While the dollar value of PE distributions has been stable, the unrealized book value (NAV) has tripled in five years. This has caused the distribution yield—distributions relative to NAV—to plummet to a historic low. This yield metric, not raw dollar exits, is the critical factor constraining LP capital and new fund commitments.

The primary growth drivers for private equity—sovereign wealth and private wealth channels—prefer concentrating capital in large, brand-name firms. This capital shift starves middle-market players of new funds, leading to a likely industry contraction where many may have unknowingly raised their last fund.

The traditional PE model—GPs exit assets and LPs reinvest—is breaking down. GPs no longer trust that overallocated LPs will "round trip" capital into their next fund. This creates a powerful incentive to use continuation vehicles to retain assets, grow fee-related earnings, and avoid the fundraising market.

When market competition compresses returns, PE firms that rigidly stick to historical IRR targets (e.g., 40%) are forced to underwrite increasingly risky deals. This strategy often backfires, as ignoring the elevated risk of failure leads to more blow-ups and poor fund performance.

The private equity market is following the hedge fund industry's maturation curve. Just as hedge funds saw a consolidation around large platforms and niche specialists, a "shakeout" is coming for undifferentiated, mid-market private equity firms that lack a unique edge or sufficient scale.

The inability to return capital to LPs constrains new fundraising, creating an environment that cannot support the thousands of PE funds operating today. This will trigger a shakeout of weaker GPs, while the top 10 funds, already capturing 36% of capital, further consolidate their dominance.

PE firms are struggling to sell assets acquired in 2020-21, causing distributions to plummet from 30% to 10% annually. This cash crunch prevents investors from re-upping into new funds, shrinking the pool of capital and further depressing the PE-to-PE exit market, trapping investor money.

Co-investing offers 'structural alpha.' By participating in average deals with average private equity managers but without paying management fees or carried interest, an LP's returns are mathematically lifted to a top-quartile level. This inherent advantage exists before any deal-specific underwriting.

The era of generating returns through leverage and multiple expansion is over. Future success in PE will come from driving revenue growth, entering at lower multiples, and adding operational expertise, particularly in the fragmented middle market where these opportunities are more prevalent.