US private equity penetration slows as sponsors turn selective

Private equity penetration in the US slowed compared to a year earlier, with private equity- and venture-capital-backed companies accounting for 90,560 of 2,647,125 total private firms — an overall penetration rate of 3.42% as of Aug. 12, according to S&P Global Market Intelligence data.

A year earlier, the US penetration rate was 3.49%.

The rate measures the proportion of private equity-backed enterprises in relation to the total number of private companies in each state. A higher percentage suggests a state with a favorable business climate and vibrant start-up ecosystem.

California led states with the highest penetration rate at 6.68%. Other states exceeding the national rate included Massachusetts, Utah, the District of Columbia, New York, Washington and Colorado.

Median penetration rate was 2.19%.

Sponsors remain active but selective in US private equity

Private equity firms continue to actively invest in the US but are increasingly much more selective compared to a few years ago. Investors are looking for "a real value creation story," according to Scott Bingham, co-leader of the US corporate finance segment at FTI Consulting.

"Capital is still out there, but new platform activity is slow, exits are harder, and hold periods have stretched," Bingham wrote in emailed comments. "The question now is less, 'Can we find the next deal?' and more, 'Can we make the current portfolio better, generate cash, improve margins, and create a credible path to liquidity?'"

While investment value remains high, the total number of deals continues to decline. Geopolitical uncertainty, rising inflation, and a valuation gap between sellers and buyers are making sponsors cautious, Tilman Ost, global private equity advisory leader at KPMG International, wrote in emailed comments. This condition results in investment committees applying stricter underwriting standards.

Investors are willing to pay high prices but only selectively for high-quality assets, which increasingly means a targeted company holds potential to grow perhaps five years beyond the typical five- to seven-year holding period, making the asset attractive for an exit to another sponsor or strategic buyer, according to Ost.

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Private equity and venture capital investments in the US are primarily made through participation in rounds of funding.

In 2025, private equity investments totaled $684.51 billion across 6,566 deals. Funding-round participation accounted for $305.32 billion across 5,633 transactions — 86% of total deal volume and 45% of total investment value.

Leveraged buyouts made up 7% of total volume and 32% of total value.

California, Texas lead top states for PE investment

California dominated private equity investments in 2025 with a total of $320.48 billion, including $187.30 billion in rounds of funding and $65.05 billion in leveraged buyout transaction value. Silicon Valley has always been home to venture capital and start-up activity, but the rise of several AI leaders, such as Anthropic PBC and OpenAI LLC, headquartered in Northen California, are an additional pull for for start-up capital.

AI also seems to be driving private equity investment in Texas and Illinois, where application software companies account for the largest volume of deals.

In Texas, total private equity investments rose over 324% year over year to $74.85 billion in 2025 from $17.63 billion in 2024. Illinois saw a more than 300% increase in investments during the same period, to $52.36 billion from $12.87 billion.

Biotechnology investment remains the top invested industry in Massachusetts, particularly in the Boston area, with its cluster of universities and ecosystem of biotechnology and pharmaceutical businesses. Boston is also home to Bain Capital LP, Advent International LP, HarbourVest Partners LLC, TA Associates Management LP and Thomas H. Lee Partners LP

Specific cities such as Dallas, Austin and Houston in Texas, as well as the broader Southeast, including Miami, Atlanta, Charlotte and Nashville, are also attracting private equity capital. These cities are drawing both large buyout firms and middle-market investors due to supportive investment conditions, such as population growth and corporate relocations, as well as lower tax burdens and less regulation, according to Ost.

Outlook

US middle-market investment is expected to continue, supported by accessible private credit and signs of a gradual narrowing of valuation expectations between buyers, who are ready to spend dry powder, and sellers, who are beginning to accept economic conditions, Ost said.

Some larger private equity firms are also moving down to the middle market, Tim Tracy, EY Americas vice chair, private equity, told Market Intelligence.

"Some of the checks that are being written are smaller until exits come and there's more fundraising," Tracy said. "Some of these middle-market companies are growing at over 20% or 30%, and that is exactly the type of investment [that] private equity would like to make because they can actually scale the business."