Private equity funds just have too much money: They are struggling to find potentially profitable investments, can’t sell companies they already own, and are being pressured by exasperated limited partners.
The buyout industry has some $1.2 trillion in unspent capital, so-called dry powder, and 24 percent of that total has been held for four years or longer, according to consultant Bain & Co. And even though the total has fallen slightly from $1.3 trillion — the amount that has not been invested has only grown. It has jumped from 20 percent in 2022.
The numbers “suggest that GPs are struggling to find first-rate, affordable targets,” according to the consultant’s annual review of private equity.
But that’s just the beginning. Buyout funds are also having trouble selling the companies they already own. There is a “towering” $3.6 trillion of unrealized value in some 29,000 unsold companies in the funds’ portfolios, the consultant said. And while buyout funds are holding twice the assets as they did in 2019, Bain said the total “exit value is at about the same level.”
The overhang comes at a time when distributions as a portion of net asset value last year sank to 11 percent, the lowest rate in a decade and which is leading investors to slam shut their pocketbooks to new funds. “Fundraising is a lagging indicator that responds to industry cash flows. The heavy drawdowns of capital to feed the dealmaking beast in 2021 were followed by an abrupt skid in exit activity when interest rates spiked and dealmaking slumped,” Bain explained. “The resulting slowdown in distributions caused LPs to cut back on new allocations.”
Last year, buyout funds raised 23 percent less capital globally than they did in 2023, Bain said. “Fewer funds closed during the year, and of those that did, more than a third had been on the road for two years or more.”
Bain & Co. compared the environment to that surrounding the global financial crisis when assets under management rapidly grew in the run-up to the crisis, which was followed by a dearth of exits. For example, “the 2005–06 fund vintages that were launched right before the global financial crisis took over nine years, on average, to return capital to investors, raising fears that the capital lodged in current portfolios will take equally long, or even longer, to pay back.”
Last year, after the worst environment since the financial crisis, buyout investment value did bounce back, jumping 37 percent year over year to $602 billion.
For the moment, however, hopes for continued momentum in 2025 have been dashed. “The industry is certainly anxious to make deals, but the year’s early slowdown in M&A activity globally suggests that the dreaded U word (uncertainty) continues to keep markets on edge. Investors are looking for clarity amid back-and-forth signals regarding tariffs and other macro issues.”
Moreover, the situation is probably worse than the statistics show. “Abnormally large fund vintages of 2021 and 2022 are holding down the median age of these unsold companies, which might be making the situation look better than it is,” said Bain. “Given the lofty acquisition prices at which those deals were executed, it’s reasonable to ask whether the opposite effect will take hold in coming years if sponsors struggle to exit these expensive assets at reasonable returns.”
Bain noted that the situation could take time to unwind. The normal fund payback schedule follows what the industry calls a J curve — funds call pledged capital, put it to work, and pay it back, usually in around seven years. For funds of the 2019 vintage, the last one with a five-year record, the fully realized proportion of the portfolios’ companies dropped closer to 20 percent, compared with 44 percent for vintages between 2014 and 2019.
A major problem plaguing buyout funds is their dependence on leverage, which means that rising interest rates in the past few years have hurt returns. Meanwhile, Bain said that fees are under pressure, and costs for the business, including in-depth research and investor relations, are rising.
Despite the so called 2 and 20 “rack rate” for private equity funds, the consultant said that “increasingly, fierce competition for capital often results in quiet fee concessions, while the growing trend toward fee-free coinvestment exerts even more downward pressure on firm economics.”
Bain & Co. calculated that these two factors have already reduced average net management fees by as much as half since the global financial crisis.
“Pressure on fees is coming at a time when PE firms can least afford it,” it said.
