Right now in America we have more private equity firms than we have McDonald’s. Let that sink in…. More leveraged buyout shops than fast food franchises. And somehow that is supposed to be normal….
This is the investmnt vehicle of choice for Ivy League nepo babies who want the upside without the liability. They sit on top of a backlog of 31,000 to 39,000 companies they cannot sell because they stuffed them with debt and marked them at fantasy valuations. The funds are supposed to close. The assets are supposed to exit. But the market will not pay what they claim those assets are worth.
So what do they do??
The PE firm itself takes almost no risk. They create a fund. Outside investors supply the capital. They borrow the rest from banks, pensions, and public retirement systems. Then they buy a company and load the debt onto that company’s balance sheet. Not their own. The company owes the money back.
It is like buying a car where you get the title, the resale credit, and the bragging rights, but the car is responsible for making the payments. And while the car is trying to pay for itself, you sell its parking spot, lease out its tires, refinance its mainteance plan, and siphon the cash. Then you add more debt. The car still owes it all.
For years, that game worked because rates were near zero. Over the last two years, rates went up. That adjustable rate debt they stacked on top of these businesses is now costing 14 to 18 percent. In distressed deals, 21 PCT. On billions of dollars.
So the math stopped working……..
Instead of taking the loss, they started doing secondaries. ABC PE cant sell its billion dollar company. XYZ Private Equity cannot sell theirs. So they sell them to each other at the same inflated valuations. They borrow fresh money from pensions and other investors to do it. The first fund gets “liquidity.” The second fund inherits the problem.
The Financial Times has been calling this a pyramid for years. No real price discovery. No true market validation. Just circular trades at numbers they agreed on.
Then even that stopped working. One hundred billion dollars in assets could not be moved in the last two quarters of 2025, even through these internal trades.
So now we get continuation funds.
This is where it goes from financial engineering to parody. ABC Private Equity has a company it cannot sell. The fund must close. So they create Fund 2. They raise new money from new investors. Then Fund 2 buys the same asset from Fund 1 at an even higher valuation. The cash from Fund 2 pays off the investors in Fund 1. The asset never faced the open market. The price is whatever they say it is.
That is not sophisticated. That is a textbook Ponzi dynamic. New money pays off old money. The underlying asset does not justify the valuation. It just gets passed around inside the same firm.
And who is the new money? Public pensions. Retirement accounts. 401k allocations. Teachers, firefighters, municipal workers. People who do not even know their retirement is being used to refinance a debt stack on a company nobody else would buy.
Meanwhile, those companies are being strip mined. Fees. Dividends. Asset sales. Cost cutting. More leverage. All while being valued at numbers the market has already rejected.
There is now 31,000 to 39,000 companies sitting in this pipeline. They need exits. They need buyers. They need cash.
Ponzi structures always collapse the same way. Not with drama at first, but with a liquidity squeeze. Eventually you run out of new money. When that happens, the valuations get marked to reality. And reality is not kind to overleveraged assets paying double digit interest.
Instead of admitting the model is broken, the industry is looking at the biggest pools of capital left and thinking: open the pensions wider. Shift the allocation rules. Expand the mandate. Push more retirement money into private markets.
So rather than let bad bets fail, we socialize the downside.
More private equity firms than McDonald’s. Tens of thousands of companies trapped in debt stacks. One hundred billion dollars that could not even be papered over with internal trades. And the proposed solution is to feed it more pension cash.
If this ends the way Ponzi structures usually end, it will not be the partners in the Hamptons taking the hit.
It will be the retirees.