Private equity funds have significantly underperformed in returning cash to investors, with payouts in 2024 reaching only half of typical levels. This marks the third consecutive year of such shortfalls, primarily due to a deal drought. Cambridge Associates estimates that funds have fallen short by approximately $400 billion in payments to investors over the past three years compared to historical averages. This situation is increasing pressure on firms to find ways to exit investments and return capital.
The difficulty in striking deals at attractive prices began in early 2022, when rising interest rates increased financing costs and led to a decline in corporate valuations. Despite expectations from dealmakers and advisers for an acceleration in merger and acquisition activity in 2025, which could help address the "towering backlog" of $3 trillion in aging deals, some experts like Andrea Auerbach of Cambridge Associates believe the industry's issues will take several years to resolve.
In response, private equity firms have resorted to novel tactics, such as increasing the use of continuation funds. These funds involve one fund selling stakes in portfolio companies to another fund managed by the same firm to engineer exits. Jefferies forecasts that continuation fund deals will reach a record $58 billion in 2024, accounting for 14% of all private equity exits, a significant rise from 5% in 2021.
However, some investors are skeptical about the industry's ability to sell assets at current valuations. A record $1 trillion-plus in buyouts occurred in 2021 just before interest rates rose, leading to concerns that many deals are held on firms' books at overly optimistic valuations. Goldman Sachs noted that private equity asset sales, historically done at a premium of at least 10% to internal valuations, have recently been made at discounts of 10-15%, indicating that many assets are still over-marked and stuck.
