Private equity returns are broken: the case of David Lloyd
- Robin Powell
- 2 days ago
- 12 min read
Updated: 2 hours ago
A UK gym chain just got sold by a private equity firm to itself. It sounds absurd — but it's symptomatic of a $3.2 trillion crisis showing why private equity returns have collapsed, why top-quartile performance no longer persists, and why the four-decade model underpinning institutional allocations has fundamentally broken.
Picture this: you're selling your house. You find a buyer, negotiate a price, exchange contracts. Except the buyer is... you. You've just sold your house to yourself, pocketed the estate agent's fees, and called it a successful transaction.
Ridiculous? Welcome to the world of modern private equity.
David Lloyd Leisure — owner of those posh gyms with eucalyptus-scented towels and photographs of pebbles on the walls — was recently sold by its owner, private equity firm TDR Capital, to... another bit of TDR Capital. The transaction used something called a "continuation vehicle," backed partly by money from CVC, which is, naturally, another private equity firm.
If you're thinking this makes no sense, you're not alone. Normal people find this bewildering. What you're witnessing isn't clever financial engineering. It's desperation.
And it's becoming alarmingly common. In the first half of 2025, these circular transactions — private equity firms essentially selling companies to themselves — represented 19% of all private equity exits, according to investment bank Jefferies. That's up 60% from the previous year. We're not talking about a few oddball deals. We're talking about tens of billions of pounds changing hands in transactions that resemble a financial version of passing parcels at a children's birthday party.
The question isn't why David Lloyd got sold to itself. The question is: why has this become normal? And what does it tell us about an industry that manages trillions in institutional capital, including a substantial chunk of your pension?
The inventory crisis no one wants to discuss
Private equity firms are sitting on $3.2 trillion worth of companies they can't sell. Let that number settle for a moment. It's not a typo. Three point two trillion dollars.
That represents roughly 12,000 companies trapped in private equity portfolios, according to Bain & Company's 2024 analysis. To put this in perspective, there are only about 4,000 publicly listed companies in the United States. Private equity is now warehousing three times as many businesses as trade on American stock markets — and it can't find buyers for them.
In the UK specifically, PitchBook reports more than 2,700 companies seeking an exit. Sales fell 12% in the first half of 2025 compared to an already-depressed 2024, which was itself down more than 50% from 2023. The average holding period has stretched beyond eight years, nearly double the historical norm of four to five years.
Every year for the past four years, the industry has insisted that "next year" will be when exits normalise, when the pipeline finally clears, when markets stabilise and companies can be sold at reasonable valuations. Every year, that promised relief fails to show up.
Financial Times columnist Katie Martin captures it perfectly in her recent analysis: these companies are "circling the airport," perpetually waiting for their slot to land. Except the runway never opens.
This isn't temporary constipation requiring patience. The plumbing is broken. And as I've written previously, fundraising has collapsed to seven-year lows as investors refuse to commit new capital whilst their existing investments remain trapped.
Private equity returns rely on leverage, not genius
Here's what actually drove private equity returns for four decades. Spoiler: it wasn't operational brilliance.
When private equity firms pitch institutional investors, they talk about their "special brand of management genius" — their ability to transform mediocre businesses through superior strategy, cost discipline, and operational improvements. Compelling story. Mostly fiction.
Data from both Bain & Company and McKinsey reveals the uncomfortable truth: roughly 68% of private equity returns come from two sources — leverage and multiple expansion. Only about 25% stems from actual operational improvements like revenue growth and margin expansion.
"When leverage drives two-thirds of your returns and your cost of leverage suddenly doubles, your economic model doesn't just get dented — it shatters."
Translation: private equity firms borrow heavily to buy companies (typically five to six times EBITDA versus three times for comparable public companies), hold them whilst hoping market valuations rise, then sell at a higher multiple. The debt does most of the heavy lifting. The operational transformation? That's garnish on a plate that's mostly borrowed money.
Now consider the macro backdrop. From 1981, when three-month Treasury bills yielded over 16%, interest rates declined steadily for four decades, reaching near-zero following the 2008 financial crisis and again during the pandemic. Cheap, abundant capital wasn't just helpful for private equity — it was the entire model.
As Antoine Gara observed on the Financial Times' Unhedged podcast, "the most amount of money in the private equity industry's history was invested at the tail-end of the zero-rate interest rate world." Then rates normalised. Firms that underwrote deals assuming borrowing costs would stay around 2.5% suddenly faced a world where debt costs 5% or more.
When leverage drives two-thirds of your returns and your cost of leverage suddenly doubles, your economic model doesn't just get dented — it shatters.
And here's the kicker: you can't repeat a 40-year decline in interest rates from 16% to zero. That tailwind, which made private equity appear brilliant, was a once-in-a-lifetime macro phenomenon. It's over.
Recent performance data confirms the model's collapse. In 2024, the State Street Private Equity Index returned 7.08%. The S&P 500 returned 25.02%. The last time private equity outperformed for a full calendar year was 2022 — and only because both fell, with private equity falling slightly less.
Academic research by Steven Kaplan and his colleagues found that private equity funds raised after 2005 showed no outperformance versus public market equivalents. The golden age ended two decades ago; the industry just kept dining out on the reputation.
The manager selection myth implodes
When confronted with mediocre average returns, the private equity industry retreats to its final defence: "Sure, the average fund underperforms, but you just need to pick the good managers. Top-quartile funds still crush public markets."
Seductive argument. Wrong.
Research from Harvard Business School by Lietz and Chvanov examined 20 years of performance data from both mega-funds (over $1 billion in assets) and mid-market funds. Their findings are devastating for anyone who believes skill can be reliably spotted in advance.
70 per cent of mega-funds were not in the top performance quartile more than once over the two-decade period. Let me repeat that: the vast majority of large, established private equity firms with supposedly superior resources, deal flow, and expertise failed to consistently deliver top-tier results.
The picture for smaller funds is even worse.
What does this tell us? That top-quartile performance isn't persistent. The winners change each vintage year. It's not a skill game — it's closer to a random walk.
Academic research supports this uncomfortable conclusion. Robert Harris, Steven Kaplan, and colleagues found in their 2020 update that whilst persistence could be detected when looking backwards at final performance, "it largely disappears when using only the information that investors had available at the time of fundraising."
You can't identify future winners by examining past winners. Prior top-quartile performance provides no reliable signal about future outperformance.
Nicholas Chun's research was even more blunt, noting that the data "raises doubts as to whether private equity partnerships have proprietary skills enabling them to maintain consistent performance."
This destroys the industry's last credible defence. If you can't systematically identify skilled managers, you should expect to receive average returns when you allocate capital to private equity. And average private equity returns now lag public markets whilst charging you 2% management fees plus 20% of profits (a drag of 400-600 basis points annually, according to Bain).
You're paying premium fees for mediocre performance, selected through what amounts to throwing darts.
"You're paying premium fees for mediocre or worse performance, selected through what amounts to throwing darts."
The diversification fraud: volatility smoothing as accounting trick
Perhaps private equity's disappointing returns could be justified if it genuinely diversified portfolios and reduced overall risk. This has been the industry's pitch to institutions: yes, returns may compress, but we offer uncorrelated exposure with lower volatility than public markets.
It's an illusion — and a dangerous one.
Private equity reports quarterly valuations based on appraisal models rather than market prices. This creates something statisticians call autocorrelation: today's reported value is heavily influenced by last quarter's value. The numbers evolve smoothly because they're estimated, not because the underlying businesses aren't experiencing real volatility.
The mathematical adjustment for this smoothing is straightforward. If reported returns show autocorrelation of 0.6 (common in private equity), the true economic volatility is roughly double what's reported. Research by T. Rowe Price and others confirms this: when you de-smooth private equity returns to account for stale valuations, the volatility matches leveraged small-cap public equities.
The "low correlation" with public markets? That also evaporates during stress. In both the 2008 financial crisis and the 2020 pandemic shock, correlations between private equity and public equities exceeded 0.9. Diversification disappeared precisely when investors needed it most.
Secondary market transactions provide the smoking gun. When private equity stakes are actually sold under duress — when real price discovery occurs — discounts to reported NAVs tell the truth. During the 2008 crisis, secondary market discounts reached 60%. During the pandemic, they hit 30-50%.
Those discounts prove that reported NAVs were fantasy numbers, artificially inflated through accounting conventions rather than reflecting genuine economic value.
The implications for portfolio construction are severe. Institutional investors often allocate 20-50% of their equity portfolios to private equity, despite private equity representing only about 3% of global equity market capitalisation. This massive overallocation is driven by models that treat private equity as low-volatility, low-correlation when in reality it behaves like leveraged, illiquid small-cap stocks.
You're not diversifying. You're concentrating exposure to leverage and illiquidity whilst paying through the nose for the privilege.
The ageing company problem: why public markets won't rescue private equity
Some industry observers insist the backlog is temporary — that when IPO markets "normalise," private equity will simply list these portfolio companies and everyone will be fine.
Two problems with that: public markets are functioning normally, and they're correctly sceptical of what private equity is trying to sell them.
Torsten Sløk at Apollo recently highlighted a striking trend: in 1999, the median age of companies going public was five years. By 2022, it had stretched to eight years. Today, it's 14 years.
Private equity firms are holding companies longer, squeezing every bit of juice from them before attempting exits. By the time these businesses reach public markets, they're laden with debt (five to six times EBITDA versus three times for comparable public companies), growth has been extracted, and they're fundamentally less appealing investments.
Public market investors aren't being difficult. They're being rational. When you're offered a highly leveraged, mature business that's already been optimised (or, more accurately, had its easy wins harvested), you demand a discount. That creates the "expectations gap" the industry complains about — the difference between what private equity thinks companies are worth based on smoothed NAVs, and what actual buyers will pay based on cash flows and growth prospects.
Katie Martin observes that this problem is partly self-inflicted: "Private equity companies have bricked up their own exit." They've taken so many companies private, held them so long, and loaded them with such high leverage that public markets have correctly concluded these aren't attractive opportunities.
The flow is going the wrong direction. Rather than private equity exiting companies through IPOs, more listed companies are being taken private. Spectris recently delisted in a nearly £5 billion deal with private equity buyers — adding to the backlog rather than relieving it.
The IPO pipeline everyone keeps promising? It's not coming. Public markets are open. They're just not interested in buying what private equity is selling at the prices private equity demands.
"The IPO pipeline everyone keeps promising? It's not coming. Public markets are open. They're just not interested in buying what private equity is selling at the prices private equity demands."
What actually works: the liquid alternative
If private equity fails to deliver superior returns, shows no manager selection persistence, provides illusory diversification, and can't exit portfolio companies, what should investors do instead?
The answer is embarrassingly simple: use liquid, transparent, low-cost vehicles to access the same economic exposures private equity targets without the illiquidity, opacity, or excessive fees.
Exchange-traded funds provide exposure to virtually every dimension private equity claims to offer. Want small-cap exposure? Russell 2000 or MSCI World Small Cap ETFs. Sector specialisation? Healthcare, technology, and infrastructure sector ETFs. Factor tilts? Value, quality, and momentum factor ETFs. Geographic diversification? Emerging markets and regional ETFs are readily available.
The structural advantages are overwhelming.
ETFs offer daily liquidity versus seven to ten-year lockups. You can trade at real-time NAVs rather than quarterly appraisals subject to manager discretion. Fees run 0.05-0.30% annually instead of 2% management plus 20% carried interest. Holdings are disclosed daily.
Risk reporting reflects actual mark-to-market volatility, not smoothed fantasy. Capital deploys immediately rather than through gradual capital calls. Operational complexity is minimal — no K-1 tax forms, no capital call management, no opaque fee calculations.
If you want leverage, you can add it at the portfolio level with full transparency rather than having it hidden inside portfolio companies. If you believe in operational transformation strategies, you can tilt toward value or quality factors that target similar characteristics without paying someone 2-and-20 to do it for you.
This doesn't mean abandoning private equity entirely. There remains a legitimate role for genuinely operational private equity — funds that identify specific companies, take meaningful board seats, and drive revenue growth and margin expansion through hands-on strategic involvement. That was private equity's original mission. It's valuable work.
But that describes a tiny fraction of the industry. Most private equity has devolved into leveraged buyouts at auction, minimal operational involvement, and financial engineering to manipulate reported returns. That version of private equity — the commoditised, fee-generating version — offers no compelling value proposition relative to liquid alternatives.
What this means for you
If you're an institutional allocator, the evidence demands a rigorous reassessment. Are your private equity allocations sized to the asset class's 3% share of global equity markets, or have they ballooned to 30-40% of your equity portfolio based on flawed volatility assumptions? Have you de-smoothed reported volatilities to understand true risk? Are you demanding proof of operational value creation beyond leverage-driven returns?
Consider reallocation toward liquid small-cap strategies that deliver equivalent economic exposure with superior liquidity, transparency, and fee structures. If you maintain private equity exposure, focus ruthlessly on sector specialists demonstrating genuine operational engagement with portfolio companies, not financial engineers running auction processes.
For individual investors, be deeply sceptical of private equity products being marketed to retail. These evergreen fund structures eliminate the discipline of the traditional model where capital goes out, comes back a decade later, and performance gets objectively measured. Instead, you're being asked to trust subjective valuations whilst your capital remains locked up indefinitely.
If private equity appears in your 401(k) or pension, understand that you're likely being sold pieces of the backlog — the $3.2 trillion inventory that institutional investors are desperate to exit. You're the patsy at the table. History shows that 75% of alternative funds fail within a decade, and retail investors consistently receive the worst terms.
For financial advisers, fiduciary duty requires honest assessment. Does adding private equity to a 60/40 portfolio actually improve risk-adjusted returns when you use de-smoothed volatilities? Or does it just make optimisation models look better whilst exposing clients to illiquidity, opacity, and hidden leverage? The evidence suggests the latter.
Back to basics or irrelevance
When TDR Capital sold David Lloyd gyms to itself, it wasn't executing a brilliant financial innovation. It was admitting it couldn't find anyone else willing to pay the price TDR thought the business was worth. The continuation fund structure is a mechanism for delaying that uncomfortable mark-to-market moment whilst generating another round of fees.
That single transaction encapsulates the industry's crisis. Private equity built four decades of reputation on returns that were primarily leveraged bets on declining interest rates, not operational genius. Now that rates have normalised, returns have collapsed to below public market benchmarks. The claim that skilled manager selection solves this problem has been demolished — top-quartile performance no longer persists. The diversification benefits were accounting illusions that vanish during stress. And the exit mechanisms have seized up because public markets correctly perceive that over-leveraged, mature companies aren't attractive investments.
Twelve thousand companies worth $3.2 trillion sit in portfolios, circling airports that won't clear them for landing. Firms are selling companies to themselves at record pace because no one else will buy them at fantasy valuations. Meanwhile, the industry is pivoting toward retail investors and evergreen structures that eliminate the performance discipline that made private equity work in the first place.
This isn't innovation. It's desperation.
Private equity faces a stark choice: return to its original mission of genuine operational transformation — taking board seats, driving revenue growth, expanding margins, improving strategic positioning — or continue down the current path as an expensive, illiquid, opaque replication of something investors can access more cheaply and transparently elsewhere.
For investors, the verdict is clear. When an industry starts selling companies to itself, it's not a sign of sophisticated financial engineering. It's a sign the model is broken. Respond accordingly.
For a comprehensive analysis of the data behind this argument, see Simon Nocera's recent research paper examining private equity's structural challenges.
Resources
Bain & Company. (2024). Global Private Equity Report 2024.
Cherry Bekaert. (2024). Private Equity Industry Report 2024.
Chun, N. (2012). Performance persistence in private equity funds. Working paper.
Harris, R. S., Jenkinson, T., & Kaplan, S. N. (2014). Private equity performance: What do we know? Journal of Finance, 69(5), 1851-1882.
Harris, R. S., Kaplan, S. N., et al. (2020). Buyout performance persistence post-2000. Working paper.
Kaplan, S. N., & Schoar, A. (2005). Private equity performance: Returns, persistence, and capital flows. Journal of Finance, 60(4), 1791-1823.
Lietz, N., & Chvanov, A. (2024). Does the case for private equity still hold? Harvard Business School Working Paper, No. 24-066.
McKinsey & Company. (2024). Private Markets Annual Review 2024.
Nocera, S. E. (2025). The private equity illusion: Revisiting risks, returns, and realities. Lumen Global Investments.
PitchBook. (2024). Private Equity Data and Trends.
State Street. (2024). Private Equity Index and Performance Reports.
T. Rowe Price. (2025). Diversification and Portfolio Construction Study.
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