Fuelled by over a decade of ultra-low interest rates, private equity’s (PE) assets under management grew from $1.463 trillion in 2009 to $9.26 trillion in 2021 – an increase of 533%. Recently, however, according to consultancy Bain & Co, the PE industry has seen a decline in assets managed for the first time since 2005. This article explores the impact of the changing macroeconomic environment on the once-burgeoning industry, as well as the strategic shifts firms have undertaken to continue generating returns.
Industry Slowdown:
Over the last couple of years, the macroeconomic environment – marked by high inflation and interest rates – has put pressure on the traditional private equity model. On the buyer side, leveraged buyouts, which use a large amount of debt to finance transactions, have become more expensive, consequently leading to a decline in activity since 2022. Conversely, on the seller side, companies are facing lower valuations, as higher interest rates raise the discount rates applied to future cash flows, thereby reducing the present value of the business and, therefore, their incentive to sell. As firms struggle to buy and exit their investments, PE fundraising has slowed as a result, raising only $401bn last year – a 23% year-on-year decline, as well as its weakest figure since 2020.
Rise in Secondary Activity:
As PE firms continue to struggle to return cash to investors, the secondary market – where investors trade stakes in funds between each other – has expanded in an attempt to provide liquidity. In the first half of 2025, more than $100bn of sales took place, an increase of almost 50% from the same period last year. A large portion of secondary activity has taken the form of continuation funds, where a PE firm sells an asset it owns from one fund to a newer fund owned by the same firm. According to investment bank Jefferies, continuation funds were used to exit $41bn of investments in the first half of 2025 – making up 19% of sales in the entire industry, signalling the industry’s demand for exits amidst a broader slowdown in IPO and takeover activity.
Changing Focus:
With cheap debt no longer available, PE firms are unable to use high amounts of leverage to drive returns. Instead, firms are placing an increased emphasis on driving operational improvements in their portfolio companies to create value. This includes implementing AI to boost growth and efficiency, refining core commercial strategies, as well as hiring key management personnel with the expertise to help drive performance. In today’s macroeconomic backdrop – characterised by the end of ultra-low interest rates – firms must pivot from a focus on financial engineering towards creating operational improvements in order to continue generating returns in this new era.
Writer: Sameer Chowdhry
Editor: Toby K.
Sources: FT, Ocorian, Bspeclub.
Image: Unsplash
