The New Problems That Aren't Mine

Private equity just had its hardest year in a decade. You can read it in the latest McKinsey private markets report, the gloomiest one to cross my desk in years.

On the surface, last year looked like a recovery. Exit values jumped more than forty percent and the IPO window cracked back open, with public listings nearly doubling in value.1 Underneath that headline, the machine that actually returns money to investors kept seizing up.

I spent years on the institutional side of this business before I left to become a fundless sponsor. I know how these funds are built because I worked inside one. So when I read the report now, I read it the way I read everything, by asking one question of each trend: does this apply to me? Most of what is breaking in private equity is breaking because of how the funds are built. The deals are mostly fine. The structure is the thing that is cracking.

Here is what is happening, and here is why almost none of it reaches the way I operate today.

The Cash Stopped Coming Back

The number that matters most to a limited partner is how much cash actually comes back, and that number has collapsed. McKinsey puts distributions as a share of total private equity assets at about six percent over the trailing year, against a long-run average closer to sixteen. Five-year rolling distributions just hit the lowest level on record.2

Read that slowly. As a share of the money sitting in funds, cash going back to investors has never been lower. LPs are not naive. Distributions to paid-in capital, the cash they can actually spend, now sits alongside their oldest measures of return when they decide where to allocate, because they have learned that a markup on a quarterly statement does not fund a pension check.

The pressure compounds downstream. Endowments and pensions that counted on those distributions to fund their next commitment are stuck, which is part of why so many are now selling fund stakes on the secondary market at a discount just to free up cash. When the exits stop, the whole chain seizes, and the people who feel it first are the ones who were promised a return years ago and are still waiting.

For me, cash back to investors is the whole point of the structure. When I sell a company, my investors get paid. There is no fund-level netting, no recycling of proceeds, no waiting for the rest of a portfolio to catch up. The deal closes and the wire goes out.

The Powder Is Getting Old

Funds raise money and then sit on it until they find something to buy. McKinsey estimates that more than forty percent of the dry powder waiting to be deployed has now been waiting at least two years, a record high.3 Even as headline deal value rose, the actual count of buyouts fell last year, and it fell in every region.4

Old money on a clock is a dangerous thing. A fund that raised capital a few years ago promised to put it to work, and the fee meter runs whether or not a good deal exists. That pressure is exactly how firms talk themselves into paying up for mediocre businesses. Take-private deals jumped more than forty percent last year, with North America up over seventy, as firms went hunting for value in discounted public companies because the private ones were too picked over.5

I carry no blind pool. I have no committed capital sitting idle and aging, and no clock forcing me to deploy. I look at a business, and if it is the right one, I raise the money against that specific deal. If it is not, I pass and nothing is lost. The absence of a fund is the absence of that pressure.

When a fund borrows against its own portfolio to cut investors a distribution check, that check is a loan wearing a costume.

Paul W. Swaney III

The Raise Never Ends

Closed-end fundraising has become slow, selective, and brutal. There are fewer first-time funds being raised today than at any point in the past decade. Capital keeps concentrating in the largest managers: funds over five billion dollars take a bigger slice every year, while funds under five hundred million have shrunk to thirteen percent of fundraising from seventeen percent five years ago.6

What that means in practice is that a general partner spends a staggering amount of time raising the next fund instead of running the current one. The treadmill never stops. You close Fund III and you are already on the road for Fund IV, selling a track record while the companies you own wait for attention.

I raise capital one deal at a time, from investors who can see exactly what they are buying. There is no fund to perpetuate, no franchise that has to keep growing just to justify the team. When I am not raising for a specific deal, I am operating. That is the job.

Financial Engineering in a Costume

When real exits are scarce, the industry invents ways to manufacture the appearance of liquidity. Secondaries trading volume jumped almost fifty percent last year.7 Continuation vehicles, where a firm sells a company out of one of its own funds into another fund it also controls, have gone from novelty to standard practice. NAV lending, borrowing against the whole portfolio to fund distributions, is now a mainstream tool.

Some of these structures are legitimate. All of them share a tell. They move value around inside the system rather than taking it out. An investor who receives a distribution funded by a loan against the very assets they still own has been handed their own money with interest attached.

I had a front-row seat to the rise of the semiliquid vehicle, from inside one of the firms that helped invent it. That model has now spread across the industry: fundraising into semiliquid private equity vehicles in the United States has more than doubled in two years, past two hundred billion dollars, because the institutional well is running dry and the industry needs a fresh source of cash.8 I understand the appeal. I also understand what it is papering over.

I do not have these tools and I do not want them. My investors get liquidity the old way, when a business actually sells to a real buyer at a real price. It is slower and it is honest.

Nobody Learned to Operate

Here is the trend sitting underneath all the others. McKinsey calls the new engine of returns operational alpha, which is a polite way of saying that cheap debt and rising multiples are gone, and the only way left to make money is to genuinely make the business better.

The trouble is that most of the industry never built that muscle. A generation of returns came from leverage and multiple expansion. You could buy well, hold, and sell into a rising market without ever changing how the company actually ran. The people who climbed through that era learned to model and to negotiate. Most of them have never sat in the operator's chair and had to fix the thing they bought.

I have. When I underwrite a deal, the value-creation plan is not a spreadsheet exercise. It is a short list of specific things I already know how to change: how the shop floor schedules its work, how quotes get priced, which customers are quietly unprofitable, where a few weeks of working capital are trapped in inventory nobody is watching. Those are the levers that move a lower middle market business, and you only find them by being in the building.

I spend real time inside the companies I own, on the floor, with the people doing the work. That is the only edge I have. A rising market is not coming to rescue the numbers, so the operating work is the whole game.

Why None of This Is My Problem

Read the report again with the structure in mind and a pattern jumps out. The liquidity drought, the aging powder, the endless fundraising, the financial engineering, the missing operating skill. Every one of them traces back to the same source, which is the blind-pool fund itself. Raise money before you know what you will buy, promise a return on a fixed timeline, then spend a decade managing the gap between the promise and reality.

I made that promise for years, and then I stopped. Now I find the deal first, then I find the capital, then I operate the business, then I sell it and everyone gets paid. The model is older and smaller and far less glamorous than a multibillion-dollar fund. It also happens to skip every one of the problems giving the rest of the industry a hard year.

The terrain got tougher for people driving the wrong vehicle. I am on foot, and I can see exactly where I am going.

Paul W. Swaney III is the founder of Swaney Group Capital, a fundless sponsor focused on acquiring and operating lower middle market businesses. LeverUp® publishes at least weekly. More if I have something extra to say.

Sources

1. PE-backed exit value rose more than 40 percent globally in 2025 to its second-highest year on record, driven by IPO exits; IPO exit value nearly doubled to more than $320 billion. McKinsey & Company, Global Private Markets Report 2026: “Clearer view, tougher terrain,” June 2026 (Private Equity chapter).

2. Distributions to paid-in capital as a share of total PE assets under management were about 6 percent in the 12 months ended June 2025, versus a 2015–19 average of roughly 16 percent; five-year rolling DPI as a share of AUM hit its lowest recorded level. McKinsey & Company, Global Private Markets Report 2026: “Clearer view, tougher terrain,” June 2026 (Private Equity chapter).

3. The share of global buyout dry powder that is two years or older reached approximately 40 percent, a record high and about 15 percentage points above the five-year average. McKinsey & Company, Global Private Markets Report 2026: “Clearer view, tougher terrain,” June 2026 (Private Equity chapter).

4. Global buyout deal count fell about 5 percent in 2025: North America down 7 percent, Europe down 4 percent, Asia–Pacific down 3 percent. McKinsey & Company, Global Private Markets Report 2026: “Clearer view, tougher terrain,” June 2026 (Private Equity chapter).

5. Global take-private value increased 43 percent in 2025, with North American take-privates up 72 percent. McKinsey & Company, Global Private Markets Report 2026: “Clearer view, tougher terrain,” June 2026 (Private Equity chapter).

6. Fewer first-time funds were raised than at any point in the past decade; funds under $500 million fell to 13 percent of fundraising from 17 percent five years ago, while funds over $5 billion gained share. McKinsey & Company, Global Private Markets Report 2026: “Clearer view, tougher terrain,” June 2026 (Private Equity chapter).

7. PE secondaries traded value increased 48 percent in 2025. McKinsey & Company, Global Private Markets Report 2026: “Clearer view, tougher terrain,” June 2026 (Private Equity chapter).

8. Fundraising into United States semiliquid private equity vehicles more than doubled since 2023 to $204 billion in 2025, per Robert A. Stanger & Company, as cited in the report. McKinsey & Company, Global Private Markets Report 2026: “Clearer view, tougher terrain,” June 2026 (Private Equity chapter).