“Massive Culling” Imminent For Alt Managers, Soros Fund CEO Warns

Authored by Lance Roberts via RealInvestmentAdvice.com,

Dawn Fitzpatrick says overallocated LPs, frozen distributions, and mounting margin-call risk are converging into a sector-wide shakeout. Such will eventually separate survivors from the casualties. I used Claude to source data on private credit and equity funds, sources disclosed at the end.

In July 2024, I penned an article entitled “Private Equity: Why Am I So Lucky,” which began with:

“Lately, I have been getting many questions about investing in private equity. Such is common during raging bull markets, as individuals seek higher rates of return than the market generates. Also, during these periods, Wall Street tends to bring new companies to market to fill the demand of the investing public. Private equity is always alluring, as is the tale of someone who bought the company’s shares when it was private and made a massive fortune when it went public. Who wouldn’t want a piece of that?”

The private equity (PE) business is huge. When I say huge, I mean $4.4 trillion huge.

However, as we warned then, the risks have come home to roost. The private equity and private credit industry is heading into a gut-wrenching period of consolidation. That, according to one of Wall Street’s most influential investors, Dawn Fitzpatrick, CEO of Soros Fund Management. She told attendees at Bloomberg Invest this week that a “massive culling” of alternative asset managers is coming. And that the industry has no one to blame but itself.

Speaking with Bloomberg’s Lisa Abramowitz on Tuesday, Fitzpatrick delivered a blunt diagnosis. For a decade, private managers gorged on cheap money, inflated valuations, and investor enthusiasm for one of the greatest financial expansions ever. Now, she argues, the bill is coming due. “Investors are overallocated to private assets,” she said. “Their private equity is not cash flowing,” and the compounding pressures of frozen exits, extended hold periods, and surging secondary market activity are exposing the structural fragility at the heart of the alternative investment complex.

The Liquidity Reckoning

Fitzpatrick’s comments crystallize a slow-motion crisis that has been building since the 2022 rate-hiking cycle. What seemed irrelevant at the time has now made the exit environment suddenly hostile. The traditional private equity model was simple. Buy a company, leverage it, improve operations over a 3- to 5-year holding period, then sell or IPO it. However, that model has stretched into something unrecognizable. Median hold periods, which stood at 4.2 years in 2010, ballooned to 6.8 years by 2023. They are getting even longer since. Furthermore, the asset class defined by its ability to generate compounding cash-on-cash returns has increasingly become a warehouse of paper gains.

The numbers are stark. According to MSCI research, US private equity funds delivered annualized returns of just 5.8% between 2022 and 2025. That was less than half the S&P 500’s 11.6% over the same period. For investors who sacrificed liquidity and accepted illiquidity premiums, the trade has spectacularly misfired.

A World Of Hurt

Fitzpatrick’s diagnosis wasn’t limited to returns. The real crisis, she argued, is structural. The pensions, endowments, wealth funds, and family offices that seed private vehicles have been caught in a vice they made. For the last decade, they aggressively shifted portfolios toward private assets in pursuit of higher returns. Now, many find themselves overexposed, illiquid, and unable to meet future capital calls without selling positions at significant discounts.

This is the so-called “denominator effect.” That is where falling public equity valuations inflate the proportional weight of private holdings in a portfolio. The result was widespread overallocation across pensions and endowments during the 2022 public market selloff. While public equity recoveries have since eased that mechanical pressure for some, the underlying liquidity problem persists. Notably, private equity is not generating the cash distributions investors need to rebalance and redeploy capital.

According to McKinsey’s 2026 Global Private Markets Report, five-year rolling distributions-to-paid-in capital as a share of AUM hit its lowest recorded level in 2025. That is a consequence of a backlog of unsold portfolio companies that has been accumulating since exits froze in 2022. Data from Bain & Company shows that the GPs attracting capital today are those that delivered steady distributions. Firms like Thoma Bravo, which closed a $24.3 billion flagship fund in 2025, and Bain Capital, which closed a $14 billion vehicle are examples.

For the rest, the window is narrowing fast.

The Secondary Surge and What it Signals

One of the most telling symptoms of the liquidity crisis has been the explosive growth of the secondary market. Secondary transaction volume hit a record $240 billion in 2025, up 48% from the prior year, according to Jefferies. GP-led continuation vehicles, mechanisms that allow managers to hold onto assets longer while offering existing investors an exit option, now account for $115 billion of that total. That number has more than tripled in five years, from $35 billion in 2020.

To some, the surge in continuation vehicles reflects creative financial engineering by GPs navigating a difficult exit environment. To others, including Fitzpatrick, it raises pointed questions about who these structures are really serving. About 30% of surveyed LPs in a McKinsey study described assets in continuation vehicles as “distressed” or “challenged.” According to Fitzpatrick, the managers who survive the shakeout will be those who return capital as promised. Those who don’t will be those funds that find ever more elaborate ways to extend their fee-generating relationships with aging assets.

Private Credit – The Hidden Fuse

If the PE liquidity crunch is the industry’s visible problem, Fitzpatrick’s most pointed technical warning is for private credit. The $1.8 trillion market that has absorbed enormous capital flows over the last decade is now sitting on an underappreciated time bomb.

The concern centers on a mechanism that has received relatively little public attention. The banks that are lending against private credit funds’ own portfolios. As the value of private credit loans gets reassessed, whether by rising defaults, falling collateral values, or increased regulatory scrutiny on the banks themselves, those lenders could begin demanding more collateral from the credit funds.

“Once they do that, those private credit funds are going to have to come up with cash to meet those margin calls.” – Fitzpatrick

Morgan Stanley itself warned in a February 2026 report that approximately 50% of software sector loans in private credit carry lower credit ratings (B- or lower), signaling elevated default risk, and over 80% are issued by private, sponsor-backed companies.

However, Goldman Sachs Asset Management’s global co-head of private credit, Vivek Bantwal, pushed back on at least part of the concern. He argues that withdrawal limits on retail-facing private credit vehicles were “features and not bugs,” protecting funds from fire-sale dynamics. However, the events of this past week are certainly testing that thesis as those very mechanisms are being triggered at multiple funds simultaneously.

Lastly, Ares Management CEO Mike Arougheti, while dismissing UBS’s most extreme 15% default-rate forecast for private credit as “absolutely wrong,” acknowledged that some portfolios saw loss rates of 8% to 10% during the 2008 financial crisis. That is a data point that takes on new resonance in the current environment.

Notably, the events of the past week validate Fitzpatrick’s warning in real time. She warned about the “gating” potential on March 3rd. Since then:

• BlackRock’s $26 billion HPS Corporate Lending Fund capped withdrawals at 5% after shareholders requested 9.3% of shares, returning roughly $620 million of the $1.2 billion investors sought.

• Cliffwater’s $33 billion flagship private credit vehicle, the second-largest retail-facing private credit fund, capped redemptions at 7% in Q1 after investors sought to pull a record 14% of shares — one of the largest withdrawal requests ever seen in the $1.8 trillion market.

• Morgan Stanley’s North Haven Private Income Fund, with nearly $8 billion in assets, returned around $169 million — less than half of what investors requested — after capping redemptions at 5%.

• JPMorgan Chase has begun marking down the value of loans in private credit fund portfolios and restricting its lending to those funds, resulting in $22.2 billion of exposure to the sector.

JPMorgan’s markdowns primarily affect loans to software companies, which the bank views as increasingly vulnerable to AI disruption. Because these loans serve as collateral when private credit funds borrow from banks, lower valuations directly reduce the financing those funds can access — precisely the mechanism Fitzpatrick described.

Who Gets Culled and Who Survives

Fitzpatrick’s warning lands in a market already exhibiting sharp bifurcation. McKinsey’s 2026 Global Private Markets report found that about 40% of dry powder available for deployment has been sitting unused for more than two years. That is a signal that GPs are struggling to find deals at prices that work. Fundraising, meanwhile, has become increasingly winner-take-all. The managers pulling in commitments are concentrated among scaled platforms with demonstrated distribution records. However, smaller and emerging managers face an existential squeeze.

Apollo’s Marc Rowan offered a complementary, if blunter, verdict on the risk landscape.

“People made choices: if you wanted a higher dividend, you could take more risk. That felt really good on the way up. That’s not going to feel so good on the way down.”

But, Ares’ Arougheti held the line on private credit’s long-term structural merits. He argued that diversified, multi-strategy platforms with rigorous underwriting will prove out the asset class even as weaker players stumble. He noted that firms that manage across private equity, credit, real assets, and infrastructure have natural hedges and capital-recycling advantages that pure-play credit shops lack entirely.

The Road Ahead

For Fitzpatrick, the next 18 to 24 months represent a painful but ultimately necessary correction. The industry that, in her view, over-promised and under-delivered on the most fundamental commitment any investment manager makes: returning capital. The macro backdrop: geopolitical turbulence, AI-driven disruption to software valuations, and an uncertain rate environment, amplifies the pressure without being its cause. The cause, she argues, is structural. There were too many managers, too much capital raised at peak valuations, too many continuation vehicles propping up stale assets, and a performance record that, net of fees, no longer justifies the illiquidity premium being charged.

For institutional investors now trapped in the denominator’s grip, the path forward is constrained. Capital calls from existing commitments continue even as distributions dry up. Selling on the secondary market provides exit options, but at increasingly steep discounts. The Bain & Company chair of global private equity practice put a sobering timeline on the resolution: “We’re talking about a 5-plus year problem,” he noted earlier this year, drawing a parallel to the years it took to work through the Great Financial Crisis backlog.

Fitzpatrick’s verdict, in the end, is a market-efficiency argument dressed in the language of capital allocation: the managers who survive will be those who earn their keep. The ones who didn’t — who built empires on fee income and rolled assets forward indefinitely — will face a reckoning as LP patience runs out and capital concentrates among proven performers. In her framing, it is not a crisis but a correction. For the managers who can’t make that distinction about themselves, it amounts to the same thing.