Insights

Understanding Private Equity Risks in 2025: What Individual Investors Need to Know

Insights

Understanding Private Equity Risks in 2025: What Individual Investors Need to Know

Topic(s):

Commentary Investing

The private equity industry has always thrived on mystique — glossy reports, confident fund managers, and promises of “uncorrelated returns.” But 2025 is shaping up to be the year the shine starts to dull. Bloomberg put it bluntly in September: “Some PE firms are doomed to fail as a high-flying industry loses its way.” That’s not hyperbole. After years of easy money, private equity is struggling under the weight of its own structure — too much capital, too little liquidity, and rising debt costs.

And just as the industry’s fault lines are showing, policymakers are opening the door for private equity to enter 401(k) plans. It’s a move that could reshape how millions of Americans save for retirement — and not necessarily for the better. So, before anyone gets swept up in the allure of “alternative investments,” let’s talk about what’s really happening behind the curtain.

The Liquidity Trap

Liquidity is the lifeblood of investing — and private equity is bleeding it slowly.

In plain terms, private equity funds buy companies, improve (or at least restructure) them, and then sell for a profit. The catch? The “sell” part isn’t happening. Recent fund vintages are lagging historical benchmarks for returning capital to investors. The 2018 fund class, for example, shows only a 0.6x distributed-to-paid-in (DPI) ratio, far short of the 0.8x that was once standard by this stage.

Exit activity — the process of selling or taking portfolio companies public — has plunged to roughly 12–13% annually, about half the long-term norm. That might sound like a small difference, but in private markets, it’s seismic. When exits slow, cash stops flowing back to investors. Pension funds, endowments, and wealthy individuals who expected liquidity find themselves stuck waiting years longer than planned.

Meanwhile, more than $1 trillion in unsold assets sits on private equity balance sheets — a massive backlog representing roughly 29,000 portfolio companies. Many of those firms are profitable on paper but can’t find buyers at valuations that make sense in a higher-rate world. Add to that another $2 trillion in “dry powder” (committed capital waiting to be deployed), and you’ve got an industry that looks rich in cash but poor in motion.

You can almost picture it: a traffic jam of money — thousands of cars idling on the freeway, engines humming, but no one actually going anywhere.

Performance Under Pressure

Private equity’s original pitch was simple: higher returns in exchange for illiquidity and complexity. But lately, the math hasn’t supported the promise.

Industry veteran Richard Ennis put it bluntly: “Alts bring extraordinary costs but ordinary returns.” Egyptian billionaire Nassef Sawiris echoed the sentiment, saying private equity “has seen its best days.” Even the head of Kuwait’s $1 trillion sovereign wealth fund told Bloomberg that “private equity is very troubled, especially in large buyouts.”

So, what’s behind the skepticism?

Start with fees. The classic “2 and 20” model — 2% management fees plus 20% of profits — still dominates, even as returns shrink. When you layer in transaction, exit, monitoring, and directors’ fees, investors often lose about 180 basis points (1.8%) annually just to keep the lights on.

State Street data shows that private equity underperforms the stock market on a net basis across multiple time periods. Sure, there are standout funds — but the industry average tells a different story: returns that barely outpace public markets once adjusted for risk and fees.

And unlike an ETF or mutual fund, you can’t just sell out when things look bad. You’re locked in for 7 to 10 years — sometimes longer. That’s fine if the fund performs as advertised. But if it doesn’t? You’re stuck watching a high-cost vehicle crawl toward mediocrity.

Bankruptcy and Structural Risks

Then there’s the issue no one wants to talk about: bankruptcy.

Private equity-backed companies are 10 times more likely to go bankrupt than firms without PE ownership. In fact, 70% of large U.S. bankruptcies (over $1 billion in liabilities) in the first quarter of 2025 were PE-backed — even though private equity represents just 6.5% of the U.S. economy.

That’s not a statistical blip. It’s a warning sign.

Take a look at the headlines:

What ties them together? Debt. Lots of it.

Private equity’s strategy often involves “leveraged buyouts,” where borrowed money finances most of the purchase. That leverage magnifies gains — when things go well. But when interest costs spike or cash flow dips, it can sink the entire ship.

The Leverage Problem

Speaking of debt — it’s getting painfully expensive.

The average cost of borrowing for PE-backed deals is now 3.8 percentage points above the 20-year U.S. average. In Europe, debt costs have doubled since 2022, from around 4% to 8%. Sponsored loan volume (that’s the credit supporting leveraged buyouts) has collapsed by two-thirds since the 2021 peak.

And yet, instead of pulling back, funds are finding new ways to borrow — this time at the fund level through what’s called NAV lending (Net Asset Value loans).

In short, fund managers are borrowing against their own portfolio to meet redemptions, distributions, or make new investments. The market for NAV debt has ballooned from $100 billion in 2023 to an expected $700 billion by 2030.

It’s a clever workaround, but also a dangerous one. It blurs the once-clear line between portfolio company leverage and fund-level leverage. In other words, when one part of the portfolio struggles, the entire fund feels the strain.

To use a homeowner analogy — it’s like taking out a second mortgage on your house to pay off the first one. It might buy time, but it adds risk on top of risk.

Transparency and Valuation Concerns

Private equity also faces a credibility problem — not because it lies, but because it lags.

PE funds are notorious for what some analysts call “volatility laundering.” Unlike public markets, where stock prices adjust minute by minute, private equity valuations are updated quarterly — often using internal estimates. That means reported returns can look remarkably steady, even when underlying companies are struggling.

Those valuations often lag true market conditions by 30 to 90 days, creating a distorted sense of stability. Investors think their holdings are fine because the quarterly report hasn’t caught up to reality yet.

For retirees or institutions relying on predictable valuations, that’s risky. The “smoothing effect” can mask underlying fragility until it’s too late — as many university endowments discovered in 2008 when private equity marks suddenly collapsed months after public markets did.

The Democratization Dilemma

Here’s where the conversation turns from professional investors to everyday savers.

In August 2025, the White House issued an executive order paving the way for private equity investments inside 401(k) plans. On paper, that sounds progressive — letting ordinary investors share in the same opportunities once reserved for institutions.

But the reality is far messier.

Most retail investors don’t have the expertise (or patience) to evaluate complex, illiquid partnerships. The typical 401(k) contribution — between $3,000 and $6,000 a year — barely covers the administrative costs of a PE fund. Products tailored to retail investors historically underperform their institutional cousins by a wide margin, largely due to higher costs and weaker deal flow.

And here’s the systemic concern: Stanford researchers warn that democratizing illiquid assets could create a “systemic risk machine.” If millions of 401(k) investors suddenly expect liquidity during a market downturn, it could trigger a cascade of forced sales and valuation writedowns across the entire private market ecosystem.

It’s the classic liquidity illusion — believing you can exit a private investment just because your statement arrives monthly.

Sector-Specific Vulnerabilities

Not all industries suffer equally under private equity ownership, but two stand out in 2025: healthcare and retail.

Healthcare has become a cautionary tale. Roughly 80 healthcare companies filed for bankruptcy in 2023, with about 21% of them backed by PE firms. Many of these cases trace back to sale-leaseback transactions, where hospitals or clinics sold their real estate to pay investors and then leased it back — locking themselves into rent obligations they couldn’t sustain.

When healthcare facilities buckle under financial stress, it’s not just investors who lose. Communities lose access to critical care.

Retail tells a similar story. Red Lobster’s financial troubles were linked to sale-leaseback maneuvers orchestrated by Golden Gate Capital. Familiar brands like Bed Bath & Beyond, Payless, and Toys “R” Us all share a similar postmortem: too much leverage, not enough reinvestment.

What Individual Investors Should Really Take Away

Private equity isn’t inherently bad — it’s just built for a very different type of investor. Institutions can afford to wait ten years for capital to come back. They can absorb the lack of transparency and volatility. But for most individuals, the trade-offs don’t make sense.

Here are the key takeaways:

  1. Liquidity Risk: Your capital could be tied up for a decade or more, with no guarantee of a timely exit.
  2. Performance Questions: High fees and leverage make consistent outperformance difficult.
  3. Transparency Issues: Valuations are opaque, delayed, and often optimistic.
  4. Structural Risks: Heavy debt magnifies losses during downturns.
  5. Suitability Concerns: Complex strategies are rarely appropriate for small investors or retirement accounts.

The Bottom Line

Private equity has its place — in the right hands, at the right scale, under the right circumstances. It can provide diversification and sometimes outsized gains. But the same qualities that make it appealing to institutions — illiquidity, complexity, leverage — make it treacherous for individual investors.

As Suttle Crossland often tells clients, transparency, liquidity, and alignment with your personal goals matter more than chasing headline returns. For most investors, a globally diversified portfolio of public equities and bonds — low-cost, tax-efficient, and flexible — offers better long-term outcomes.

Private equity might still have its champions, but in 2025, it’s no longer the sure bet it once seemed. And for individual investors, that realization may be the most valuable return of all.

Note: Suttle Crossland Wealth Advisors does not endorse or oppose private equity investments but encourages investors to fully understand the risks, costs, and suitability before committing capital.

Sources

Topic(s):

Commentary Investing

The private equity industry has always thrived on mystique — glossy reports, confident fund managers, and promises of “uncorrelated returns.” But 2025 is shaping up to be the year the shine starts to dull. Bloomberg put it bluntly in September: “Some PE firms are doomed to fail as a high-flying industry loses its way.” That’s not hyperbole. After years of easy money, private equity is struggling under the weight of its own structure — too much capital, too little liquidity, and rising debt costs.

And just as the industry’s fault lines are showing, policymakers are opening the door for private equity to enter 401(k) plans. It’s a move that could reshape how millions of Americans save for retirement — and not necessarily for the better. So, before anyone gets swept up in the allure of “alternative investments,” let’s talk about what’s really happening behind the curtain.

The Liquidity Trap

Liquidity is the lifeblood of investing — and private equity is bleeding it slowly.

In plain terms, private equity funds buy companies, improve (or at least restructure) them, and then sell for a profit. The catch? The “sell” part isn’t happening. Recent fund vintages are lagging historical benchmarks for returning capital to investors. The 2018 fund class, for example, shows only a 0.6x distributed-to-paid-in (DPI) ratio, far short of the 0.8x that was once standard by this stage.

Exit activity — the process of selling or taking portfolio companies public — has plunged to roughly 12–13% annually, about half the long-term norm. That might sound like a small difference, but in private markets, it’s seismic. When exits slow, cash stops flowing back to investors. Pension funds, endowments, and wealthy individuals who expected liquidity find themselves stuck waiting years longer than planned.

Meanwhile, more than $1 trillion in unsold assets sits on private equity balance sheets — a massive backlog representing roughly 29,000 portfolio companies. Many of those firms are profitable on paper but can’t find buyers at valuations that make sense in a higher-rate world. Add to that another $2 trillion in “dry powder” (committed capital waiting to be deployed), and you’ve got an industry that looks rich in cash but poor in motion.

You can almost picture it: a traffic jam of money — thousands of cars idling on the freeway, engines humming, but no one actually going anywhere.

Performance Under Pressure

Private equity’s original pitch was simple: higher returns in exchange for illiquidity and complexity. But lately, the math hasn’t supported the promise.

Industry veteran Richard Ennis put it bluntly: “Alts bring extraordinary costs but ordinary returns.” Egyptian billionaire Nassef Sawiris echoed the sentiment, saying private equity “has seen its best days.” Even the head of Kuwait’s $1 trillion sovereign wealth fund told Bloomberg that “private equity is very troubled, especially in large buyouts.”

So, what’s behind the skepticism?

Start with fees. The classic “2 and 20” model — 2% management fees plus 20% of profits — still dominates, even as returns shrink. When you layer in transaction, exit, monitoring, and directors’ fees, investors often lose about 180 basis points (1.8%) annually just to keep the lights on.

State Street data shows that private equity underperforms the stock market on a net basis across multiple time periods. Sure, there are standout funds — but the industry average tells a different story: returns that barely outpace public markets once adjusted for risk and fees.

And unlike an ETF or mutual fund, you can’t just sell out when things look bad. You’re locked in for 7 to 10 years — sometimes longer. That’s fine if the fund performs as advertised. But if it doesn’t? You’re stuck watching a high-cost vehicle crawl toward mediocrity.

Bankruptcy and Structural Risks

Then there’s the issue no one wants to talk about: bankruptcy.

Private equity-backed companies are 10 times more likely to go bankrupt than firms without PE ownership. In fact, 70% of large U.S. bankruptcies (over $1 billion in liabilities) in the first quarter of 2025 were PE-backed — even though private equity represents just 6.5% of the U.S. economy.

That’s not a statistical blip. It’s a warning sign.

Take a look at the headlines:

What ties them together? Debt. Lots of it.

Private equity’s strategy often involves “leveraged buyouts,” where borrowed money finances most of the purchase. That leverage magnifies gains — when things go well. But when interest costs spike or cash flow dips, it can sink the entire ship.

The Leverage Problem

Speaking of debt — it’s getting painfully expensive.

The average cost of borrowing for PE-backed deals is now 3.8 percentage points above the 20-year U.S. average. In Europe, debt costs have doubled since 2022, from around 4% to 8%. Sponsored loan volume (that’s the credit supporting leveraged buyouts) has collapsed by two-thirds since the 2021 peak.

And yet, instead of pulling back, funds are finding new ways to borrow — this time at the fund level through what’s called NAV lending (Net Asset Value loans).

In short, fund managers are borrowing against their own portfolio to meet redemptions, distributions, or make new investments. The market for NAV debt has ballooned from $100 billion in 2023 to an expected $700 billion by 2030.

It’s a clever workaround, but also a dangerous one. It blurs the once-clear line between portfolio company leverage and fund-level leverage. In other words, when one part of the portfolio struggles, the entire fund feels the strain.

To use a homeowner analogy — it’s like taking out a second mortgage on your house to pay off the first one. It might buy time, but it adds risk on top of risk.

Transparency and Valuation Concerns

Private equity also faces a credibility problem — not because it lies, but because it lags.

PE funds are notorious for what some analysts call “volatility laundering.” Unlike public markets, where stock prices adjust minute by minute, private equity valuations are updated quarterly — often using internal estimates. That means reported returns can look remarkably steady, even when underlying companies are struggling.

Those valuations often lag true market conditions by 30 to 90 days, creating a distorted sense of stability. Investors think their holdings are fine because the quarterly report hasn’t caught up to reality yet.

For retirees or institutions relying on predictable valuations, that’s risky. The “smoothing effect” can mask underlying fragility until it’s too late — as many university endowments discovered in 2008 when private equity marks suddenly collapsed months after public markets did.

The Democratization Dilemma

Here’s where the conversation turns from professional investors to everyday savers.

In August 2025, the White House issued an executive order paving the way for private equity investments inside 401(k) plans. On paper, that sounds progressive — letting ordinary investors share in the same opportunities once reserved for institutions.

But the reality is far messier.

Most retail investors don’t have the expertise (or patience) to evaluate complex, illiquid partnerships. The typical 401(k) contribution — between $3,000 and $6,000 a year — barely covers the administrative costs of a PE fund. Products tailored to retail investors historically underperform their institutional cousins by a wide margin, largely due to higher costs and weaker deal flow.

And here’s the systemic concern: Stanford researchers warn that democratizing illiquid assets could create a “systemic risk machine.” If millions of 401(k) investors suddenly expect liquidity during a market downturn, it could trigger a cascade of forced sales and valuation writedowns across the entire private market ecosystem.

It’s the classic liquidity illusion — believing you can exit a private investment just because your statement arrives monthly.

Sector-Specific Vulnerabilities

Not all industries suffer equally under private equity ownership, but two stand out in 2025: healthcare and retail.

Healthcare has become a cautionary tale. Roughly 80 healthcare companies filed for bankruptcy in 2023, with about 21% of them backed by PE firms. Many of these cases trace back to sale-leaseback transactions, where hospitals or clinics sold their real estate to pay investors and then leased it back — locking themselves into rent obligations they couldn’t sustain.

When healthcare facilities buckle under financial stress, it’s not just investors who lose. Communities lose access to critical care.

Retail tells a similar story. Red Lobster’s financial troubles were linked to sale-leaseback maneuvers orchestrated by Golden Gate Capital. Familiar brands like Bed Bath & Beyond, Payless, and Toys “R” Us all share a similar postmortem: too much leverage, not enough reinvestment.

What Individual Investors Should Really Take Away

Private equity isn’t inherently bad — it’s just built for a very different type of investor. Institutions can afford to wait ten years for capital to come back. They can absorb the lack of transparency and volatility. But for most individuals, the trade-offs don’t make sense.

Here are the key takeaways:

  1. Liquidity Risk: Your capital could be tied up for a decade or more, with no guarantee of a timely exit.
  2. Performance Questions: High fees and leverage make consistent outperformance difficult.
  3. Transparency Issues: Valuations are opaque, delayed, and often optimistic.
  4. Structural Risks: Heavy debt magnifies losses during downturns.
  5. Suitability Concerns: Complex strategies are rarely appropriate for small investors or retirement accounts.

The Bottom Line

Private equity has its place — in the right hands, at the right scale, under the right circumstances. It can provide diversification and sometimes outsized gains. But the same qualities that make it appealing to institutions — illiquidity, complexity, leverage — make it treacherous for individual investors.

As Suttle Crossland often tells clients, transparency, liquidity, and alignment with your personal goals matter more than chasing headline returns. For most investors, a globally diversified portfolio of public equities and bonds — low-cost, tax-efficient, and flexible — offers better long-term outcomes.

Private equity might still have its champions, but in 2025, it’s no longer the sure bet it once seemed. And for individual investors, that realization may be the most valuable return of all.

Note: Suttle Crossland Wealth Advisors does not endorse or oppose private equity investments but encourages investors to fully understand the risks, costs, and suitability before committing capital.

Sources

Address

Suttle Crossland Wealth Advisors, LLC
20715 North Pima Road, Ste. 108
Scottsdale, AZ 85255

(602) 834-3905 [email protected]

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