Despite a surging public stock market and record-setting corporate transaction volumes driven by the artificial intelligence (AI) boom, the private equity (PE) sector is facing an unprecedented liquidity crunch. According to recent data from PitchBook, PE firms are currently holding a record 13,325 unsold US companies as of the end of May, an increase from 12,900 in October of the prior year. At the current transaction velocity, it would take an estimated 11 years to clear this backlog—marking a two-year increase in exit duration since last autumn.
The Great M&A Divergence
This exit bottleneck highlights a growing disparity in the global M&A market. While Wall Street is on track for a blockbuster year in mergers and acquisitions, debt issuance, and public listings, the activity is highly concentrated. Major corporations are utilizing their cash reserves to fund massive, strategic AI-related transactions. Conversely, the bulk of portfolio companies stuck inside PE funds are smaller, highly leveraged, and operate in traditional industries less sensitive to the AI hype cycle.
Dealogic data confirms this trend: global M&A deal volume driven by financial sponsors fell 11% in total value and 8% in deal count year-to-date through June 24. Compared to the peak deal-making years of 2021 and 2022, overall sponsor activity has plummeted by over 25%. This drop is a direct consequence of the Federal Reserve’s aggressive interest rate hiking cycle initiated in 2022, which dramatically increased the cost of acquisition debt.
A Conundrum of Valuation and Capital Return
Many of the unsold assets currently sitting in portfolios were acquired during the low-interest-rate environment of 2020–2021 at peak valuations. According to PitchBook research, roughly 33.3% of these portfolio companies have been held for four to six years, while 26.9% have been in portfolios for seven years or longer. PE managers (General Partners) are reluctant to sell these assets in a high-rate environment where buyers demand lower multiples, as doing so would write down fund returns. However, institutional investors (Limited Partners) are putting intense pressure on fund managers to return capital before committing to new fund vintages.
The AI Disruption Factor
The rise of generative artificial intelligence has further complicated exit strategies, particularly in the software sector—historically a primary driver of PE returns. Investment committees must now evaluate every potential exit through the lens of AI displacement. Software-as-a-Service (SaaS) providers are undergoing deep scrutiny to determine whether they will leverage AI for margin expansion or be rendered obsolete by open-source LLMs. Consequently, exit activity has shifted toward sectors deemed ‘AI-resistant,’ such as healthcare and industrials, where physical operations provide a defensive moat against digital disruption.
