There is a new risk for Private Equity that has been growing over the last ten years. The superior returns to this asset class have been gradually fading for years due to increased supply of capital, lower liquidity, and longer timing for exits. Overarching these trends over the last ten years has been a growing political risk to investments that hasn’t been a factor in the United States since WWII. These changes are a symptom of a structural shift in the private equity investment environment that every manager in this asset class must now confront.
Many PE portfolios encountered significant issues from a convergence of populist trends that have grown more pervasive over the last several years:
- Broad political and regulatory uncertainty. The volatile and unpredictable federal policy since the Covid epidemic and Trump’s election has caused increasing problems for business. Unprecedented market interventions have raised the cost of capital for private businesses and slowed exits industry wide.
- Tariff-driven supply chain disruption. The Trump administration’s escalating trade war created sustained input cost inflation and sourcing instability across multiple portfolio companies.
- Global conflict escalation. The regional conflicts leading up to the Iran War had global implications with acute energy cost volatility and further disrupted logistics networks in ways that even our highly experienced CEOs said were not foreseeable. US military interventions have been unpredictable and add a new dimension of global risk which has already been elevated since Russia’s invasion of Ukraine in 2022.
The Political Risk Factor Grows
The political cycle in the United States has worsened as both sides of the political spectrum have become highly interventionist. As a result, Private Equity’s volatility will grow and will necessitate a new approach to investing. This will involve material write-downs and will force this asset class to evolve and change course. It is important to understand the history of Private Equity’s success and why its key success factors no longer exist.
How Private Equity Generated Returns: 1990–2016
Modern private equity was built on four Key Success Factors for Entrepreneurs in the U.S. that held, with only brief interruptions, for more than 35 years:
- Low interest rates — artificially suppressed after 2008 — made leverage cheap and amplified equity returns across buyout and recapitalization strategies.
- Low inflation provided stable input cost environments and predictable cash flow modeling across long hold periods.
- Productivity growth through technology, consolidation and globalization — including outsourcing, supply chain optimization, and access to global markets — consistently expanded EBITDA margins.
- Political stability and rule of law — transparent regulation, independent institutions, and predictable government behavior — made long-term capital commitments in the United States effectively zero political-risk investments.
Since my career started in 1990, Private Equity assets under management have grown from $500 billion to over $10 trillion. Median annual IRRs of 10–13% exceeded public equity returns by 3–5%, a premium that investors accepted as fair compensation for illiquidity. The model worked because the environment was stable enough to reward patient capital. The biggest issue was the growing oversupply of Private Equity Capital which was slowly depressing returns. Before 2016, increasing political polarization and gridlock occurred but didn’t impact private equity’s success factors.
Politics has always been a factor in taxation and industries such as defense and health care but never a systemic risk to returns.
What Changed After 2016: The Populist Risk Premium
Beginning with the 2016 election and particularly post-Covid, political risk expanded and all four Key Success Factors have been compromised — not temporarily, but structurally. The critical insight is that this is not a cyclical correction; it is a regime change.
| Factor | Pre-2016 Environment | Post-2016 Reality |
|---|---|---|
| Interest rates | Artificially suppressed; leverage cheap | Normalized post-COVID and volatile; leverage costly |
| Inflation | Structurally low; cash flows predictable | Persistent; deficit-driven; unpredictable |
| Trade & productivity | Global supply chains; outsourcing gains | Tariff/trade wars; supply chain fragmentation |
| Political environment | Stable; bipartisan; rule of law | Interventionist; unpredictable; bipartisan populism |
What’s New? Political Risk Must Now Be Included in U.S. Valuations
For the entire history of modern American private equity — roughly 1980 to 2016 — US investors operated with an implicit assumption so reliable it was never formally priced: the United States, unlike most countries, had no meaningful political risk. Regulation was stable. Institutions were independent. Trade rules were predictable. The rule of law protected contracts and property rights uniformly. No one questioned why the dollar rose to become the reserve currency post-WWII.
The Key Success Factors have been rapidly eroding since 2016, under both Republican and Democratic administrations. Tariffs affecting specific industries, challenges to Federal Reserve independence, interventionist M&A review, deficit spending with no bipartisan constraints — these are not temporary aberrations. The drastic response to Covid by all levels of government opened the door to even more deficit spending and government involvement in the economy. Populist policy instincts across both parties have mushroomed and we believe will persist through multiple election cycles.
The CAPM Implication of a Third Risk Factor
Traditional Capital Asset Pricing Model valuation uses two components: a risk-free rate (US Treasury yield) plus a market risk premium (historically 4–6%). US investors must now add a political risk factor — including tariffs, regulatory intervention, monetary policy interference, and legal uncertainty.
In developing economies, political risk can add 5–10% to the cost of capital. There is no precise measure of the elevated political risk in the United States but it has grown well above zero. For example, a 5% addition to the US discount rate reduces the Net Present Value of a 7-year investment by approximately 43%. That is not a cycle, it is a fundamental repricing of the asset class.
Populism Exacerbates the Oversupply of Capital
Private Equity commitments approach $10 trillion globally with “dry powder” of $2.4 trillion. This is parked in 10-year committed funds and rarely withdrawn. Public equity investors can re-price daily. Bond markets can react within hours. Private equity cannot. The illiquidity that historically justified a premium return now works against investors in a high-volatility political environment:
- Hold periods of 5–10 years now span multiple election cycles, each capable of introducing policy reversals that negate an investment thesis built under the prior administration.
- Leverage amplifies political risk. A buyout underwritten at 6x EBITDA with 4x leverage in a stable environment becomes a restructuring candidate when tariffs compress margins and rates rise simultaneously.
- Valuations are self-reported and opaque. Unlike public markets, private equity NAVs do not automatically reprice when the environment deteriorates. GPs have strong incentives to delay recognition. This creates a slow-moving but inevitable repricing — what we describe as a frog in boiling water dynamic. The industry’s adjustment to reality will be sudden when it comes.
- Exit markets have slowed. Only 7% of PE portfolio companies were sold in 2025, an historic low, leaving nearly 30,000 companies purchased at peak multiples in the low-rate era unable to exit at carrying value.
This Is More Structural Than Cyclical
A normal cyclical downturn in private equity — higher rates, compressed multiples, slower exits — corrects when the cycle turns. Rates fall, multiples recover, the model reasserts itself. Investors who are patient through the cycle are rewarded.
The political risk factor that has entered the US investment environment is different. It is not going to be resolved by the next Fed rate cut or the next election. Populism is now bipartisan. The fiscal deficit is structural and neither party is willing to address it. Trade policy and international relations have been permanently disrupted; even if specific tariffs are rolled back, the era of frictionless global supply chains is over. The embedding of political intervention in business decisions — across M&A, regulation, monetary policy, and trade — is not only a Trump phenomenon. It predates him and it will outlast him.
Investors who treat the current environment as a cycle to wait out will be disappointed. Those who adapt their frameworks will find that private equity remains a viable and superior asset class — but only for managers who genuinely restructure their approach.
Part III: How to Invest in Populist America
A forward strategy is built on two convictions. First, private equity will continue to generate returns superior to public markets — but only for managers who correctly price the new risk environment. Second, the structural shift described above actually creates significant opportunities for investors who adapt: flexible terms and structures, lower entry multiples as capital withdraws, targeting motivated sellers in the secondary market, and an underserved population of founders who need capital partners but not necessarily control buyers.
The Blended Mezz/Equity Model — Compressing Duration Against Political Risk
A shift toward blended mezzanine debt and equity positions directly addresses the core structural problem: long-duration equity in a high-political-risk environment is now fundamentally mispriced.
Current income from mezzanine compresses duration. Cash yield in year 2 is not subject to the policy environment of year 7. By blending mezzanine yield with equity upside, exposure to the tail risk of political cycles is reduced without abandoning equity participation in value creation.
1. Minority Stakes with Founders — Differentiated Access in an Overcrowded Market
The $2 trillion in uninvested dry powder currently circling the private equity market is primarily competing for control buyouts. This creates a structural opportunity: founder-owned businesses that need institutional capital — for liquidity, growth, or succession — but do not want to sell control.
Cave Creek Capital Management’s founder-friendly positioning is not a marketing tagline. In the current environment, it is a sourcing strategy that takes us out of competition with the largest pools of capital in the market. By investing in minority preferred and mezzanine positions, we can use capital in the right amount that’s tailored to the long-term needs of the business and founders. Several other considerations are necessary to make this work.
2. Structuring Capital That Works for Both Founders and Investors
- Right-sized Capital — Overfunding a deal to meet fund investment minimums depresses IRR, crowds out other key managers and reduces incentives for the team. The right amount of capital preserves ownership and motivation.
- Proper Use of Leverage — maximizes flexibility in a competitive market and creates a capital cushion for mistakes or risk-on expansion bets. The deal isn’t dependent on a perfect exit and keeps the balance sheet resilient.
- Flexible, Founder-aligned Structure — using minority and preferred shares with PIK dividends and waterfall structures can allow founders to keep control, stay engaged and provide exceptional rewards for exceptional performance.
- Fair Valuations — frenzied auctions and high valuations can saddle a company with excessive debt and present very high hurdles for existing managers to meet future growth goals. It makes it much harder for companies to raise more capital when needed. Short-term satisfaction with a high valuation can lead to long-term problems with brand value, suppliers, customers and employee engagement.
- Governance, not Micro-Management — private equity investors need to stick to their strengths and not overstep roles beyond the Board. Control and influence positions can be very value-added but also value-destructive when pressure is applied indiscriminately.
Closing Thoughts
Private equity’s long boom phase has reached maturity and is now consolidating during a period of increasing political risk — a bad combination for returns. The top quartile will always find a way to create superior value, but the historical strategy of equity only, 5–10 year holding periods, and growth for growth’s sake will have to change. $10 trillion of committed capital overwhelms the supply of investment opportunities capable of equity returns at current valuations. Capital will slowly be destroyed or shift away and valuations will gradually adjust. Until then, excess capital is spilling into larger and larger public buyouts, secondary funds, CVs and other alternatives designed to shuffle the same assets. The necessary evolution for private equity will require a shift to longer-term capital, flexible ownership stakes, and the ability to convert into debt or preferred when industries mature. The multi-family office or evergreen holding company is becoming the destination of choice for selective investors as well as top-performing managers and founders seeking to preserve their long-term legacy.
