Unprecedented! $3.8 trillion in Wall Street "dry powder" turning into "zombies." A Darwinian extinction is unfolding. Are your crypto assets a shelter or a target?

The private equity industry is standing at a brutal crossroads. A recent market report shows that for the fourth consecutive year, profits returned to investors have decreased. In 2025, the distribution ratio is only 14%, the lowest level since the 2008 global financial crisis.

Meanwhile, about 32,000 companies are waiting to be sold, with assets totaling up to $3.8 trillion. The blockage of exit channels is reshaping the entire industry landscape. Fundraising is highly concentrated among top-tier firms, while small and medium-sized funds are struggling. Some analysts openly state that a long-anticipated Darwinian survival of the fittest is happening, and smaller, less distinctive fund managers may face extinction.

Returns have hit crisis-era lows. Data shows that in 2025, private equity distributions as a percentage of net asset value remain at 14%, the second-lowest level since the financial crisis. The average holding period for assets has extended from five to six years (2010-2021) to about seven years. Industry leaders note that management companies have sold their top-tier “jewel” assets, but are reluctant to sell uncertain assets. When holding periods exceed five or six years, internal rates of return become less attractive.

Fundraising is also under pressure. In 2025, leveraged buyout fund fundraising declined by 16% year-over-year to $395 billion. The number of funds completing fundraising dropped by 23%, marking the fourth consecutive year of decline. The report also mentions that certain policy uncertainties abruptly halted deal activity in early 2025, even though in January of that year, deal momentum appeared very strong.

Despite a 44% year-over-year increase in total global M&A deal value in 2025, reaching $904 billion, there is clear structural differentiation behind this impressive figure. The report points out that just 13 mega-deals over $10 billion contributed about 30% of total deal value, mainly concentrated in the U.S. market.

Meanwhile, the total number of deals decreased by 6%. Some large privatizations have limited impact on digesting the $3.8 trillion of unsold assets backlog. Analysts from private market data providers say that large institutions, due to diversified operations and managing vast capital, have stronger buffers during deal slowdowns. This pressure impacts mid-market managers more significantly.

The analyst further warns that, based on current conditions, many funds of all sizes are struggling to raise capital, and many managers may have already raised their last fund without realizing it. Poor performers are likely to quietly wind down.

As industry reshuffling accelerates, opinions on exit strategies are increasingly divided. Some industry leaders expect consolidation to speed up, but others remain cautious. They believe not all firms can be acquired by mega-platforms, especially when the assets for sale are inherently “grey” assets tied to difficult-to-exit or hard-to-valuate management fee income.

Another path is called “zombification.” Some managers choose to roll assets into extension funds, providing liquidity to investors while continuing to hold assets—essentially buying time. However, warnings indicate that if funds cannot continue to distribute capital to investors, this model cannot last. 2026 is expected to be a critical year to distinguish between managers who can deliver on promises and those who cannot, with this industry reset being described as an “absolute Darwinian淘汰.”

Even those firms surviving this round of reshuffling face much greater profitability challenges. Analysts note that in the 2010s, with ultra-low borrowing costs and rising valuation multiples, buyout funds could achieve twofold or higher returns within five years by modest profit growth in portfolio companies. That wind has now gone.

Current leverage costs are near 8-9%, and valuation multiples are relatively stagnant. This shift is summarized as “12% is the new 5%”—meaning EBITDA growth rates of portfolio companies need to increase from about 5% to 10-12% annually to achieve the same 2.5x investment return. Previously, maintaining a 5% EBITDA growth rate before exit was sufficient, but given current interest rates and multiples, a 12% annual growth over five years is now required for similar returns.

This means fund managers must drive profitability growth through substantive measures like pricing discipline, working capital improvements, and management upgrades, rather than relying solely on cheap debt chasing multiples. The current environment is truly testing how much operational value managers can create.

The difficulties faced by private equity are not isolated. Market signals indicate that the private credit market is also under warning signs. A CIO warns that the dangerous signals seen in private credit today are eerily similar to those in 2007, especially pointing to worsening lender protections and complex liquidity terms masking asset mismatches.

A February report from Deutsche Bank shows that the discount of related index fund prices relative to net asset value has reached the highest level since the COVID-19 pandemic. Events like redemption restrictions and significant reductions in investor holdings have further fueled market panic.

However, the bank remains cautiously optimistic about systemic risk, describing the current situation as “heavy smoke but no visible flames,” believing conditions for a large-scale market contagion are not yet present. It also notes that over $3 trillion in private market dry powder could serve as a key buffer.

The bank highlights four key indicators to watch: sharp increases in credit spreads, substantial contraction in corporate profits, stress in the government bond market, and changes in bank regulation or capital requirements related to private markets. Currently, none of these indicators have reached dangerous levels.

Nevertheless, the main author of the report still considers private equity a strong investment choice overall, offering diversification that public markets no longer provide. But right now, the market is somewhat stuck.

When traditional finance’s “dry powder” faces “zombification,” where will capital seek efficiency and certainty? Historical experience suggests that asset classes with higher liquidity, more transparent rules, and the ability to anchor real-world assets (RWA) and enhance productivity tend to attract risk-averse and profit-seeking investors. This may explain why narratives around AI and data storage-driven DePIN (Decentralized Physical Infrastructure Networks) are gaining increasing attention in the current macro environment.

Take Walrus, a storage layer project in the Sui ecosystem, as an example. It aims to address data storage efficiency and cost issues—an essential infrastructure in the AI era. When traditional capital struggles to exit, building decentralized infrastructure on blockchain with clear utility and revenue models may represent a new paradigm for capital allocation and value capture.

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