All is not well in the world of private equity. UK managed funds generated returns of just 2.1% last year, well below the long-term average of 6.2%.
Rising interest rates have made debt far more expensive, squeezing returns and slowing deal activity. There are fewer transactions and fundraising is sluggish, with PE firms struggling to raise new funds as they take longer to return capital to existing investors. At the end of the first quarter of this year, fundraising had fallen 30% year over year to $462bn (£384bn), according to the data platform Pitchbook.
“There’s no doubt the PE model is under pressure” says Stuart Marcy, head of private equity at Gerald Edelman, an accountancy firm. He traces much of the strain back to the Covid-19 pandemic, which unleashed decades-high inflation, followed by Trump 2.0 sparking fresh waves of political and economic uncertainty. “Periods of prolonged, protracted uncertainty are far more economically challenging to private equity models than short, sharp recessions or periods of unease,” he says.
The era of cheap money and effortless returns has ended and, with it, the traditional PE model built on flipping companies for quick profits.
Evolving LP-GP dynamics
The squeeze on returns and deal activity is rippling through every level of the private equity ecosystem – not least among the investors who fund it. Ongoing market volatility is prompting limited partners – PE investors commonly referred to as ’LPs’ – to reassess their exposure to the sector. Many are scrutinising fund performance and fee structures more critically, questioning whether long-standing relationships with PE firms – otherwise known as general partners (GPs) – still justify continued investment.
This renewed scepticism is putting fresh pressure on fund managers. “The current environment is separating strong performers from weaker ones in a way not seen since the 2008 financial crisis,” Marcy says. “There are certainly several heavy-hitting names in the private equity world where funds are not getting raised or are failing to hit their targets,” he continues. “I am expecting to see some well-known blue-chip names in mid-market private equity in the UK begin to fade away over the next few years. When firms wind down it tends to happen relatively quietly and without much fanfare, but I believe that cases of this will begin to emerge.”
Such an environment, while challenging for GPs, hints at a healthier, more sustainable fundraising environment going forward. As Marcy points out: “a number of firms have stood out by delivering strong results or successfully differentiating themselves, showing that quality still attracts investor confidence even in tough times.”
Shifting tactics
Amid these challenges, PE firms are being forced to evolve, adapting their once-reliable playbooks to a slower, more complex environment.
For some, the focus has turned to deal flow – although opportunities are increasingly scarce and often come with greater risk. “If a grade-A target comes to market, it attracts huge attention,” says Marcy. “But there are also many promising businesses with trading challenges or operational risk that make investors hesitate.” The result is a cautious market, where firms are weighing every move with heightened scrutiny, he adds.
With IPOs largely off the table and valuations in flux, PE firms have struggled to sell their existing investments. In 2024, global PE exits – including trade sales, secondary buyouts and IPOs – fell to $392bn (£294bn), a five-year low, according to S&P Global.
To bridge the gap, GPs are increasingly turning to alternative liquidity strategies to return proceeds to investors sooner, says Andrew Houghton, partner at Reed Smith, a UK advisory firm. This includes dividend recapitalisations, refinancing and continuation vehicles, which transfer one or more assets from an existing fund into a new one to give investors optional liquidity. Still, as Houghton cautions: “There’s no real substitute for an old-fashioned exit.”
The consequence is a growing backlog of assets waiting to be sold. “Both private equity funds and private business owners have been holding off, hoping for more stable times, but no one can say when those more certain times will come” says Marcy.
Rethinking value creation
These pressures are driving another important evolution in the PE model. More than 30% of portfolio companies are now held for over five years or longer, and the median holding period of 3.5 years is the highest it’s been in at least a decade, according to data cited by PwC. This is pushing fund managers to focus on improving existing portfolios and use capital more efficiently.
“Firms are thinking differently about how they create value for stakeholders,” says Houghton. The days of relying on leverage and multiple expansion to generate returns are fading. Instead, fund managers are focusing on “genuine value creation,” Houghton explains, refining core business processes and using technology and AI to boost efficiency and growth from within.
PE firms are increasingly positioning themselves as long-term stewards rather than quick-flip investors. For portfolio companies, this shift demands deeper collaboration as their investors take a more active role in day-to-day operations. This may mean more rigorous performance management and a shift toward data-driven decision-making, including the use of performance data, ESG metrics and generally reporting on progress more frequently. As such, management teams will be expected to demonstrate greater transparency and agility and be ready to execute on shared value creation plans.
The future of the model
The next phase of PE will prioritise long-term partnership over quick-turn returns. And while some view this period as an existential slowdown, others see it as renewal.
“We’re seeing signs of confidence returning to private equity” says Houghton. “Financing conditions have improved, and there’s definitely more activity around transactions that have been stalled. That said, it’s a steady recovery.”
Private equity has always been good at adapting, Houghton adds. “The current environment presents new challenges, but the adaptation is likely to make the market more disciplined, creative and better equipped for long-term growth.”
Gone perhaps are the days of highly leveraged, often hostile private equity buy-outs. For now, the industry’s evolution points to a more patient, operationally driven and transparent era, one where success depends less on financial engineering and more on building lasting, tangible value in the businesses it backs.
All is not well in the world of private equity. UK managed funds generated returns of just 2.1% last year, well below the long-term average of 6.2%.
Rising interest rates have made debt far more expensive, squeezing returns and slowing deal activity. There are fewer transactions and fundraising is sluggish, with PE firms struggling to raise new funds as they take longer to return capital to existing investors. At the end of the first quarter of this year, fundraising had fallen 30% year over year to $462bn (£384bn), according to the data platform Pitchbook.
“There’s no doubt the PE model is under pressure” says Stuart Marcy, head of private equity at Gerald Edelman, an accountancy firm. He traces much of the strain back to the Covid-19 pandemic, which unleashed decades-high inflation, followed by Trump 2.0 sparking fresh waves of political and economic uncertainty. “Periods of prolonged, protracted uncertainty are far more economically challenging to private equity models than short, sharp recessions or periods of unease,” he says.
