The total assets under management in the private equity sector fell in 2024 for the first time in several decades, as investors withdraw from the sector due to enormous amounts invested in illiquid positions that cannot be sold, writes FT. According to a report by consulting firm Bain & Co., private equity investment funds managed $4.7 trillion in assets in June last year, representing a 2 percent decline compared to 2023.
This is the first such decline since 2005, when Bain & Co. began tracking the industry.
Even during the financial crisis of 2008, private equity recorded modest growth, further emphasizing the seriousness of today’s problems. Buyout funds, a key segment of private equity specializing in company acquisitions, are now facing increasing challenges in exiting investments and returning capital to investors.
Why the Decline
As noted by Bain, illiquid assets and a slowdown in the sale of investments naturally lead to a market decline. Many funds still hold enormous amounts in investments that cannot be sold – it is estimated that this illiquid asset is worth about $3 trillion. This means that funds cannot return capital to investors, which reduces their ability to raise new funds.
Additionally, the Federal Reserve (FED) and the European Central Bank (ECB) have raised interest rates to curb inflation, significantly complicating the financing of new acquisitions. Buyout funds traditionally use long-term loans to finance their acquisitions, but more expensive capital means lower profitability of investments.
Moreover, there is pressure on institutional investors. Large pension funds and foundations, which are among the largest investors in private equity, are reducing their investments as they are not receiving the capital returns they had planned. According to Bain & Co., distributions from private equity have fallen to the lowest level in over a decade, reaching only 11 percent of total net asset value.
Finally, they add that in 2024, private equity funds attracted only $401 billion in new investments, which is 23 percent less than the previous year. This is the worst result since 2020. At the same time, funds sold $468 billion in assets but failed to offset the capital outflow.
Funds’ Reaction
The Bain & Co. report further states that funds are increasingly using secondary transactions, where they sell parts of their portfolios to other funds to free up capital. This is a temporary solution that can relieve pressure but does not address the underlying problem of illiquidity. Additionally, the traditional management fee of 2 percent is no longer sustainable, as more and more institutional investors are using co-investment strategies to invest without paying high fees. Funds like Blackstone and Apollo Global are increasingly investing in so-called ‘evergreen’ funds with lower fees to attract investors.
Long-term Consequences
Hugh MacArthur, head of Bain & Co.’s global private equity practice, warns that pressures on the industry will not ease quickly.
– Not everything will be better by 2025. This is a problem that will last three to four years – he stated.
In the long run, the private equity industry may undergo a redefinition of investment strategies. This means a focus on smaller and more flexible investments, greater collaboration with institutional investors through direct investments, and a reduction in reliance on financial leverage in acquisitions.
This decline in the industry ultimately marks the end of a period of almost uninterrupted growth. High interest rates, issues with illiquid investments, and reduced investor interest have led the sector to go through its toughest period in the last twenty years. Although private equity remains a crucial part of the global financial system, it is clear that funds will need to redefine their strategies in the coming years and find new ways to ensure returns for investors.
