Some 18,000 private capital funds are currently “on the road” seeking to raise a total of $3.3 trillion, according to Bain & Co. The problem is that for every $3 general partners seek, there’s only $1 dollar of potential allocations, the consultant estimated.
Bain called it a “supply and demand” problem.
Private equity firms’ fundraising crisis, which has also been stoked by the lack of cash distributions for existing funds, is even prompting some investors to accept a haircut on their investments. “LPs are increasingly dissatisfied with partial or minority exits; instead, they are pushing for full, traditional realizations despite the headwinds faced by such transactions,” according to Bain. It noted that some 63 percent of investors participating in a webinar poll conducted by the Institutional Limited Partners Association preferred a conventional exit “even accepting a valuation below recent marks if necessary.”
Such exits were preferable to dividend recapitalizations, which only 33 percent preferred. (PE-backed companies borrow money in a dividend recap that is then used to pay a special dividend to shareholders.) LP-led secondaries, which are the main growth segment of private equity, got 20 percent of the votes.
But they are not a panacea. “The secondaries market certainly offers a bargain-hunting opportunity to investors with fewer liquidity constraints,” said Bain. “Yet even with their strong growth momentum, secondaries aren’t close to being mature enough to resolve the industry’s broader liquidity needs, amounting to less than 5 percent of private equity assets under management globally.”
Some discounts in secondary transactions may be narrowing. But that’s not the case for all of them. “Buyers only want top names, leaving most LP interests unsalable,” said Jeff Hooke, finance lecturer at Johns Hopkins University and author of a recently published study on the top 25 leveraged buyout managers.
Other types of exits are even less popular among investors, according to the poll. Only 17 percent preferred continuation vehicles, and distributions via specialized financing such as NAV loans garnered only 7 percent. Some 3 percent chose distribution solutions such as simple leverage.
“The pressure within the industry—to find exits, distribute funds, source fresh capital and then put it to work—continues to mount,” according to Bain’s midyear private equity report.
Part of the problem is a slowdown in deals due to the Trump tariffs. The value of deals announced in April was 24 percent below the monthly average for the first quarter, Bain said.
“The most immediate and visible impact was seen in the IPO channel, where the already subdued market for initial public offerings essentially shut early in the second quarter, with offerings postponed or canceled amid the tariff turmoil,” according to the firm.
This problem exists even though the stock market is still soaring. “Stocks are at all-time highs yet IPOs are near all-time lows,” said Nate Koppikar, founder of hedge fund Orso Partners. “Sponsors prefer to exit to other sponsors who can control their marks rather than submit themselves to the more democratic public markets.”
Buyout funds have been particularly hard hit. None of the buyout funds that closed in the first quarter were bigger than $5 billion, the first time in a decade that threshold hasn’t been met, Bain said.
Investor money is just not there. According to a survey by Campbell Lutyens in April, 33 percent of investors said they were slowing their private market investments in response to U.S. tariffs, while 8 percent were pausing them entirely.
With demand far outstripping the supply of capital for it, Bain said “it remains to be seen how much the emergency of private wealth as a source of funding can ease this mismatch by boosting supply.” That trend also got pushback from Moody’s Ratings. In a recent report, Moody’s suggested that selling private funds to retail investors “could have systemic consequences.”
