The Stranded Middle Market: Why Family Offices Are Positioned to Buy Private Equity’s Best Mid-Market Companies at a Discount

Situation

Private equity has a backlog problem, and it is much larger than most outside the industry appreciate. By Bain & Company’s count, the global private equity industry entered mid-2026 holding roughly 32,000 unsold portfolio companies, an inventory of unrealized value approaching $3.8 trillion [i]. Hugh MacArthur, chairman of Bain’s Global Private Equity Practice, provided some context about the private equity liquidity logjam on the podcast Dry Powder: The Private Equity in August 2025. MacArthur talked about how the previous year’s distribution to private equity LPs as a percentage of net asset value (NAV) was only 11% compared to 20% to 30% historically. At 11%, this equates to 10 years before an LP gets its money back compared to the historical 4 to 5 year cash recycling cycle. Tellingly, the last time that the private equity industry had around 11% distributions was in 2008. Since that podcast, the distribution to private equity LPs has recovered to 13.4% in 2025, but this still remains a seven- to eight-year capital cycle before LPs see their money back. [ii]

McKinsey & Company has come to a similar conclusion that private equity assets are being held much longer than usual. According to McKinsey data, private equity holding periods have climbed to historic highs. As of 2025, over 16,000 buyout-backed companies globally—representing a record 52% of total inventory—have been held for more than four years. This marks a 10 percentage point increase over the previous five-year average. Currently, the average holding period for a typical general partner (GP) portfolio company has stretched past six and a half years, according to McKinsey analysis, remaining significantly above historical norms.

The Opportunity

If one assumes that these 16,000 companies are worth half of the $3.8 trillion of unrealized value, that is $1.9 trillion of value that LPs want back soon, and these LPs will increasingly put pressure on even the best GPs to exit, even if exit multiples are suboptimal. In an environment where LPs are increasingly starved for real liquidity, cash exits are prioritized over creative structures.

These are not distressed assets in the conventional sense. Many are good businesses: durable revenue, defensible market positions, capable management teams. What they share is not poor performance but bad timing, inside a fund structure that was never designed to hold anything this long. That mismatch, between assets that need more time and capital that has run out of it, is the opportunity this article addresses. Over the next several years, mid-market private equity funds will be compelled, with increasing frequency, to sell good companies at discounted prices. Not because the companies have failed, but because the fund clock has expired and limited partners want their capital back.

Family offices that command permanent or long-duration capital are structurally positioned to be the buyer on the other side of those transactions, on one condition: they must first build a capability most do not yet possess, a team that knows how to buy, operate, and sell companies rather than allocate to funds. This is not necessarily a contrarian call on private equity as an asset class, although the private equity sector clearly has its challenges ahead. It is an observation about a structural feature of the mid-market segment and about who is best positioned to benefit from it.

Thirty-Two Thousand Companies with Nowhere to Go

The scale of the backlog is without precedent in the buyout industry’s history.[iii] McKinsey estimates that roughly 16,000 portfolio companies globally are ready to exit but have sat on the books for more than four years: 52 percent of total buyout-backed inventory, ten percentage points above the trailing five-year average and the highest share ever recorded.[iv] Behind that inventory sits roughly $1.3 trillion in buyout dry powder still awaiting deployment.[v] All that capital was raised under the same implicit promise: deploy, build value, and return cash within a contractual fund life of seven to ten years. The unsold inventory is the visible evidence of that promise breaking down.

The routes out have narrowed simultaneously. For much of the past decade, sponsor-to-sponsor sales were the mid-market’s most reliable release valve: one fund selling a portfolio company to another, often at a markup justified by operational improvement still left to capture. That mechanism has stalled on a valuation gap. Sellers remain anchored to the multiples they paid during the cheap-money years of the early 2020s, while buyers underwrite to a higher cost of capital and more conservative growth. The IPO market has effectively exited the conversation for anything but the largest, highest-growth issuers, and corporate acquirers have grown more selective, prioritizing near-term synergies and differentiated technology over the steady, moderate-growth businesses that make up the bulk of the mid-market universe.[vi]

What liquidity does exist is pooling at the very top of the market. In 2025, the global exit count fell 15 percent even as total exit value rose 41 percent, a recovery carried almost entirely by the largest transactions.[vii] The mid-market, where much of the unsold backlog sits, remains comparatively frozen. Middle-market fundraising has now declined for two consecutive years, falling 7 percent in 2025 to roughly $282 billion [viii], as limited partners who have not seen distributions from existing commitments grow reluctant to make new ones.

The Fund Clock Meets the LP Revolt

Two forces compound from here. The first is the closed-end fund clock. Most buyout funds carry seven-to-ten-year lives, after which the general partner is contractually expected to have returned capital to its limited partners: pension funds, endowments, insurers, and increasingly, family offices investing as LPs rather than as owners. A GP approaching fund-end with companies still unsold has three options, none attractive: extend the term and ask LPs for patience they are increasingly unwilling to give; sell at whatever price the market will bear, even below the GP’s own view of intrinsic value; or move the asset into a continuation vehicle, in which the GP effectively sells the company to a new fund it also controls.

The third option has become the industry’s pressure-release valve of choice. GP-led secondary transactions reached a record $47 billion in the first half of 2025 alone, up 68 percent year over year, with continuation vehicles accounting for 87 percent of that volume. [ix] The broader secondaries market crossed $200 billion in annual volume for the first time in 2025, finishing near $226 billion, a 41 percent increase over 2024 [x], with secondaries-dedicated dry powder standing at roughly $315 billion by the third quarter of 2025. [xi] Every one of these figures tells the same story: an industry manufacturing liquidity events because the natural ones are not coming fast enough.

The second force is the shift in what limited partners demand. For most of private equity’s modern history, LPs tolerated paper returns: net asset value marked up quarter after quarter, with the promise of eventual cash. That tolerance has eroded. According to McKinsey’s analysis, 54% of LPs ranked distributions to paid-in capital, DPI, as their most critical performance metric.[xii] In a recent ILPA poll, roughly one in five LPs reported reducing buyout allocations outright, citing liquidity pressure and long-term return concerns.[xiii]

Put the two forces together, and the mechanism becomes clear. GPs are holding companies longer than ever while answering to LPs who care more than ever about cash returned rather than paper marks. When that pressure peaks at fund-end, at a fundraising deadline, or when a GP needs a realized win to market its next vehicle, something must give. Continuation funds can defer the reckoning, but they do not eliminate it. When a GP sells because the clock has run out rather than because the business has reached its peak, the price reflects the seller’s calendar more than the asset’s quality.

The Permanent Capital Advantage

This is precisely the setup in which permanent and long-duration capital holds a structural edge that no amount of financial engineering or value creation skill inside a traditional fund can replicate. A family office is not bound by a ten-year fund life. It does not answer to a limited partner base demanding distributions on a schedule set a decade earlier. It does not need a realized return in time for its next fundraise, because for most family offices there is no next fundraise: the capital is the family’s own, intended to compound across generations.

Industry surveys over the past year have been consistent in showing family offices moving toward direct investing and away from fund commitments, citing control, fee efficiency, and direct relationships with the management teams of the businesses they own.[xiv] The deeper appeal is the absence of a mandate that forces a sale before the value creation thesis has played out. A family office can acquire a mid-market company from a motivated seller, hold it for twelve or fifteen years rather than five or six, and let compounding do work that a standard fund life structurally cannot accommodate.

The advantage matters most exactly where the opportunity is concentrated. In the mid-market, a family office buyer is not competing against the IPO window or the largest strategics; both are largely absent at this end of the market. It competes primarily against other funds in sponsor-to-sponsor processes where the seller’s urgency, not the buyer’s enthusiasm, dominates price discovery. A permanent-capital buyer that can move with the certainty of an all-cash, no-fund-life acquirer is a credible counterparty at precisely the moment motivated sellers most need one.

A Similar Playbook, a Longer Clock

None of this is an argument for buying mediocre companies cheaply and hoping time fixes them. The value creation playbook private equity has refined over four decades, professionalizing finance and reporting, upgrading commercial leadership, pursuing disciplined add-on acquisitions, modernizing systems, sharpening pricing, remains mostly the right playbook. Still, there are areas of improvement that a more permanent owner can bring to the value creation equation. The opportunity for family offices is not necessarily a different playbook. It is a similar, improved playbook applied at a different clock.

On Dry Powder: The Private Equity podcast in August 2025, MacArthur also talked about how margin improvement on average contributed nearly 0% to realized returns, with 50% coming from revenue growth and the other 50% coming from multiple expansion (enabled by low rates). He points out that private equity firms have funneled capital to their portfolio companies for customer acquisition at the expense of margins. Clearly, there is an opportunity to improve on the value creation playbooks that private equity firms have historically deployed over the last decades, now that the multiple expansion game is less likely and the market is becoming more wary of growth at all costs.

Many of the highest-value initiatives in an operational transformation do not fully pay off within a five-to-seven-year hold: a multi-year systems implementation, a genuine sales-force transformation, a sequence of bolt-on acquisitions integrated one at a time, a management succession plan that develops talent internally. All these compounds, the longer they run, are routinely curtailed inside a traditional PE hold because the fund’s calendar, not the business’s optimal trajectory, sets the exit date. And with AI intelligence and AI agent tools rapidly developing for real deployment, the opportunity to implement an AI-first playbook to optimize workflows and improve productivity in many companies may even further enhance the value creation playbook. A buyer with a fifteen-year horizon can pursue the full version of these initiatives and avoid the value-destructive behavior, deferred capital expenditure, underinvestment in talent, premature price increases, that often accompany a sale process timed to a fund’s deadline.

There is a second, quieter advantage. A family office buying from a motivated GP is often paying a more attractive entry multiple than the GP itself paid years earlier, because urgency, not a renewed appraisal of the business, is setting the price. Combined with a longer runway, this recreates the classic private equity return formula: acquire below intrinsic value, improve operations, realize a higher multiple, except that the exit need not happen at all. A family office can simply continue owning a compounding business, collecting distributable cash flow along the way: a return profile no closed-end fund can offer its LPs.

Allocators Are Not Operators: The Talent Question

The single most common failure point in family office direct investing is not capital, sourcing, or conviction. It is personnel. The team that has served a family well as an allocator, selecting managers, negotiating fund terms, constructing portfolios, and pacing commitments is running what is essentially a fund-of-funds. That is a genuine skill, but it is a fundamentally different discipline from buying and owning an operating company. Manager selection rewards analytical judgment at arm’s length. Direct ownership demands something else entirely: negotiating a purchase agreement, structuring debt, writing a hundred-day plan, sitting on the board, replacing an underperforming chief executive, integrating an acquisition, and preparing a business for eventual sale. In addition, because inorganic growth through additional acquisitions is an excellent path to getting to scale, family offices need to develop M&A and integration capabilities as well as a strong innate understanding of valuation versus price.

A family office that intends to buy companies directly needs executives who have run businesses of the relevant size and sector, deal professionals who have closed control transactions, and operating partners who can drive the same professionalization and performance management an institutional sponsor would bring. The asymmetry is unforgiving. In this market, the seller is a professional investor who has owned the asset for years and knows precisely why it did not sell in an auction. An allocator team underwriting against that counterparty is structurally outmatched; an operator team is not. The family offices converting this thesis into realized outcomes are the ones that have hired this capability internally or partnered with firms that provide it before writing the first check.

From Thesis to Execution

Sourcing must be deliberate. The best opportunities rarely surface in broad auctions, where the GP’s incentive is to maximize price. They come through direct relationships with GPs managing aging funds, through secondaries intermediaries who track which funds face the most LP pressure, and through operating executives who know which businesses inside a tired fund are genuinely strong rather than merely available.

Selection and underwriting discipline matter more here than almost anywhere in private investing. Not every company in the backlog is a good business held hostage by fund mechanics; a meaningful share is there because the business underperformed, and no amount of patient capital fixes a structurally weak competitive position. In addition, as more business sectors get impacted by AI-first playbooks, the rate of business deterioration may accelerate for those that are left behind. The work is separating companies that are genuinely good and simply mistimed from companies that are merely aging too rapidly. The former is the real opportunity set, and it is considerably smaller than the full backlog.

Structuring deserves particular attention. Much of this inventory will not change hands through a clean control acquisition. Continuation vehicles, structured minority co-investments alongside an existing sponsor, and staged buyouts in which a GP retains a minority position through a transition are increasingly common, and each carries governance and alignment considerations that must be underwritten explicitly rather than treated as a standard buyout.

Vintage works as a screening filter. Funds raised between roughly 2013 and 2018 are now in the final years of their standard terms or already operating under extensions, precisely the cohort most likely to be carrying unsold companies into a market that has repriced since they were acquired. Within that cohort, business services, specialty manufacturing, healthcare services, and lower-mid-market software are sectors where durable, cash-generative businesses were bought by funds that needed them to be exit-ready on a calendar the businesses did not set. Family offices with sector expertise in these areas have a natural starting point.

The Discipline This Opportunity Demands

This opportunity will not stay quiet. Sovereign wealth funds, insurance-linked permanent capital vehicles, and private equity firms raising long-life and evergreen structures are converging on the same dynamic, and competition for the genuinely attractive assets within the backlog will intensify. Nor is the execution gap trivial: direct ownership carries concentration, illiquidity, governance, and talent demands that bear little resemblance to writing a check into a fund, and a poorly executed direct deal carries risks a fund commitment does not. None of these changes the underlying structural reality. It raises the bar for how the opportunity should be pursued: with the rigor of a top-tier institutional sponsor paired with the patience only permanent capital can offer.

Conclusion

The mid-market backlog is not a temporary dislocation that will clear with the next cyclical upswing. The structural mismatch driving it- fund lives never designed for today’s holding periods and LPs demanding cash that the current exit environment cannot supply- shows no sign of resolving on its own. Mid-market general partners will continue to part with good companies before those companies are ready to be sold at prices that reflect the seller’s calendar rather than the business’s full value.

For family offices with permanent or long-duration capital, this is a rare alignment of structural opportunity and structural advantage. The capital that can wait the longest is, in this specific market, also the capital best positioned to buy the best assets at the most attractive prices. However, capturing it requires sourcing capability, real operating talent, selection and underwriting discipline, and the experience and judgment to distinguish a genuinely good business that has been mistimed from one that is merely aging too rapidly.

For Architech March’s clients and partners, this opportunity reinforces a theme we return to often: the families who win in this environment will not be those with the most capital, but those who pair patient capital with disciplined operating capability and the institutional infrastructure to act on opportunities that unfold over years, not quarters. That is the architecture this moment requires.

Authors: Alex Tae Ho Kim, Alex J. Kim

Sources & References

Bain & Company, Private Equity Midyear Report 2026: Control the Controllable, Weather the Rest (June 2026). https://www.bain.com/insights/private-equity-midyear-report-2026/

Bain & Company, Global Private Equity Report 2026: Gaining Traction (February 2026). https://www.bain.com/insights/outlook-gaining-traction-global-private-equity-report-2026/

McKinsey & Company, Beating the Odds: How Private Equity Firms Can Improve Exit Prospects (March 2026). https://www.mckinsey.com/industries/private-capital/our-insights/beating-the-odds-how-private-equity-firms-can-improve-exit-prospects

McKinsey & Company, Global Private Markets Report 2026: Private Equity, Clearer View, Tougher Terrain (February 2026). https://www.mckinsey.com/industries/private-capital/our-insights/global-private-markets-report

Jefferies Private Capital Advisory, H1 2025 Global Secondary Market Review (July 2025). https://www.jefferies.com/wp-content/uploads/sites/4/2025/08/Jefferies-Global-Secondary-Market-Review-July-2025.pdf

Pensions & Investments, Secondary Market Soars to $226 Billion in 2025, a 41% Jump Over Prior Record (Evercore data). https://www.pionline.com/alternative-investments/private-equity/pi-secondaries-volume-226-billion-2025-record/

Ropes & Gray, Secondaries Q3 2025 Update (November 2025). https://www.ropesgray.com/en/insights/alerts/2025/11/secondaries-q3-2025-update

S&P Global Market Intelligence, Middle-Market Private Equity Fundraising Slips in 2025 Amid Fewer Exits (March 2026). https://www.spglobal.com/market-intelligence/en/news-insights/articles/2026/3/middle-market-private-equity-fundraising-slips-in-2025-amid-fewer-exits-99997996

The Daily Upside, Exit Strategizing: Private Equity Carries Record Backlog of Companies into 2026 (December 2025). https://www.thedailyupside.com/finance/private-equity/exit-strategizing-private-equity-carries-record-backlog-of-companies-into-2026/

PwC, Capital Considerations: Private Equity Exit Drought. https://www.pwc.com/us/en/services/consulting/deals/library/capital-considerations-private-equity-exit-drought.html

Bloomberg, Family Offices Embrace Direct Deals Over Private Equity (April 2026). https://www.bloomberg.com/news/newsletters/2026-04-07/family-offices-embrace-direct-deals-over-private-equity

CNBC, How Family Offices Partner with PE Funds to Find Top Deals and Save on Fees (January 2026). https://www.cnbc.com/2026/01/29/family-offices-private-equity.html

This article was prepared by the research team at Architech March. It is intended for informational and educational purposes only and reflects the views of Architech March’s advisory practice. Nothing herein constitutes investment advice. Family offices and their advisors should conduct independent analysis before making any capital allocation decisions.

[i] Bain & Company, Private Equity Global Private Equity Report 2026

[ii] Private Equity’s Liquidity Wake-up episode on Dry Powder: The Private Equity Podcast published on August 19, 2025.

[iii] The Daily Upside, Exit Strategizing: Private Equity Carries Record Backlog of Companies into 2026 (December 2025), https://www.thedailyupside.com/finance/private-equity/exit-strategizing-private-equity-carries-record-backlog-of-companies-into-2026/.

[iv] McKinsey, Beating the Odds: How Private Equity Firms Can Improve Exit Prospects (March 2026), https://www.mckinsey.com/industries/private-capital/our-insights/beating-the-odds-how-private-equity-firms-can-improve-exit-prospects.

[v] Bain & Company, Global Private Equity Report 2026: Gaining Traction (February 2026), https://www.bain.com/insights/outlook-gaining-traction-global-private-equity-report-2026/.

[vi] PwC, Capital Considerations: Private Equity Exit Drought, https://www.pwc.com/us/en/services/consulting/deals/library/capital-considerations-private-equity-exit-drought.html.

[vii] McKinsey, Beating the Odds: How Private Equity Firms Can Improve Exit Prospects (March 2026), https://www.mckinsey.com/industries/private-capital/our-insights/beating-the-odds-how-private-equity-firms-can-improve-exit-prospects.

[viii] S&P Global Market Intelligence, Middle-Market Private Equity Fundraising Slips in 2025 Amid Fewer Exits (March 2026), https://www.spglobal.com/market-intelligence/en/news-insights/articles/2026/3/middle-market-private-equity-fundraising-slips-in-2025-amid-fewer-exits-99997996.

[ix] Jefferies Private Capital Advisory, H1 2025 Global Secondary Market Review (July 2025), https://www.jefferies.com/wp-content/uploads/sites/4/2025/08/Jefferies-Global-Secondary-Market-Review-July-2025.pdf.

[x] Pensions & Investments, Secondary Market Soars to $226 Billion in 2025, a 41% Jump Over Prior Record (Evercore data), https://www.pionline.com/alternative-investments/private-equity/pi-secondaries-volume-226-billion-2025-record/.

[xi] Ropes & Gray, Secondaries Q3 2025 Update (November 2025), https://www.ropesgray.com/en/insights/alerts/2025/11/secondaries-q3-2025-update.

[xii] McKinsey, Global Private Markets Report 2026: Private Equity, Clearer View, Tougher Terrain (February 2026), https://www.mckinsey.com/industries/private-capital/our-insights/global-private-markets-report.

[xiii] Bain, Midyear Report 2026, above at note 1 (reporting April 2026 ILPA poll).

[xiv] See Bloomberg, Family Offices Embrace Direct Deals Over Private Equity (April 2026), https://www.bloomberg.com/news/newsletters/2026-04-07/family-offices-embrace-direct-deals-over-private-equity; CNBC, How Family Offices Partner with PE Funds to Find Top Deals and Save on Fees (January 2026), https://www.cnbc.com/2026/01/29/family-offices-private-equity.html.