Private Equity’s Reset for 2026: Fixing Dry Powder, Exits & LP Trust

The Wall Street Journal’s recent article underscores that while 2025 showed signs of recovery in private equity—exits and IPOs bouncing back—fundamental challenges persist that require “housecleaning” in 2026. [1] Chief among these are the glut of legacy portfolio companies, strained exit pathways, and the mismatch between what portfolio companies were bought for and what buyers will pay in a high-rate environment. [1][3][8]

A critical metric: about 12,900 US companies remain unsold in PE portfolios as of September 30, 2025, slightly up from year-end 2024. [1] The average hold period stands near seven years—down from peaks but still far above pre-pandemic norms. [1][5] With valuations depressed by rate increases, many General Partners are avoiding sales that would lock in underwhelming returns. [1][4]

Parallel to these are dynamics in dry powder and fundraising. US-based PE firms held ~$880 billion in undeployed capital by September 2025, down from a record $1.3 trillion in December 2024. [1][4] Globally, dry powder has fallen from peaks, but much of it is aging capital, raised four or more years ago. [3][4] Fundraising has dropped sharply—global buyout fundraising fell ~23% year over year in 2025. [5][6]

For LPs, the challenge is one of liquidity and returns. Distributions (cash returned) remain low in many funds; the internal rate of return (IRR) and DPI (distributions-to-paid-in capital) metrics have underperformed expectations. [5][6][10] Meanwhile, rising LP demands are putting GPs under pressure to deliver realized returns, not just NAV growth. [6][8]

Looking ahead, 2026 is likely to be a year of adjustment rather than a boom. Success for private equity firms will hinge on exit discipline, sector specialization, innovating in deal structures (continuation funds, secondary sales), cost discipline, and emphasizing operational value creation. But several open questions remain: when and to what extent will interest rates decline; how quickly buyers will accept lower valuations; whether LPs will shift away from mid-size funds; and which firms will fail or consolidate in this environment. Systemic risk arises if carry pressure, fee compression, and exit dislocations widen.