Is this the end of private equity? The industry could trigger a crash

The precious metal dealers of New York’s Diamond District have had a wild week. Last Thursday, as the price of gold and silver plunged after a spectacular rally, New Yorkers rushed to sell their jewellery. The Financial Times reported that at least three large refineries closed to sellers that day, for fear they would lose money if they continued to buy while prices were plummeting.

As it turned out, the crash was only just beginning. Gold plunged some 15% over the weekend and silver more than twice that. In their fall to earth, these precious metals had joined the crypto-crash, which has so far seen Bitcoin shed over 40% of its value since its all-time peak in October.

On their own, such price falls will burn some wallets but needn’t hurt the economy. The danger, though, is that they could trigger falls elsewhere in the market. And one corner of the market which we really ought to keep an eye on is private equity — that tranche of firms that raise capital to invest in other companies but don’t themselves trade on stock exchanges. Following a roaring decade and a half during which it made fortunes for many institutional investors, from pension funds to university endowments, investors have recently soured on private equity. Now the sector appears to be looking for government lifelines, and that’s seldom a good sign.

Although a major player since the Eighties, the heyday of private equity came in this century, and particularly after 2008. The assets under management by private equity firms mushroomed from $1.5 trillion in 2010 to nearly $10 trillion today. Following the global financial crisis and the advent of ultra-loose monetary policy, private equity followed a simple but lucrative rule: borrow cheap, buy low, ride a rising market, sell high, pay back your loans, bank the profit, repeat. Different funds have deployed different strategies, with some specialising in buying troubled companies then taking them off the market while they restore their health, others investing in startups that they then list publicly, and others still cannibalising assets after buying state companies (of which the British Thames Water case was a notorious instance). But most funds used a common financial model to drive their growth: secure capital from institutional investors, leverage that to obtain loans, use the money to buy companies, keep the companies private while developing them to the point they can be sold in an IPO (initial public offering on the stock market), then distribute the profits to investors.

The scale of funds managed by the big private equity firms is vast because investments have been restricted to institutional investors like pension funds. Some of the largest funds exceed $100 billion. This has given fund managers inordinate market power. That leverage has enabled them to obtain good prices for their investors and prod the firms they buy to change more to their liking.

In theory, expertise, flexibility and the lack of a quarterly reporting requirement that binds publicly traded firms allowed private equity managers the space — away from the prying eyes of investors charting their portfolios online — to build competitive firms that would ultimately earn attractive share values once they went public. But another factor was working in the industry’s favour. Private equity firms rode the cheap-money train to all-but-guaranteed riches. Once central banks cut real rates of interest on short-term debt to about 0% after 2008, it became difficult for private equity managers not to make money.

The loose money policies of central banks flooded the economy with so much cash that virtually all asset prices, from real estate to crypto to stocks, were driven up. From its trough at the start of 2009 to its 2021 peak, the US stock market rose 13% per year on average. That steady rise all but guaranteed that private equity firms would deliver a profit on the sale of the companies they’d taken into their portfolios. As a result, in the years following the financial crisis, the capital of the private equity sector grew far faster than the stock market, and the industry now raises more money than the public market. While private equity rose, the number of publicly traded companies on stock exchanges fell.

However, ever since the inflation spike of 2021-22 and the consequent rise of interest rates, particularly in the US, which remains the epicentre of the global private equity industry, the breakneck growth of the stock market has begun to slow. Amid the slowdown, private equity’s ability to offload assets at a profit has been crimped, while its debt-financing costs have risen.

In this environment, investors are beginning to rethink their allocations, and some want their money back. As a result, last year the growth of private equity began to lag the public markets for the first time since the turn of the Millennium. With fundraising becoming more difficult, and investors demanding their dividends, private equity managers increasingly started resorting to opaque deals, like transferring assets across their own funds to generate cash, while awaiting more propitious conditions in the IPO market. This use of “continuation funds” reached a record last year, with private credit funds in particular selling unprecedented amounts of debt to themselves. Faced with this drying up of revenue, investors in the sector have begun pulling back.

President Donald Trump’s return to the White House last year stirred hopes of a revival of activity in this segment of the market; instead, as his policy-making injected turbulence into the economy, the market all but froze. By early last year, the number of IPOs dropped and the gap between private equity investments and exits reached a decade high. Between the last quarter of 2024 and the first quarter of 2025, private equity “realisations” — essentially, the profits paid out to investors — fell by 50%. Immobilised by the market inertia, funds that held off on IPOs were left sitting on $3 trillion of assets they would normally have offloaded by then. Although the market reopened somewhat as 2025 advanced, it was not enough to unblock the pipeline.

This year could therefore prove pivotal to the future not only of private equity, but of the broader market. With hopes rising that some big players like SpaceX, OpenAI, and Anthropic will go public this year, all eyes will be on the valuations they obtain. If they blow through expectations, it may signal that the market has come back to life and a rally for the ages awaits.

But in the meantime, to meet its short-term financing needs, private equity has resorted to private credit, since this remains the one corner of its universe which is still attracting significant investor interest. But as JPMorgan chief Jamie Dimon warned last year, that poses huge risks: retail investors are crowded in, but since the industry isn’t regulated, they’d be on the hook for private losses. Recent research has highlighted the dangers posed to the financial sector as a whole by private credit, given the degree to which the regulated banking sector and the private credit industry have become intertwined. In other words, private equity could become the spark which ignites the next financial conflagration.

Conventional analysis of the current situation in Western economies downplays the risk of financial crisis because both households and the banking system have better balance sheets than they did at the time of the 2008 crash. But this overlooks the fact that private debt has declined as a proportion of debt to GDP because public debt has surged, with much of the increase being taken on by non-bank financial institutions — including private equity and pension funds. As the Bank for International Settlements emphasised in last year’s annual report, this creates the risk of a liquidity crisis, similar to what happened during the 2020 bond market panic and the Liz Truss gilts crash.

Private equity fund managers have shown their inventiveness and adaptability in the past, and so it’s possible that amid this turning-point the best of them thrive and the industry grows stronger. Nevertheless, it is revealing that the industry has also begun quietly pressing politicians for what sounds suspiciously like a rescue package. Recent lobbying succeeded in getting Congressional Republicans to slip some tax breaks for the industry into Trump’s Big Beautiful Bill, and the administration is also looking into regulatory changes that would open private equity to retail investors for the first time. Many see this as a way of lining up suckers onto whom fund managers can offload bad assets. Were a crash to happen then, the costs would be transferred from rich fund managers to mom-and-pop investors, making it a repeat of 2008.

Short of the much hoped-for late-year turnaround in markets, private equity may be steering us towards stormy seas. When late last year JPMorgan took a $170 million loss from its investment in the failed private credit-backed auto lender Tricolor, Jamie Dimon warned: “My antenna goes up when things like that happen. And I probably shouldn’t say this, but when you see one cockroach, there are probably more. And so everyone should be forewarned at this point.” The falls in gold, silver, crypto and other frothy corners of the market may be one-offs. But if any private equity firms have borrowed to invest in them and are consequently forced to begin selling other assets to cover losses, a few scattered cockroaches could quickly become an ugly infestation.

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