What's The Big Deal?
Get the view from the inside. Every week, Graham Smith (ex-Ares) and Deborah Taylor (ex-Barclays) take a look at Wall Street’s headline-grabbing deals.
From mega-mergers and hostile takeovers to complex private credit transactions, they break down the why, the how, and the who behind the numbers.
What's The Big Deal?
Private Equity Faces a 9-Year Backlog. Here's Why.
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US private equity firms now face a 9-year backlog of unsold portfolio companies at the current pace, according to new PwC and PitchBook analysis. Roughly 13,500 companies sit in PE portfolios as of June 30, with nearly 4,000 held for 6+ years and 1,500 held for 9+ years.
Fundraising has collapsed alongside, with only $159.6 billion raised in H1, on track to match 2025's muted total.
In this episode, Debs and Graham dig into Bain's private equity report and unpack the structural pressures behind the slowdown, which explain why financial sponsor transaction volume is down 9% year-on-year even as broader deal activity has hit records.
The conversation opens with the strategic vs. financial buyer dynamic. In a period of uncertainty, financial sponsors are more resistant to defensive punts because they need to underwrite specific return targets in a highly uncertain environment.
Beyond the motivational split, Graham walks through the structural pressures on PE returns. Cost of leverage has risen with floating-rate debt getting more expensive in a hawkish rate environment.
Purchase price multiples remain elevated (Bain calls it a "deal cost index" at all-time highs). High entry combined with high cost of debt makes it structurally harder to underwrite the returns PE requires.
Software exposure is the other major theme. PE has historically been overweight software for good reasons (cash-generative, recurring revenue, pricing power), which now looks vulnerable to what one analyst calls the "SaaS-alypse", the fear that AI will destroy the software space overnight.
Graham is skeptical the collapse will be as sudden or sweeping as the narrative suggests, but the fear alone is enough to spook LPs and put pressure on private credit funds that back PE deals.
The result is a broader machine slowdown. Holding periods have extended from the traditional 5 years to 7 years on average, which erodes IRR. LPs aren't getting their capital back at expected pace.
New fundraising is more difficult. Only the highest-quality assets are trading, which means the remaining book is likely lower-quality than the marks suggest, creating further LP hesitation.
Continuation vehicles have become one workaround, but Graham flags that they carry their own LP concerns around marking and capital return.
The episode closes on what would need to change: more clarity on the software/AI trajectory, and PE firms doing what they can, running existing assets as well as possible until exit conditions improve.
Key Discussion Points:
- The 9-year backlog: 13,500 portfolio companies and a fundraising collapse to $159.6bn in H1
- Strategic vs. financial buyers in uncertainty: why sponsors sit tight while corporates move
- Cost of leverage pressure: floating rates and rising interest bills eroding equity returns
- The Bain "deal cost index" and elevated purchase multiples
- Software exposure and the "SaaS-alypse" fear: overblown or real?
- Extended holding periods (5 years to 7 years) and IRR compression
- The best assets sold first: what that means for LP confidence in remaining marks
- Continuation vehicles: solution or symptom of the broader slowdown?
- What could restart the PE deal machine
What's the Big Deal? is an educational podcast covering deals and market developments in public and private markets. Nothing in this episode constitutes financial advice.
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MA value want to say up 40, 41% financial sponsor transaction, down 9% year on year. So what's going on?
SPEAKER_00Why are they so nervous of what's been happening in terms of the software scene?
SPEAKER_01Everyone thinks that AI is just gonna come and completely destroy the software space overnight. I don't think it's gonna have the one-time overnight big wall kind of impact that I think a lot of people think it might.
SPEAKER_00What's the catalyst that needs to happen, do you think, to re-stimulate deal activity in private equity space?
SPEAKER_01Deals find a way. Like private equity is going to find a way.
SPEAKER_00I guess we'll dive straight in. What's the big deal this week?
SPEAKER_01Last week we talked about the MA update in the first half of the year. I want to do the same in private equity because I think quite interestingly, you would expect the two to really follow each other closely. If global MA volume is up, then private equity MA volume should be up as well. And it's not. And I want to spend a bit of time digging into some of the reasons why that's the case.
SPEAKER_00Absolutely. Yeah, last week's episode, we talked all about the MA boom. We talked about the drivers, we talked about the risks. But hang on a second, Graham. Private equity, not the same thing happening over there. Talk to us about it. What's going on?
SPEAKER_01Okay. So compared to public MA, where we had where we had MA value, I want to say up 40, 41%, financial MA or financial sponsor transaction down 9% year on year. So what's going on? One, if you think overall thematically, what's been happening in global MA volumes? We talked last week, there's a ton of uncertainty right now. We're in a high interest rate environment. There's a lot of geopolitical uncertainty, uncertainty from software and AI exposure, like all this, all this stuff that's making everyone just say, I don't know what's going on. In public MA, we talked about a lot of people we think are buying companies as a defensive posture, right? Uncertainty is driving, is driving MA volume because people are trying to protect themselves. I guess if you compare the the motivations of a strategic buyer to a financial buyer in a period of high uncertainty, if you're a financial buyer, you're a lot more, you're a lot more resistant to take this defensive punt. I think just say, you know what, I I need to first I need to sit on the sidelines and just wait and see what plays out. Because if I go, if I go and make a big investment in uh in say an AI business to support a software business I already own, I just don't, I don't know how this is all, how this is all gonna play out. So my first, my first kind of order of operations is to say, you know what, I'm just going to, I'm gonna sit tight and and kind of see what happens. I don't think that's the only thing that's that's causing this slowdown, though. So you have you have overall overall this uncertainty. And you also have some real some real reasons why private equity is just a lot more, a lot more constrained than it used to be. I mean, obviously we still have one thing we talked about before, you still have a lot of dry powder, right? So private equity is still gonna have to go out and and buy businesses. But at the same time, the other thing private equity needs to do, which they haven't done as much of, or certainly not at the pace that they used to, is repay capital back to investors. And ultimately the only way that private equity is gonna continue to continue raising funds, continue to buy more businesses, is if they return that capital back to LPs and then and then raise more money. I think there's some good reasons why that has all started to slow down a little bit. And we'll spend a few minutes covering covering some of those.
SPEAKER_00Okay. So you say, you know, although there is a lot of dry powder, uh they're finding it harder to exit their current investments, and they're also not raising as many much new funds. So that's kind of one angle in terms of, you know, maybe less uh appetite for deals from that perspective. But in terms of the market environment, the interest rates, the valuations, the stuff we talked about in last week's episodes on MA, why does it have so much more of an impact on appetite for deals for private equity versus corporates?
SPEAKER_01Well, just think about how private equity is financing a lot of these acquisitions. I mean, there we're undertaking leverage buyouts, we're using a lot of leverage. If you go back to that private equity episode we did, what, a month or two months ago, we're kind of looking at the value drivers in a typical LBO deal. Ultimately, a lot of the way, one of the ways that you're increasing your equity return is through the use of leverage in a private equity transaction. If that leverage is getting more expensive and most private equity debt is floating, some kind of floating rate instrument. So in a rising interest rate environment, your overall interest bill is is going up. If you're paying more, if you're paying more interest expense, then your equity return goes down. Your overall, we call it cost of ownership is going up. Um it's actually it's actually kind of funny. There's, I mean, obviously we're looking at another, another Bain report as well as part of the as part of the backing data for some of this episode. And you can tell a consultant put this together, I think, because I think they call it a a deal cost index or something like that. And basically saying, you know, deal, deal cost is an all-time high. And what they really mean is purchase price multiples are high right now, right? We talked about, we've talked about public equity, US public equities are at a much, much more premium valuation, say, compared to Europe. We've got the overall global MA volume driving up purchase price multiples. So companies are still expensive right now. Yeah. So you've got both a high, a high entry multiple combined with a high cost of debt, and those two things together means it's just not as easy to make your return as it used to be.
SPEAKER_00Okay. So we've got that. And then but then you also mentioned software as well, which, you know, again, that's kind of almost stimulated the corporate MA scene, because, you know, they, as you said, they've been kind of moving quite defensively to buy up other businesses, try and protect their positioning in the market. But that's not the case with private equity. Why are they so nervous of what's been happening in terms of the software scene?
SPEAKER_01Well, the people have taken, have taken kind of a at least a perceived hit around software exposure. Because we've we've talked before about how private equity has outsized software exposure compared to most other investment classes, right? And that for historically, historically good reason, right? Cash-generated businesses, good revenue visibility, you've got the, you've got the you've generally got a pretty good ability to put price increases through year on year, you know, good customer attention, all the things that make both a good equity and a debt investment kind of has led to this, led to this outsiz software exposure. You've also got obviously the outsize software exposure in the private credit space. A lot of private credit managers have been under pressure, you know, not able to make all these redemption requests and whatnot. So you've got just overall scrutiny on both the private equity, private equity funds and the and the credit funds that back them through this software exposure. That's meant. Let's think about how it plays out on say the credit side. If your, if your providers of credit are facing a lot of pressure from their investors, their LPs, what does that mean for you, the borrower? Most likely your your borrowing cost is going to increase. Your capital is getting more scarce, it's going to get more expensive, it's going to make it even more difficult for you to make that same return on any given deal. Now, interestingly, I don't know. I don't think I've seen any real software default yet still. So I think as far as as far as I'm aware, we're still in this. I think the term they use in this Bain report is SAS pocalypse. Everyone thinks that AI is just going to come and completely destroy the software space overnight. I think one of the things I was saying a while ago is I think there's a I think there's a good reason to believe that AI is going to have a big impact on this space. I don't think it's going to have the one-time overnight big wall kind of impact that I think a lot of people think it might. And by the way, I think if that were the case, I think we would have seen something already. And I'm not saying, by the way, that I don't think we're going to have any software pressure or any software defaults, but it feels like it feels like that particular aspect might have been blown out of, blown out of proportion a little bit. But there's still all these, all these GPs are still facing LP pressure around around all these themes. And again, it's just making it more difficult for for them to raise money.
SPEAKER_00Yeah. Um, and then so coming back to the exit point though. So um challenges around exits. I know we've talked before about, you know, particularly the IPO market, much more challenging uh for uh private equity at the moment. Um the report does talk about the holding periods. Uh traditionally, we talked about, you know, we we talked about private equity aiming to hold for a period of five years, you know, two and a half times your money over five years. That's a nice, sweet 20% IRR, um, which is what a lot of funds will target with their deals. Um the average holding period's now gone up to seven years, which does erode in the absence of anything else changing, erodes that IRR.
SPEAKER_01Um so Yeah, well, assuming assuming you're still exiting at the same at the same valuation, but yeah, 100%.
SPEAKER_00Exactly. So that's a challenge for them, isn't it? If they're actually sitting on these on these uh investments for much longer than they want to.
SPEAKER_01Yeah, and I think the other thing that I think some LPs are thinking, and that seems to be, it seems to be coming out in this report, and certainly from every every private equity and private credit business I know that's kind of been selling assets, I think, I think this this generally holds true, which is in this environment where you have especially financial sponsors, financial buyers who are feeling a bit nervous and not willing to pay up for any asset. I think what we've been seeing is generally speaking, we've had people sell, you can still sell really high quality assets, right? We've seen people sell high quality credit assets. We're seeing people sell high quality, high quality equity assets as well. So you can you can still sell the good stuff, basically. So I think what's happening, which is worrying some LPs, and I think quite rightly, is if you have financial sponsors that are going to market with their best assets and trying to prove a track record to say, hey, I can, I can still sell like I used to be able to, what that's meant is the rest of this, the rest of their portfolio, kind of the rump of assets, is probably not as high quality as what has been sold so far. So I think a lot of investors are saying, hey, I don't have necessarily as much faith in the marks, maybe that I used to. I'm not as willing to help you raise a new fund because especially I haven't, I still haven't received that money back. And then so we've been in this market where we've seen a lot of people instead of selling assets are putting assets into continuation vehicles just to kind of keep their, keep their exposure. That works, but you also face some LP pressure for that too, because then you have questions around, hey, what what valuation or what mark does it does it go from one fund to the other in? Also, that still requires, that still requires funding. That's an LP potentially not getting their not getting their capital back. So I think we're just in this, in this sort of weird cycle where we've got private equity just hasn't been able to sell assets like they like they used to be able to. That's had an impact on their ability to raise new funds. And it just feels like the overall private equity machine is just not operating as fast as it used to. Now, I do think like like all things, this is gonna be, this will be a cycle in the market. I don't think we'll be in this position forever. We talked before about deals find a way, like private equity is going to, is gonna find a way. It just feels like we might be in this, this kind of slowdown for for a little bit now.
SPEAKER_00Well, Graham, you're gonna get me a bit depressed here. It sounds like private equity is in a real funk at the moment. So what does what what's the catalyst that needs to happen, do you think, to re-stimulate deal activity in private equity space?
SPEAKER_01Good question. I think we need a bit more time on say this software scare trade to see how it pans out. I suspect a lot of I suspect a lot of LPs are sitting tight and waiting to see, waiting to see what happens here. Are we gonna have a big wave of software defaults? Are we gonna see EBITDA decrease 30% in in the next couple years? Like I don't, I don't know yet. And I think if you're if you're private equity right now, right now, you're just doing the one thing you can, which is, you know, I've got I've got this portfolio of assets. I'm just gonna run those assets as well as I possibly can, especially on the basis that we know the thing you the one thing you can seem to do right now is sell a high quality asset. So if you if you've got this portfolio of companies, you're gonna do whatever you can to to improve asset quality and hopefully get them to a point where you can actually list them for sale.
SPEAKER_00Okay, interesting. Um, so that was a really uh insightful uh sort of discussion there. Learned a little bit more about the state of the private equity market at the moment, and uh maybe uh some hope for the future in the coming months uh if uh news flow on software particular isn't as bad as feared. So I hope those of you that have tuned in to listen, you've really enjoyed our deep dive into the state of the private equity market at the moment. That's all we've got time for today. Thanks from me and David to Graham.
SPEAKER_01Thanks, Debs, and thanks to everyone, and we'll see you all next week. Take care.