd lien term loan ✅
-$200mm preferred equity ✅
-$200mm common equity ✅

A total capital structure valued at $900mm. 📌

3. At a 4x multiple this is only a $400mm business. Shit! 😬

4. The top of the stack is repaid first, so the 1st lien term loan is 100% repaid. Then, all that is left is 50% repayment of the 2nd lien term loan

-The 2nd lien lenders would take the keys of this business 🔥

5. At a 6x multiple, this business is still only worth $600mm! 💩

6. The 1st lien is fully repaid, the 2nd lien is fully repaid, and only 50% of the preferred stock is repaid. Common equity is totally wiped out ✅

-The business is now owned by the preferred equityholders! 🔥

This is a perfect question to assess someone's understanding of how the capital structure works.

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“The Pulse” #131