The Private Equity Liquidity Crisis: Why DPI Is Stalling Across Portfolios and Leaving SaaS Companies "Unsellable"

The private equity landscape is in uncharted territory. For years, the narrative was one of relentless capital deployment, soaring valuations, and the promise of outsized returns. But right now, something fundamental has shifted. There's a gnawing anxiety permeating boardrooms, a quiet dread felt by Limited Partners (LPs) eyeing their statements, and a stark reality facing General Partners (GPs): the cash just isn't flowing back.

We're talking about a multi-trillion dollar backlog of companies—a staggering 31,000 portfolio companies valued at roughly $3.7 trillion still awaiting an exit. (FinancialContent) The average buyout holding period has climbed to a 20-year high of nearly 7 years. (FinancialContent, UnlistedIntel) And the metric that truly matters to LPs, Distributed to Paid-In Capital (DPI), has plummeted to its lowest levels in over a decade.

This isn't just a cyclical downturn; it feels like a structural "Great Locking." While rising interest rates and a valuation gap between buyers and sellers are often cited as the culprits, they're really just scratching the surface. What if many of these portfolio companies, especially in the once-booming SaaS sector, aren't just facing tough market conditions, but have become fundamentally "unsellable" due to outdated products and stalled customer demand?

This article will pull back the curtain on this escalating private equity liquidity crisis. We'll dive deep into why DPI is stalling, expose the rise of "zombie companies," critically examine the limitations of financial engineering, and, most importantly, provide a strategic playbook for PE firms to truly reignite value creation in their SaaS portfolios. Because, honestly, waiting for rates to drop isn't a strategy.

DPI Decoded: Why Cash Distributions Are Collapsing
The "Zombie Company" Apocalypse: More Than Just Macroeconomics
- The Erosion of Product-Market Fit
- The Silent Drain of Stalled Customer Demand
The PE "Deal Dam": Causes of Stalled Exits Beyond Valuation Gaps
Financial Engineering's Double-Edged Sword: Band-Aids or Solutions?
Reclaiming Value: A Strategic Playbook for PE-Backed SaaS
- Product Modernization & Innovation
- Customer Demand Revival
- Lean Operations & Sustainable Growth
- Pre-Exit Operational Due Diligence
The Future of PE: Consolidation, Retailization, and a Focus on True Value
Conclusion: The Mandate for Operational Excellence
Key Takeaways for Private Equity
Frequently Asked Questions

DPI Decoded: Why Cash Distributions Are Collapsing

Let's start with the hard truth. For LPs, the ultimate measure of a private equity fund's success isn't its Internal Rate of Return (IRR), which can often be manipulated by mark-ups and early exits. No, it's DPI: Distributed to Paid-In Capital. This is the cold, hard cash actually returned to investors.

And honestly, the numbers are grim. Median five-year DPI benchmarks for recent fund vintages (think 2018–2021) are hovering at distressingly low levels, often between 0.1x to 0.3x. (FinancialContent, CEPR.net) This means that for every dollar LPs committed, they've only seen 10 to 30 cents back. Distributions as a portion of Net Asset Value (NAV) sank to a mere 11% in 2024. (UnlistedIntel)

This is a far cry from the cash-on-cash returns LPs expect and need for their own capital calls and portfolio rebalancing. When DPI stalls, LPs face a crunch. They can't reinvest, they can't meet their own obligations, and their confidence in the asset class erodes. This isn't just an inconvenience; it's a systemic threat to the entire fundraising ecosystem.

The fundamental issue is that GPs simply aren't selling companies. And when you look closely, you start to realize it's not just the market; it's the companies themselves.

The "Zombie Company" Apocalypse: More Than Just Macroeconomics

The term "zombie fund" used to be a niche concern. Now, it's become mainstream. Over half of all active private equity funds are holding companies with Net Asset Values (NAVs) exceeding 20% of their originally committed capital, yet have provided minimal distributions in the last two years. (FinancialContent) The AUM in North American zombie funds has swelled from $372 billion in 2021 to a staggering $441 billion in 2024. (CEPR.net) Nearly half of institutional investors now report exposure to these funds. (CNBC, citing Lazard survey)

These aren't just funds; these are portfolios filled with "zombie companies"—businesses that are effectively unsellable at a desirable multiple, kept alive but not truly growing or delivering value. Most top-tier financial reports attribute this to high debt from cheap rates and the current higher-for-longer interest rate environment. And yes, those are absolutely critical factors.

But here's the thing: that explanation often stops short. It doesn't tell you why a specific SaaS company in your portfolio, once a darling, is now struggling to find a buyer or justify its valuation. The real, granular truth often lies beneath the macroeconomic surface, in the operational rot that has set in.

The Erosion of Product-Market Fit

Think about it: many SaaS companies acquired during the low-rate frenzy of 2018-2021 were riding a wave of digital transformation. Their initial product-market fit was strong, and growth came relatively easily. But markets evolve rapidly. Customer needs shift, competitors emerge with more innovative solutions, and technology advances.

The problem? Many PE-backed SaaS companies failed to keep pace. They neglected product innovation, falling into a trap of incremental updates instead of truly understanding and addressing their evolving customer needs. This leads to:

Feature Bloat without Value: Adding features that don't solve core customer problems, making the product complex but not more valuable.

Technical Debt: Prioritizing quick fixes over robust architecture, leading to slow performance, security vulnerabilities, and a sluggish development cycle.

Outdated UX/UI: A user experience that feels clunky, unintuitive, or simply behind the times compared to modern alternatives.

Lack of Differentiation: The product simply doesn't stand out anymore. It's a "me-too" solution in a crowded market, unable to articulate a unique value proposition.

When this happens, the original product-market fit erodes. The product gathers digital dust, and potential buyers see a costly overhaul rather than a growth engine.

The Silent Drain of Stalled Customer Demand

Hand-in-hand with an outdated product comes stalled customer demand. This isn't always a dramatic drop; sometimes it's a slow, insidious bleed.

Increased Customer Churn: Existing customers, once loyal, quietly migrate to competitors offering better solutions or more responsive service. They're not getting their Jobs-to-be-Done as effectively as they once were, or as effectively as new alternatives promise.

Inability to Acquire New Customers: Marketing and sales efforts become increasingly inefficient. The product no longer resonates with new prospects, requiring higher Customer Acquisition Costs (CAC) for diminishing returns.

Market Saturation: The "easy" customers are gone. The market segment the company initially targeted is either saturated or has moved on. Without adapting, growth stalls.

Competitive Pressure: New entrants with innovative solutions, often built on more modern tech stacks or with a clearer focus on unmet needs, siphon off market share.

A SaaS company with an outdated product and stalled customer demand isn't just slow-growing; it's often bleeding value. And no amount of financial engineering can fix that. It requires a deep, operational intervention.

The PE "Deal Dam": Causes of Stalled Exits Beyond Valuation Gaps

While the operational health of portfolio companies is a critical, often overlooked factor, it's true that macro conditions have created a formidable "Deal Dam" that traps capital.

Here's what we're seeing:

Higher-for-Longer Interest Rates: This is the elephant in the room. Years of cheap debt allowed PE firms to fuel acquisitions with high leverage. Now, those interest payments are significantly higher, eroding cash flow and making new acquisitions less attractive for buyers. It's simply more expensive to finance deals, dampening appetite.

The Valuation Gap: Sellers (GPs) are clinging to the valuations achieved in the frothy markets of a few years ago. Buyers, facing higher capital costs and a more cautious outlook, are unwilling to pay those prices. This creates a stalemate, a standoff where neither side blinks, and deals don't close.

The Denominator Effect: LPs are over-allocated to private assets in their portfolios because the public markets have taken a hit. Their private investments, especially those with inflated NAVs, now represent a larger "denominator" of their total portfolio. To rebalance, they need cash distributions, but also have less capacity to commit new capital to PE funds, further squeezing the market.

GPs Clinging to Corpses: And this is where the human element comes in. As CNBC insightfully put it, GPs are sometimes "keeping the corpse politely seated at the board table." (CNBC) Why? Reputational damage from selling at a loss, the desire to avoid realizing losses on paper, and the hope that market conditions will eventually rebound and bail them out. It's a classic case of loss aversion and optimism bias. But this inaction only perpetuates the problem, turning potential assets into actual zombie companies.

The combination of macro pressures and this psychological aversion to realizing losses creates a perfect storm, extending holding periods to unprecedented levels and amplifying the liquidity crisis.

Financial Engineering's Double-Edged Sword: Band-Aids or Solutions?

In response to the liquidity crunch, the industry has turned to a suite of financial engineering solutions, often presented as necessary valves to release pressure. Let's look at them:

Secondaries: This involves selling existing LP interests in a fund (LP-led secondaries) or selling a portfolio company from one fund to a new "continuation fund" managed by the same GP (GP-led secondaries). Global secondary transaction volume hit a record $162 billion in 2024 and is expected to exceed $170 billion in 2025. (UnlistedIntel)

NAV Loans: Funds borrow against the Net Asset Value of their portfolio companies, providing liquidity to LPs without selling the underlying assets. NAV-based lending has swelled to an estimated $150 billion in outstanding debt. (FinancialContent)

Dividend Recaps: Portfolio companies take on more debt to pay a dividend to the PE firm and its LPs. This provides immediate cash but further leverages the company. Dividend recapitalizations reached $28.7 billion in November 2025. (CEPR.net)

On the surface, these strategies offer relief. They provide LPs with much-needed cash, allow GPs to avoid realizing losses, and extend holding periods, buying time.

But critically, are they solutions or just band-aids?

PwC states unequivocally that NAV loans are "unlikely to meet liquidity demands" in the long term. (PwC) CEPR.net provides a strong academic critique, highlighting how financial engineering often just "delays reckoning" and can even create fiduciary conflicts. Think about it: a GP selling a company to a continuation fund they also manage can present a conflict of interest.

The deeper issue is that these tools, while providing synthetic liquidity, do not address the underlying operational deficiencies of portfolio companies. They might keep a "zombie" alive a little longer, but they don't give it a pulse. If a SaaS product is outdated, if customer demand is stalling, pumping more debt into the structure or shuffling ownership within the PE ecosystem won't fix the core problem. In fact, it can mask it, making the ultimate reckoning even harder.

This is where the industry needs to evolve, moving beyond financial acrobatics to genuinely create equity value from within.

Reclaiming Value: A Strategic Playbook for PE-Backed SaaS

So, what's the alternative? How do PE firms truly transform unsellable SaaS companies into attractive exit candidates? It requires a shift from viewing financial levers as the primary value creation tool to a laser focus on operational excellence, particularly product innovation and customer-centric growth.

This isn't about generic "operational value-add." It's about a concrete, strategic playbook for PE firms and their SaaS portfolio companies.

Product Modernization & Innovation

The first step is a brutal, honest assessment of the product itself. Is it still relevant? Does it solve critical Jobs-to-be-Done (JTBD) for its target customers, better than alternatives?

Diagnose Obsolescence: Conduct deep customer research to understand unmet needs, identify feature gaps, and pinpoint areas of friction. This isn't just about surveys; it's about observing customers, understanding their struggles, and quantifying the market opportunity for new or improved solutions.

Invest Strategically in R&D: Shift focus from feature parity to true innovation. This means allocating resources to R&D that directly addresses identified unmet customer needs and competitive white space. It's about building features that matter, not just adding more.

Prioritize Technical Debt Reduction: A modern, scalable, and secure product is non-negotiable for an exit. Create a clear roadmap to reduce technical debt, modernize the tech stack, and improve overall product performance and reliability. This is a critical investment that enhances buyer appeal.

Re-establish Product-Market Fit: This might involve pivoting the product slightly, targeting new customer segments, or even entirely revamping the user experience. The goal is to ensure the product fundamentally solves a problem for a defined market in a compelling way.

Customer Demand Revival

A great product needs a vibrant customer base. If demand has stalled, it needs to be reignited.

Deep-Dive Customer Churn Analysis: Go beyond surface-level metrics. Understand why customers are leaving. Is it product functionality? Poor support? Pricing? Competitive offerings? Use this data to inform product improvements and customer retention strategies.

Re-engage & Upsell Existing Customers: Satisfied, retained customers are your best growth engine. Develop programs to re-engage dormant users, highlight new features, and identify opportunities for upsells or cross-sells by demonstrating additional value.

Target New Growth Segments: If your core market is saturated, identify adjacent markets, niche segments, or even geographic expansion opportunities where your revitalized product can find new traction. This requires meticulous market research and a clear go-to-market strategy.

Optimize Marketing & Sales: Ensure your go-to-market efforts are aligned with the revitalized product and target audience. Messaging needs to be clear, compelling, and focused on the unique value propositions that address customer pain points.

Lean Operations & Sustainable Growth

Beyond product and customer, the entire operating model needs scrutiny.

Efficiency Beyond Cuts: This isn't just about slashing costs. It's about identifying inefficiencies in processes, automating where possible, and ensuring every dollar spent contributes to value creation.

Focus on Unit Economics: For SaaS, understanding your Customer Lifetime Value (CLTV) relative to Customer Acquisition Cost (CAC) is paramount. Optimize these metrics for sustainable, profitable growth.

Build a Strong Leadership Team: Ensure the portfolio company has the right leadership in place, with a clear vision and the expertise to execute a turnaround or accelerated growth strategy.

Pre-Exit Operational Due Diligence

For PE firms, integrating these operational insights into their due diligence process before an exit attempt is crucial. This means:

Beyond Financial Metrics: Evaluate portfolio company health not just on EBITDA multiples, but on the strength of its product, the health of its customer base, its innovation pipeline, and its team's capability to deliver future growth.

Identify and Quantify Value Creation Initiatives: Clearly articulate the specific operational improvements made and their quantifiable impact on revenue, margins, and customer satisfaction. This forms a compelling narrative for potential buyers.

Address Red Flags Proactively: Don't wait for buyer due diligence to uncover weaknesses. Identify and address them upfront, turning potential deal-breakers into resolved issues.

This strategic, operational approach to equity value creation is what truly distinguishes leading PE firms in today's environment. It's about making companies genuinely more valuable, not just financially engineered. And frankly, it's why firms partner with specialized experts in Jobs-to-be-Done (JTBD) and AI-powered platforms like thrv to execute this kind of deep transformation.

The Future of PE: Consolidation, Retailization, and a Focus on True Value

The current crisis, as challenging as it is, will undoubtedly reshape the private equity industry. We're already seeing trends emerge:

Consolidation: Expect larger, more diversified mega-firms to emerge as "liquidity providers," leveraging their scale and diverse capital sources to navigate tougher markets.

Retailization of PE: The industry is looking for new capital. The move to bring PE investments to a broader base of individual investors, particularly through 401(k)s (a controversial move, as highlighted by CEPR.net), could unlock significant new capital, albeit with new regulatory and transparency demands. (CNBC)

A Shift to True Value Creation: The era of easy money and purely financial engineering is, for now, largely over. The successful firms of tomorrow will be those that can genuinely drive operational improvements, foster product innovation, and build companies that solve fundamental customer needs. This aligns perfectly with the mandate for real, sustainable equity value creation.

This isn't just a market correction; it's a strategic reset. It's an opportunity for private equity to mature, to move beyond simply financial leverage and truly focus on building better businesses.

Conclusion: The Mandate for Operational Excellence

The private equity liquidity crisis is a complex beast, but one thing is becoming undeniably clear: the path to overcoming it lies not just in waiting for market conditions to improve, nor solely in sophisticated financial maneuvers. It lies in the gritty, disciplined work of operational excellence, particularly in revitalizing the products and reigniting the customer demand of portfolio companies.

For PE firms invested in SaaS, this means a ruthless focus on understanding customer needs through methodologies like Jobs-to-be-Done (JTBD), driving genuine product innovation, and ensuring their companies offer compelling, differentiated solutions that resonate with the market.

The "unsellable" SaaS company is not a permanent state. It's a symptom of deeper issues that, when addressed strategically and proactively, can be transformed. This crisis is not just a threat; it's a profound opportunity for private equity to prove its true value creation capabilities, moving beyond financial wizardry to build robust, customer-centric businesses that deliver real DPI for LPs and lasting equity value creation for everyone involved.

Key Takeaways for Private Equity

DPI is the ultimate metric: Focus on cash returned to LPs, not just IRR. Low DPI vintages signal a systemic problem.

"Zombie companies" are an operational issue: Beyond macro factors, outdated products and stalled customer demand are making many PE-backed SaaS companies unsellable.

Financial engineering is a temporary fix: Secondaries, NAV loans, and dividend recaps provide liquidity but don't address fundamental operational rot. They can mask problems rather than solve them.

Strategic product innovation is non-negotiable: Re-establish product-market fit, aggressively tackle technical debt, and invest in innovation that directly addresses unmet customer needs.

Customer demand must be revived: Implement deep churn analysis, re-engage existing customers, and strategically target new growth segments.

Operational excellence is the new value driver: Sustainable equity value creation comes from building better, more customer-centric businesses, not just from financial leverage.

Frequently Asked Questions

What is DPI in private equity, and why is it so important now?

DPI stands for Distributed to Paid-In Capital. It's a key metric that measures the actual cash distributions LPs have received from a fund relative to the capital they've paid in. It's crucial because it represents real cash-on-cash returns, unlike IRR, which can be theoretical. In the current liquidity crisis, low DPI highlights the struggle of PE funds to exit investments and return capital, impacting LP re-ups and confidence.

How do "outdated products" contribute to the private equity liquidity crisis for SaaS companies?

Outdated products in SaaS lose their competitive edge. They might have eroded product-market fit, accumulated technical debt, or simply fail to address evolving customer needs as effectively as newer solutions. This leads to increased customer churn, difficulty acquiring new customers, and ultimately, stalled growth—making the company undesirable and "unsellable" at a premium valuation.

Are higher interest rates the sole reason for stalled PE exits?

No, while "higher-for-longer" interest rates significantly impact debt service costs and reduce buyer appetite, they are not the sole reason. The current crisis is multi-faceted, also driven by a valuation gap between buyers and sellers, the "denominator effect" impacting LPs, and critically, the operational underperformance of many portfolio companies themselves due to issues like outdated products and stalled customer demand.

Can financial engineering solutions like NAV loans truly resolve the private equity liquidity crisis?

Financial engineering solutions like NAV loans, secondaries, and dividend recaps can provide temporary liquidity and delay exits. However, they are largely band-aids. They do not address the fundamental operational problems (like poor product-market fit or stalled customer demand) that make a company truly "unsellable." PwC notes that NAV loans are "unlikely to meet liquidity demands" in the long term, and they can even mask underlying issues.

What should private equity firms do to revive "unsellable" SaaS portfolio companies?

PE firms should shift their focus to deep operational intervention. This includes:

Product Modernization: Re-evaluating and innovating the product to meet current and future customer needs, often using methodologies like Jobs-to-be-Done (JTBD).

Customer Demand Revival: Analyzing and addressing customer churn, re-engaging existing customers, and identifying new growth segments.

Operational Efficiency: Optimizing unit economics and building a strong, execution-focused leadership team.

This proactive approach drives real equity value creation and prepares the company for a successful exit.

The challenges facing private equity are significant, but so are the opportunities for those willing to embrace a new paradigm of value creation. If your private equity firm is grappling with stalled DPI, "unsellable" SaaS portfolio companies, or the need to fundamentally transform your approach to operational value, let's talk.

Connect with thrv today to explore how our proprietary Jobs-to-be-Done methodology and AI-powered platform can help you unlock trapped value, accelerate growth, and navigate this complex landscape with confidence.

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