Private equity is the entire focus of McKinsey & Co.’s 2026 global private markets report. The implication, perhaps, is that private equity is in a more problematic condition than private credit, infrastructure, real estate, etc, none of which are covered in the report. The subtitle, “Private equity: Clearer view, tougher terrain”, supports this assumption.
And yet, according to McKinsey, private equity rebounded last year with surging buyouts, recovering realisations at a 40% increase in exit value, and the reappearance of initial public offering exits. September saw the announcement of the largest ever buyout, the still-uncompleted US$55 billion consortium takeover of Electronic Arts.
So what are the difficulties?
Quite a few, according to McKinsey. For one thing, “assets have never been more expensive”, the report says. Median purchase multiples for private equity deals rose to 11.8% last year. Furthermore, the backlog of private equity-owned companies held for more than four years amounted to a record 52% of total buyout inventory worldwide.
In fact, a typical average holding period for investee companies is now more than 6.5 years. It’s no wonder then, according to McKinsey, “liquidity for investors remains more a trickle than a flood”.
Unsurprisingly, the implications for returns are bleak. Top-quartile global buyout returns averaged 8% last year based on pooled internal rate of return versus 18% from the S&P 500 and 22% from the MSCI World indexes.
Crucially, the report says multiple expansion and cheap leverage accounted for 59% of returns between 2010 and 2022. With the cheap debt era over, past results are no guide to future performance. Instead, “operational value creation, which often used to be more a marketing narrative than a true institutional capability, is now likely to be the primary source of returns”, according to McKinsey.
That creates a dilemma for an asset class which already appears overextended after its debt-driven runup in the past decade.
McKinsey poses four key questions for limited partners (LPs). The first is, “Which of your managers can still generate returns when leverage, multiple expansion, and fast exits are no longer doing the work?”
The other questions cover clarity on current versus historic returns, LP readiness for actual hold and exit conditions, and manager choice. All are important, but none, perhaps, as much as a sharp shift in the industry’s fundamental value generation mechanism.
There are many supporting data points in the report. Suffice it to say that the focus on private equity is justified. The asset class is at a turning point – which could also be a shrinking point. General partners and LPs should take note.
