This past weekend, a concise yet remarkably insightful interview with Per Franzén, CEO of Swedish investment firm EQT, published by the Financial Times, captured my attention. Franzén warned that a significant number of the approximately 15,000 private equity funds operating globally could soon become what he referred to as “zombie funds”: structures unable to raise fresh capital and therefore condemned to merely maintain their existing portfolios until they eventually wind down. The comment was brief, but it goes to the heart of a structural shift currently reshaping the private equity landscape.
To appreciate its implications, it is worth briefly recalling how the traditional private equity model operates. Institutional investors such as pension funds and insurance companies, known as Limited Partners (LPs), allocate part of their capital to investment firms, the General Partners (GPs), who manage funds typically structured around a ten-year life cycle. During this period, GPs deploy capital to acquire companies, enhance their performance, and ultimately exit these investments at a profit, returning proceeds – net of management and performance fees – to LPs. LPs then redeploy capital into new funds, enabling a recurring, self-sustaining investment cycle that has generated attractive returns for several decades.
This model has earned a reputation for delivering long-term value, combining consistent performance with a governance framework that aligns well with institutional investor needs. The asset class experienced strong and sustained expansion over the past decade. According to Bain & Company, total private equity assets under management reached approximately USD 4.8 trillion in 2023. It was also recently observed, somewhat humorously, that the United States now counts more private equity funds than McDonald’s restaurants — an arresting comparison in the homeland of fast food.
This growth did not occur in a vacuum. For more than a decade, the industry was supported by an exceptionally favourable macroeconomic environment. The prolonged era of ultra-low interest rates, introduced in response to the 2008 global financial crisis and revived during the COVID-19 pandemic, significantly reduced the cost of leverage and supported ever-increasing valuations. In such conditions, even relatively passive investment strategies could deliver strong returns. Financial engineering often played a larger role than operational transformation in value creation. The industry benefited from what was, for many years, a rising tide that lifted nearly all participants.
The environment began to shift abruptly in 2022 when central banks across developed markets initiated a rapid tightening cycle to counter inflationary pressures. Higher rates increased the cost of debt financing, reducing the attractiveness of leveraged acquisitions and placing downward pressure on valuations. At the same time, global economic activity moderated, and exit markets slowed. For the first time in many years, 2024 saw a decline in private equity assets under management. This drop was modest but symbolically important, marking a departure from the industry’s long-standing trajectory.
Confronted with the prospect of exiting investments at reduced valuations and crystallising losses — an outcome that could severely damage track records and undermine future fundraising — many GPs opted to hold assets for longer. This generated a surge in the use of continuation funds, enabling investors in older funds to exit while bringing in new investors to extend ownership of selected assets. These vehicles represented approximately USD 50 billion in assets under management in 2024 and are likely to gain further prominence. While they offer a pragmatic mechanism to maintain liquidity and preserve optionality, they also raise questions around alignment of interests and potential moral hazard. A deeper analysis of this topic merits separate discussion.
The slowdown in exits has consequences that extend beyond quarterly performance metrics. Institutional investors, mindful of concentration risk, often cap their allocation to specific asset classes. With capital tied up for longer in existing funds, LPs are constrained in their ability to commit to new vintages. The result is a paradoxical combination: record levels of undeployed capital — commonly referred to as “dry powder” — now approaching USD 300 billion, alongside a slowdown in new fundraising activity. A model historically built on fluid capital recycling is increasingly facing friction.
In this new environment, not all market participants are equally positioned. Small ‘generalist’ firms face growing challenges. Fee income for GPs is largely driven by assets under management, with performance-based fees providing an additional uplift when return thresholds are met. In a lower-growth, lower-exit environment, performance fees become more difficult to achieve. Scale therefore becomes not just advantageous, but a source of financial resilience.
At the same time, risk appetite among large institutional allocators has declined. In periods of uncertainty, decision-makers often adopt a collective mindset: it is perceived as safer to be wrong in alignment with peers than to be right in isolation. The reputational risk of backing a differentiated but ultimately unsuccessful strategy is viewed as greater than the opportunity cost of modest returns. No asset manager wishes to appear at the bottom of performance rankings due to a contrarian approach that did not pay off, particularly when client retention is at stake.
These dynamics are accelerating capital concentration within the industry, reinforcing the advantage of the largest managers with longstanding brands, diversified product suites, and global reach. However, scale is not the only viable strategic response. Specialisation offers an alternative path for firms seeking to differentiate and remain relevant. The most successful mid-sized managers are likely to be those that develop a clearly defined strategic focus — whether based on sector expertise, geographical footprint, company size, thematic conviction, or a combination of these — coupled with a recognised ability to create operational value. The conditions that enabled leverage alone to drive performance are unlikely to be repeated in the foreseeable future, increasing the importance of genuine operational capabilities.
Private equity is not in retreat; it is undergoing a necessary phase of evolution. The asset class has contributed meaningfully to corporate performance, operational discipline, strategic repositioning, and long-term value creation. When executed responsibly, active ownership provides benefits that public markets do not always support, including longer-term investment horizons and alignment between management and shareholders.
Firms that build distinctive expertise, strengthen operational value-creation capabilities, and maintain disciplined capital allocation will continue to deliver strong outcomes for investors. Those that fail to achieve either critical scale or credible differentiation may find themselves managing portfolios in run-off mode — extending fee income for as long as possible before ultimately exiting the market — a scenario that again raises questions around alignment and incentives.
The industry is not facing an existential threat. It is entering a period of reinvention that will redefine the sources of competitive advantage. Financial engineering will remain a component of the model, but it will no longer be sufficient. Success will increasingly depend on operational excellence, strategic clarity, talent depth, and alignment of interests.
The next chapter of private equity will reward firms capable of adapting to this new reality. The transformation has already begun.