Every year, a new intake of associates arrives in Patagonia gilets, carrying two phones and prepared to work 80 hours a week for the privilege of climbing a very crowded tree. Most will never reach partner.
Junior investors learn through repetition – building models, dissecting data rooms and sitting through diligence calls. AI can already do much of this work. It can screen markets, analyse documents, build a first-pass model, summarise diligence and produce an investment paper. Firms will inevitably remove a large part of the junior layer because PE people are rarely sentimental when presented with a better margin.
That creates a fairly serious problem. Judgement comes from doing tedious work, watching deals develop and getting things wrong. If AI removes this, then the industry will need another way to train its future partners. And the timing is unfortunate because PE is already in a mess of its own making.
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For years, the industry enjoyed falling interest rates, cheap debt, rising valuation multiples and an apparently endless queue of buyers. Eventually, it began to regard these conditions as evidence of its own genius. Leverage became strategic insight. Multiple expansion passed for transformation. Selling a company to another PE fund for more money demonstrated operational brilliance.
A generation of investors built careers without experiencing genuinely hostile conditions. The wind remained at their backs for so long that many concluded they were adept at sailing. The wind has now changed direction, and a surprising number of people appear to be holding the map upside down.
McKinsey reports that the backlog of PE-owned companies is larger by value, number and proportion of portfolios than at any point in the past 20 years. Five-year rolling distributions relative to buyout assets under management reached their lowest recorded level in 2025. LPs have continued meeting capital calls while waiting for distributions from assets that should have been sold years ago.
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Difficult exit markets have contributed, but the more serious issue is the quality of what PE is trying to sell. Many firms bought businesses, added debt, completed acquisitions and waited for the valuation multiple to rise. This worked beautifully during benign markets. It works considerably less well when buyers start examining what has actually improved inside the company.
PE has spent the past decade talking enthusiastically about operational transformation. It has hired armies of operating partners – but many of them are prevented from doing much operating. They appear at LP meetings, contribute to value creation plans and reassure investors that somebody in the building understands procurement. The deal partners continue controlling the important decisions and portfolio company management learns how to avoid returning their calls.
Deal sourcing contains similar levels of pageantry. Funds talk about proprietary networks, differentiated origination and privileged access. Much of the industry waits for the same investment bankers to send around the same books for the same companies.
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Everybody piles into the auction, reaches broadly the same conclusion and then pays slightly more than everyone else.
The consultants then perform commercial due diligence, forecast market growth and provide the air cover required before the investment committee. Often, they do excellent work. They also provide the deal partner with a prestigious logo confirming the market is attractive and management’s forecast is achievable. Nobody got fired for hiring Bain or McKinsey. Plenty have overpaid for companies while clutching their reports. The investment committee is the final ordeal.
The deal partner defends the company, the valuation and the heroic assumptions hiding in the model. The committee tests the argument, applies pressure and eventually grants permission to buy. A strong committee can kill a bad deal. It can also spread responsibility so widely that nobody gets blamed when one goes wrong.
Once the acquisition closes, the bankers collect their fees, the consultants move on and somebody has to improve the company. This is where the next era of PE will be decided. Firms will have to improve pricing, sales productivity, working capital, technology and management quality.
Family offices and wealthy investors should pay closer attention to cash returned than valuations reported. They need to understand how much of a manager’s historic performance came from earnings growth, how much came from leverage and rising multiples, and how much remains trapped in companies nobody currently wants to buy.
PE is going to become even more brutal. The firms that prosper will be the ones that can genuinely improve businesses. The rest are about to discover that excellent weather and a true grasp of sailing were never quite the same thing.
