Apollo Global Management Co-President Scott Kleinman stated that private equity (PE) firms need to return to fundamental strategies to create value, moving away from an overreliance on cheap debt and multiple expansion that characterized the "easy money era." He suggests that the industry "lost its way a little bit" during this period and will now "have to start capitulating for sure on valuations" due to normalized borrowing costs. This shift implies that while capital is available for exits, sellers may not be satisfied with the valuations offered.
According to Kleinman and other industry insights, the period from 2010–2021 saw approximately 66% of value creation in PE stemming from leverage and multiple expansion, factors largely beyond a manager's direct control. However, with higher financing costs, slower exits, and a recalibration of pricing power, managers who relied on these external factors are now struggling. This has led to a significant "bid–ask gap," where buyers are underwriting less leverage while sellers are still anchored to peak-cycle valuations, freezing deal-making and extending hold periods.
The new environment demands a return to the asset class's roots: disciplined buying, hands-on operational improvement, and clear pathways to liquidity. Firms that will outperform in 2026 and beyond are expected to source complex, off-cycle opportunities, avoid overpaying for assets, and use leverage prudently. Operational value creation, including detailed upfront value creation plans, active operating teams, selective M&A, and proactive capital structure management, will be crucial. This means focusing on fundamentally improving businesses rather than counting on high multiples for returns, as evidenced by the growing dispersion between top and bottom quartile funds.
The private equity sector faces a significant backlog of portfolio companies acquired during the low-rate boom, with capital calls exceeding distributions by roughly $1.5 trillion since 2018. Exits remain slow, and fund lives are stretching, impacting internal rates of return (IRRs). While some recovery in exit activity has occurred, volumes are still below five-year averages. Kleinman emphasized that even in a more selective exit environment, well-positioned firms, like Apollo itself, can still successfully exit investments if initial acquisition prices were disciplined. He added that some firms may need to scale back fundraising ambitions or exit the market if past investment decisions continue to weigh on returns.
