The Rising Risks of Private Equity Overreach in Main Street America

The private equity (PE) industry, once hailed as a catalyst for innovation and efficiency, has increasingly become a source of systemic risk for Main Street America. In 2025, the sector's fingerprints are evident in 70% of large U.S. bankruptcies—companies with over $1 billion in liabilities—despite accounting for just 6.5% of the economy. This overrepresentation is not a statistical anomaly but a symptom of a model that prioritizes short-term profit extraction over long-term resilience. For investors and policymakers, the implications are clear: the PE-driven collapse of iconic brands like Forever 21, Zips Car Wash, and Prospect Medical Holdings is reshaping risk exposure in ways that demand urgent scrutiny.

The PE Model's Flawed Logic

Private equity's core strategy—leveraged buyouts—has long relied on aggressive debt-loading to amplify returns. By saddling acquired companies with high-interest debt, PE firms force cost-cutting measures that often undermine innovation and operational flexibility. Consider Forever 21, which collapsed under a $1.5 billion debt load after being acquired in 2020. Its bankruptcy not only erased 27,000 jobs but also highlighted how e-commerce competition and financial engineering can collide to destroy value. Similarly, Prospect Medical Holdings, a hospital system with 16 facilities, filed for bankruptcy in January 2025 after decades of debt extraction by its former PE owner, Leonard Green & Partners. The result? Closure of critical healthcare services in communities already strained by economic inequality.

The data is unequivocal: leveraged buyouts have become a destabilizing force. A 2025 S&P Global analysis found that private equity exit activity hit a two-year low in Q1, as high interest rates and valuation mismatches between buyers and sellers stalled transactions. For limited partners (LPs), including university endowments and pension funds, this means prolonged holding periods and delayed returns. Harvard's endowment, which allocates 39% of its portfolio to private equity, is now grappling with reduced cash flows, a trend that could ripple across institutional investing.

Investor Risks and Exit Challenges

The risks for investors are compounding. With the Federal Reserve's benchmark rate at 5%, the cost of debt servicing for PE-backed companies has skyrocketed. This has led to a surge in distressed assets, with private equity firms struggling to sell overleveraged businesses at a profit. The result? A “liquidity crunch” that forces LPs to wait years for returns. Meanwhile, regulatory scrutiny is intensifying. The Justice Department's lawsuit against KKR for HSR Act violations and the FTC's new premerger disclosure rules signal a shift toward greater transparency—but also increased compliance costs for firms.

Policy Responses and Regulatory Scrutiny

Policymakers are beginning to act. The SEC's recent decision to open private equity investments to retail investors—a move championed by Chairman Paul Atkins—has expanded access but also raised concerns about unsophisticated investors being exposed to volatile assets. Meanwhile, the Federal Reserve's updated stress tests, which now include severe commercial real estate downturns, aim to gauge banks' resilience to PE-driven defaults. These tests, however, may not fully capture the interconnected risks of a sector that now manages $8 trillion in assets.

Legislative efforts are also gaining traction. Senators Josh Hawley and Bernie Sanders' proposed cap on credit card interest rates reflects broader skepticism of financial practices that exacerbate economic instability. In healthcare, states like Pennsylvania are pushing to restrict PE ownership of safety-net hospitals, citing the closures of Prospect Medical facilities as a cautionary tale.

The Human Cost and Public Sector Interventions

The human toll of PE overreach cannot be ignored. Over 65,000 jobs have been lost in 2025 alone due to private equity-backed bankruptcies, while communities face the collapse of essential services. The American Bankruptcy Institute's ongoing review of Subchapter V bankruptcy procedures aims to streamline reorganizations for small businesses, but it remains unclear how this will address the structural issues created by PE debt.

Public pension funds, recognizing their exposure, are adopting “PE risk mitigation” policies. These include divesting from firms with poor labor practices and demanding greater transparency in portfolio company governance. Such measures, while incremental, signal a growing awareness of the social costs of PE-driven insolvencies.

Investment Advice: Navigating the New Normal

For investors, the lesson is clear: diversification and due diligence are no longer optional. Here's how to approach the PE landscape in 2025:

1. Rebalance Portfolios: Reduce exposure to sectors heavily impacted by PE overreach, such as retail and healthcare. Consider allocating to industries with lower leverage and higher operational resilience, such as renewable energy or technology.
2. Demand Transparency: When investing in private equity, prioritize firms with proven track records in value creation, not just value extraction. Scrutinize debt structures and ESG (Environmental, Social, Governance) metrics.
3. Monitor Regulatory Shifts: The SEC's retail access policy and the FTC's antitrust reforms could reshape the industry. Stay informed about how these changes affect liquidity and valuation assumptions.
4. Hedge Against Systemic Risk: Use derivatives or short-term bonds to offset potential losses from PE-related defaults.

The private equity model, once a darling of Wall Street, is now a double-edged sword. While it can unlock value in the right hands, its current trajectory—marked by overleveraging, regulatory pushback, and social backlash—poses existential risks for both investors and Main Street. The path forward lies not in abandoning PE entirely, but in reimagining it as a force for sustainable growth, not short-term profit at all costs. For those who act now, the rewards could be substantial—but the risks, if ignored, will be borne by all.