The exit overhang: PE’s liquidity challenge

July 2026  |  FEATURE | PRIVATE EQUITY

Financier Worldwide Magazine

July 2026 Issue

The exit backlog and liquidity pressure on mature portfolios are set to be the dominant private equity (PE) issue in 2026. The industry is carrying the largest stock of unsold buyout assets on record, with roughly half of PE-backed companies held for more than four years and average holding periods extending to approximately seven years.

This backlog is creating several challenges for the PE market, including constrained capital recycling and weakened fundraising momentum. It is also forcing general partners (GPs) to prioritise distributions to paid-in capital over valuation maximisation. Exit strategies are evolving, with greater reliance on trade sales, sponsor-to-sponsor deals and continuation funds, and a heightened emphasis on operational value creation.

For John Hunt, a partner at Sullivan & Worcester LLP, prolonged exit pressure is less about reshaping fund strategy and more about driving sponsors to refine their processes. This includes more rigorous due diligence at acquisition, clearer articulation of each investment’s thesis and stronger oversight of portfolio companies.

“Investors also appear to be focusing on certain fund offering terms,” notes Mr Hunt. “Among other things, they appear less generous in permitting GPs to continue a fund’s term without limited partner advisory committee approval. They also appear to be more interested than normal in clawback terms, especially as they relate to the structure of the waterfall.”

A growing bottleneck in private equity

PE entered 2026 under mounting pressure to convert long-held portfolio companies into realised returns, yet a persistent exit overhang continues to weigh on the industry. Years of elevated interest rates, valuation uncertainty and geopolitical volatility have left many sponsors holding ageing assets acquired during the dealmaking boom, often well beyond traditional timeframes.

As a result, the industry is increasingly relying on alternative routes to liquidity, including continuation vehicles and GP-led secondaries, as it seeks to address one of its most persistent bottlenecks.

Research from W Capital Partners estimates that the industry held around 29,000 buyout-backed companies globally last year. Since 2011, there have typically been around 1500 exits annually, with 2021 as an exception at approximately 2200. This implies a backlog equivalent to roughly 20 years of exits. With the number of companies increasing by around 1000 each year, exit activity is failing to keep pace with market expansion.

The overhang is compounded by the industry’s dry powder. Capital available for deployment has reached notable levels, with McKinsey estimating that more than $2 trillion is held globally across PE, venture capital and other private funds. While often viewed as a sign of strength, this surplus capital can intensify pressure on liquidity and exit timelines.

As traditional exit routes such as initial public offerings (IPOs) remain constrained, alternative paths have become more prominent. “As a practical matter, fund sponsors will use whatever exit routes produce the greatest and fastest returns,” points out Mr Hunt. IPOs are just one exit method; so are strategic acquisitions. IPOs and strategic acquisitions are good for fund sponsors not only because they have historically generated good returns, but they also allow the sponsors to benefit from the publicity.

“Sponsor-to-sponsor transactions and continuation funds, though not as splashy as IPOs, are important, and I expect will continue to be important even with a return of a robust IPO market, because they give other groups of strategic investors access to likely undervalued investments that simply may need a longer runway to develop,” he adds.

Valuations under strain

Despite the availability of alternative routes, the growing backlog is placing meaningful downward pressure on valuation expectations. An increasing supply of sponsor-owned assets is competing for a buyer pool that remains disciplined on price, financing terms and operational resilience. This dynamic is particularly challenging for sponsors that acquired assets at peak valuations during periods of intense competition.

“Asset values of private assets have always been an important issue – not just now, and not just because of the slowdown in exits,” stresses Mr Hunt. “These types of assets have always been difficult to value, and the lack of arm’s-length transactions that can be used as comparables has only exacerbated the problem. Investments from registered investment funds, such as, undertakings for collective investment in transferable securities funds and US investment companies, in the same types of assets is also exposing the issue to more unwanted publicity.

“The focus of investors, regulators and plaintiffs’ attorneys is still on the conflict of interest between the GP’s right to value its funds’ investments and its compensation, which is largely dependent on those valuations,” he continues. “Many fund sponsors have tried to mitigate some of that conflict with third-party valuations, but that has not been foolproof and there is a perception by some investors and others, rightly or wrongly, that independent valuations can be gamed.”

Looking ahead to the second half of 2026 and into 2027, the exit overhang is expected to continue shaping expectations across the industry. It will test valuation discipline, operational execution and liquidity strategies.

While high-quality assets can still reach the market, many sponsors face a longer and more complex path to realisation. In this environment, success will depend not only on timing but also on adaptability, creativity and the ability to unlock value beyond traditional exit routes.

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Richard Summerfield