A staggering 56-58% of middle-market companies brought to market annually for the past three years did not sell, a dramatic increase from the historical average of 10%. This statistic reveals a massive and persistent valuation gap between what sellers expect and what buyers are willing to pay.

A significant shift has occurred: private equity firms are no longer actively pursuing acquisitions of solid SaaS companies that fall short of IPO scale. This disappearance of a reliable exit path forces VCs and founders to find new strategies for liquidity and growth.

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.

The private equity market has abundant capital and willing companies, yet transactions are stalled. This is because General Partners (GPs) fear selling at low returns and Limited Partners (LPs) fear over-commitment due to liquidity concerns, creating a gridlock where no one wants to act.

Just as buyout funds began selling portfolio companies to other buyout funds post-2000, VCs now increasingly exit via secondary sales to other VC or PE firms. This has become a dominant liquidity path over traditional IPOs or strategic M&A.

An estimated 15-20% of all private equity "distributions" in the last two years were not traditional sales or IPOs, but "inorganic" transactions like continuation funds and NAV loans. This means the actual yield from organic, market-driven exits is even lower than the already-dismal headline numbers suggest.

Howard Marks highlights a critical issue in private equity: a massive overhang of portfolio companies needing to be sold to return capital. Higher interest rates have made exits difficult, creating a liquidity bottleneck that slows distributions to LPs and commitments to new funds.

To generate returns on a $10B acquisition, a PE firm needs a $25B exit, which often means an IPO. They must underwrite this IPO at a discount to public comps, despite having paid a 30% premium to acquire the company, creating a significant initial value gap to overcome from day one.

Unlike past downturns caused by recessions or banking failures, the current market stagnation exists despite strong fundamentals. With over a trillion in dry powder and ample credit available, the paralysis is driven by behavioral factors and valuation disputes, not a broken financial system.