By Marco De Luca, Clara Carlhammar, and Giacomo Ridolfo
Introduction
Over the past two decades, private equity has established itself as one of the most dynamic and profitable segments of the financial world. However, in recent times, the industry has shown signs of slowdown, raising concerns among investors, fund managers, and market observers. Deal activity has declined, fundraising has become more challenging, and exit opportunities have shrunk significantly. These trends have sparked an important question: is the private equity industry entering a period of structural difficulty or is this simply a temporary adjustment?
Under pressure: how fundraising declines and exit challenges are straining private equity
Several key indicators suggest that the private equity industry is currently facing a period of strain. The most notable signal is the global sharp decline in fundraising. In 2024, global private equity fundraising fell by 23%, reaching $401 billion, a clear reflection of investor caution, driven by the prolonged period of high interest rates maintained by the U.S. Federal Reserve and the European Central Bank throughout most of 2023 and early 2024, which significantly increased the cost of borrowing, reduced the availability of cheap leverage and raised concerns over exit opportunities and long-term return prospects in an uncertain global economic environment. Institutional investors – particularly pension funds and insurance companies – have been increasingly reallocating capital toward more liquid or lower-risk assets, further constraining inflows to PE funds.
Another major struggle symptom is the growing backlog of unsold assets. PE firms now collectively hold an estimated $3 trillion in unexited investments, which is putting pressure on capital recycling and internal rate of return performance metrics. This accumulation of assets is tied to a sharp increase in holding periods: the share of assets held for more than five years rose by 18% in 2024 compared to 2022.
Adding to the pressure, geopolitical instability, macroeconomic uncertainty and persistent market volatility have led to a slowdown in key exit channels, especially initial public offerings and M&As. These are traditionally vital for PE firms to realize gains and return capital to investors. With IPO windows largely closed and strategic buyers hesitant, many PE firms are stuck with aging portfolio companies, unable to offload them at favorable valuations.
The end of cheap money for private equity in a new era of uncertainty
One of the key reasons behind this apparent struggle lies in the significant macroeconomic changes of the last two years. The rise in interest rates, following over a decade of low-cost capital, has drastically altered the economics of leveraged buyouts, which are at the core of private equity. As borrowing becomes more expensive, the traditional PE model of using debt to boost returns becomes less attractive and riskier. At the same time, inflationary pressures and slower economic growth have made both valuations and earnings projections more uncertain. In parallel, institutional investors such as pension funds and endowments are facing allocation constraints and liquidity pressures, making them more cautious in committing to new PE funds. This convergence of financial tightening, economic volatility, and investor hesitancy has created a perfect storm that is forcing the industry to rethink its strategies and expectations.
How private equity could rethink the future
In the face of current uncertainties and challenges, private equity industry is going to see many potential developments and changes in the coming years.
In order to face this pressure and uncertainty, PE funds might redirect their focus toward sectors considered resilient or with a potential growth, like healthcare,energy transition and infrastructure.The global private markets report by McKinsey highlights that healthcare and technology will continue to attract significant investments, with a potential CAGR of 10-15% over the next 5 years.
Moreover, private equity may start restructuring programs. Portfolio restructuring in private equity refers to the strategic process of reorganizing and managing a firm’s portfolio of investments to enhance performance, increase valuations, and optimize exit opportunities, To conclude, the tariff policies implemented by the previous Trump administration have added further complexity to the private equity sector, particularly regarding trade uncertainty.
A strategy for PE firms could be to prioritize domestic investment, in order to avoid the risks of export . While new trade policies may force firms to reassess their exposure to global supply chains, investments in companies with robust supply chains could become a priority to ensure greater stability. A Deloitte study found that companies with adaptable supply chains could reduce costs by up to 25% and improve responsiveness.So, also the logistic sector and supply chain management will be fundamental topics for the PE firms in the incoming years.
Private equity’s slowdown and the shift towards more solid investments
In the end, private equity is going through a tough period, mainly because of high interest rates, economic uncertainty, and investors being more careful with their money. But this doesn’t mean the industry is going to disappear, it is just slowing down. PE firms now have to change how they work, investing more in solid sectors like healthcare, infrastructure, and supply chain, and rethink how they manage their portfolios.
Bibliography
Financial Times [link]
World Economic Forum [link]
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