Private Equity Has More Housecleaning to Do in 2026

The champagne corks were popping in some corners of private equity as 2023 closed out, thanks to a few high-profile exits and a glimmer of M&A activity that hinted at a thawing market. Indeed, the early months of 2024 have continued to fuel a cautious optimism, with some firms celebrating successful divestitures and robust fundraising rounds. But don't let the celebratory mood fool you; beneath the surface, the industry is still grappling with a significant challenge: a veritable glut of aged portfolio companies that have overstayed their welcome.

While the headlines might focus on the latest mega-deal or the influx of new dry powder, the uncomfortable truth for many General Partners (GPs) is the sheer volume of assets sitting on their books, often past their typical 3-5 year hold periods. We're talking about thousands of companies acquired in the frothy markets of 2018-2021, now lingering as macroeconomic headwinds and a persistent valuation gap between buyers and sellers have made exits particularly arduous. The average hold period has stretched, in some cases, pushing 6-7 years, a duration that begins to strain traditional fund structures and, crucially, Limited Partner (LP) patience.

The problem isn't just aesthetic; it's fundamental to the PE business model. LPs, the institutional investors who commit capital to PE funds, rely on timely distributions to manage their own portfolios and re-up into new funds. When exits slow, distributions dwindle, leading to a build-up of unrealized value but little realized cash. This creates pressure on GPs to return capital, especially as the denominator effect of public market fluctuations has made private market allocations look disproportionately large for some LPs. Firms like Blackstone, KKR, and Carlyle Group, while diversified, are acutely aware of the need to demonstrate liquidity and performance across their vast portfolios.

What's more, holding onto companies for longer periods isn't necessarily a value-creation strategy. While some assets might benefit from additional operational improvements or market shifts, many start to consume management time and resources without generating commensurate returns. The cost of capital, still elevated compared to the ultra-low rates of yesteryear, also eats into potential profits, making patience a more expensive virtue than it once was.

So, how are GPs planning to tackle this backlog in 2026? It won't be a single silver bullet. We're likely to see a multi-pronged attack:

• Creative Exit Structures: Expect a continued rise in continuation funds, where a GP essentially sells an asset from an older fund to a new fund (often managed by the same GP, but with new LP capital), allowing for a partial cash-out for existing LPs while providing more time for the asset to mature. The secondary market for PE stakes is also poised for growth, offering another avenue for liquidity.
• Operational Intensification: For those companies that can't be sold, the focus will shift even more aggressively towards operational excellence. This means deeper dives into cost efficiencies, supply chain optimization, and strategic growth initiatives to boost EBITDA multiples and make them more attractive for future buyers.
• Strategic Divestitures: Some firms might be forced to consider selling non-core assets or even entire portfolio companies at valuations lower than initially hoped, simply to free up capital and demonstrate exit capabilities. This could mean accepting a smaller profit margin or even a slight loss on certain investments, a tough pill to swallow but sometimes necessary for overall fund performance and LP relations.
• A Pick-up in M&A: If interest rates stabilize or even begin to tick down, and economic certainty improves, the traditional M&A market could see a genuine resurgence. Strategic buyers and even other PE firms will have more confidence and easier access to financing, facilitating more straightforward sales.

The reality for 2026 is that it will be another year of intense focus on portfolio management and strategic exits. The recent uptick in deal activity, while encouraging, is more of a trickle than a flood. The sheer scale of the inventory — with some estimates suggesting over 5,000 private equity-backed companies globally held for over five years — means that the "housecleaning" will be an ongoing, multi-year endeavor. GPs will need to be agile, innovative, and occasionally pragmatic, balancing the desire for optimal returns with the pressing need to return capital to their LPs. The firms that navigate this challenge most successfully will be the ones that cement their reputations and secure future fundraising opportunities in an increasingly competitive landscape.