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For the first time in decades, assets under management in the private equity sector have shrunk. The main reason for this contraction lies in a backlog of unsold transactions amounting to almost $3,000bn, a situation that is preventing funds from generating liquidity for their investors. The rate of return of cash to investors continues to be under pressure, exacerbating the difficulties faced by many pension funds and other institutional investors who depended on these regular distributions to finance their commitments.
Fund-raising in decline: investor timidity
Fund-raising, traditionally one of the driving forces behind private equity, fell significantly in 2024, recording a 23% decline on the previous year. This slowdown translates into just $401bn in new assets injected into funds, a level close to that seen in 2020, a year marked by the Covid-19 pandemic. The primary cause of investors' reluctance to commit lies in the persistent uncertainty surrounding asset valuations. With interest rates remaining high, private equity firms find themselves unable to sell some of their assets at a price that reflects their earned value, often at the top of the market. Cash returned to investors, historically close to half the funds' net asset value, has plummeted to alarming levels.
Publicly-listed companies: shares battered by the market
Publicly-listed private equity companies have also been hit by the global economic turbulence. Giants such as Blackstone, Apollo Global Management, KKR, Blue Owl, CVC Capital Partners, TPG, Bridgepoint Group and Ares Management saw their shares plunge dramatically in response to the financial market meltdown triggered by Donald Trump's tariff announcements on Wednesday April 2.
These companies, which hold stakes in a wide range of sectors and have financed these acquisitions with considerable amounts of debt, are particularly vulnerable to economic fluctuations. When markets fall, these companies suffer accentuated losses. The situation is further complicated by the fact that these companies still own 29,000 unsold businesses with a total value of $3.6 trillion, many of them acquired at the top of the market.
Against this backdrop, shareholders are concerned about the inability of buyout firms to sell their assets on advantageous terms. However, some experts believe that the economic slowdown could offer low-cost buying opportunities, recalling that periods of crisis have sometimes been conducive to the sector's performance.
Diversification: a survival strategy for the big players
In the face of this slump, PE giants have begun to redefine their strategies to adapt to a rapidly changing environment. Success no longer seems to lie solely in the ability to raise funds, but also in diversifying sources of capital and exploring new market segments. Blackstone, for example, has announced that its next private equity fund will be smaller than its predecessors. At the same time, however, its lending activities have flourished, enabling it to raise over $100bn by 2024, mainly through investments in insurance companies and retail funds.
This diversification strategy is also being followed by other major players, such as General Atlantic, which has chosen to diversify into private credit, after realizing that investors were looking for more flexibility and options to meet their needs. In this way, even in times of slowdown, some companies are able to tap into significant pools of capital and find solutions tailored to an increasingly demanding market.
The impact of rising interest rates and the quest for liquidity
Another decisive factor in the private equity crisis is the continuing rise in interest rates. This has complicated not only the raising of new funds, but also the sale of assets. Pension funds and other institutional investors, already heavily exposed to unlisted assets, now find themselves faced with depreciated valuations and liquidity problems.
According to Bain & Co, the amount of unsold assets held by buyout firms is colossal, and the outcome of this situation remains uncertain. Investors, who had initially hoped for a rapid recovery in the markets, find themselves forced to rethink their strategy and look for solutions to lighten their portfolios, even if this means selling at prices lower than those recorded at the time of the acquisitions.
Challenges ahead: a difficult but necessary transition
While the private equity industry is at an inflection point, the outlook for 2025 and beyond remains uncertain. Market pressures continue to mount, and even the biggest players have to juggle major structural challenges. Mergers and acquisitions are becoming an increasingly common response, with many companies looking to join forces with larger players to benefit from increased resources. The need to find new capital flows and reorganize investment strategies seems inescapable for PE companies wishing to remain competitive.
The sector, while reorienting itself towards more flexible and diversified strategies, will probably have to readjust. The companies that can anticipate market trends and adapt to the new situation will be ahead of the game. But the road ahead remains fraught with pitfalls for a sector that, while still powerful, is today facing a series of interconnected crises, from geopolitical tensions to financial market instability.
A changing industry
Private equity is going through an unprecedented period of turbulence. Faced with increasing pressure on returns and liquidity, large companies are having to reinvent their business models to navigate this complex environment. As fund-raising slows and asset valuations come under pressure, some companies are finding solutions in diversifying their activities, notably into segments such as credit or infrastructure. However, the outcome remains uncertain. The sector, while still full of opportunities, will have to reinvent itself if it is to weather this period of turbulence and emerge more resilient. It is in this adaptation that the key to a renaissance may lie, provided we can meet the challenges without being overwhelmed by the current economic storm.
