As MainFT reported on Monday, the capital flywheel powering buyout funds isn’t running quite as smoothly as it did in yesteryear. Bain & Company have published their big annual report on the sector, which we’ve combed through before as a guide to the state of the asset class. Back in 2024 we wrote:
Much of private equity works on a five-step process:
1. Collect client capital commitments
2. Buy firms
3.Strip assets and gear upImprove firms
4. Sell firms and return capital to clients
5. Profit!
We concluded that winter had set firmly in on the sector. And we were right 🥳. Two years on, are there signs of green shoots? Let’s go through our checklist.
First up, collect client capital commitments. At a global level, private capital funds raised $1.3tn, which is objectively a big number. But it also represents the fourth straight year of contraction in capital raises. Buyout, the industry’s largest category, saw fundraisings shrink by 16 per cent to $395bn. So while we’d give private capital in general a 7/10 on this front, buyout PE has gone broadly sideways for seven years now. No signs of spring here. 5/10
Second up, buy firms. This part of the flywheel is flying, and flying fast. 2025 was a bumper year for deals, bested only by 2021’s record year. This sounds like a solid 9/10. But the reports’ authors make the point that not all of these PE deals were done by PE funds. Is this enough to handicap our dealmaking score to 8/10?
In fact, the authors note that the total was buoyed by 13 megadeals worth $10bn or more — like the $56.6bn take-private transaction for Electronic Arts (which will be more than 90 per cent owned by Saudi Arabia’s Public Investment Fund), and the $27.5bn aircraft leasing platform Air Lease deal (of which Sumitomo Corp and SMBC Aviation Capital are new majority owners). Saudi’s PIF and Sumitomo Corp cannot, under any normal definition, be described as private equity buyout funds. But because they include slithers of equity sold to proper PE funds, the whole of these transactions have been counted as buyout deals.
It’s hard to get a sense of quite how many of these deals were actually done by garden variety PE buyout funds. But in the first half of the year undrawn committed capital — so-called ‘dry powder’ — fell by only $8bn to $1.3tn, much of which has sat undrawn for several years. And this suggests that buyout funds are still scraping around looking for decent targets. Oh, and overall deal count fell marginally. As such we’re scoring them only 6/10 for buying firms.
How about number three: stripping assets and gearing up improving firms? The Bain study doesn’t provide a lot of detail here, but does outline how the general market environment makes it tough to deliver the kind of returns investors have historically look for to justify locking up their money.
Back in 2015, a typical buyout fund would double their equity with debt, financed at maybe 6-7 per cent, write the authors. With multiples generally expanding, you needed only five per cent ebitda growth to generate a target 2.5x multiple on invested capital over a five-year holding period for your equity clients. Fast forward — and with high and stagnant multiples, higher debt costs, and less appetite to lend quite as much debt — you need maybe twelve per cent ebitda growth to make the numbers add up.
We’ve put together a chart using a toy model to help illustrate what this means. Toggle the drop-down menu to see what happens to targeted multiple on invested capital as ebitda growth and debt assumptions change:
It looks like buyout managers will have to pull their finger out, especially given the industry’s inability to deliver hitherto. It’s hard to give a score out of ten, but we hope for fund investors’ sake it’s close to 12/10.
Number 4: sell firms and return money to clients. It’s not like there haven’t been sales of buyout firms. In fact, the total value of sales hit its second highest level in nominal terms last year — $717bn. And there were 1,750 exit transactions last year, which sounds like another big number.
But they need to be put in the context of around 32,000 unsold firms, valued at $3.8tn. Exits are, moreover, flattered by the rise of continuation vehicles which now constitute close to 8 per cent of PE exit values, by the increasing churn of portfolio companies that sponsors/managers sell to one-another, and by a few landmark deals (just seven transactions accounted for almost a quarter of the total).
As such, distributions as a share of net asset values have spent a fourth year at levels long-toothed investors might remember from the global financial crisis:
And this has left the average holding period stubbornly above seven years, with almost two-fifths of all companies sitting on the books for more than five years. This compares to less than thirty per cent of PE companies awaiting sale in 2019 when the average holding period for a portfolio company was a smidgen over six years.
Moreover, according to the authors:
Regardless of channel or size, the companies exiting successfully in 2025 tended to be a fund’s “gem” assets—those with strategic relevance or exceptional quality. GPs had a much harder time moving anything with weaker momentum or an uncertain future.
The ageing of portfolio companies matters because the total value to paid-in capital — a measure of total cumulative return for PE funds — on portfolio company values has historically flattened out if kept beyond a 7-8 year holding period.
As such, if history repeats, the bulk of PE fund holdings look increasingly like dead money trapped in high cost fund structures rather than the hot asset class investors ought to be falling over themselves to access.
Funnily enough, with distributions undershooting for four straight years, investors are less keen to commit new capital. In fact, the authors describe the environment for the average buyout fund seeking new capital as “perhaps the most difficult period in fundraising the industry has ever seen”. So sorry people, despite the monster headline number we’re going to give exits an icy 3/10 — and only because we’re feeling generous.
What about number five, profit? For clients, US buyout funds have lagged public equity returns over the last five and ten years, though remain ahead over the twenty years to Q3 2025 on a net IRR basis, whatever that’s worth.
Still, given that the narrowness of gains in public market has freaked a lot of people out, it seems likely that lower returns won’t lead investors to desert the asset class.
For managers, profits have been more handsome, though there are signs that fee compression is coming for the sector. Average base buyout fund fees were down a fifth, to 1.6 per cent of net asset value. And the rise of more muscular and sophisticated asset owners has seen a median of 33 cents of largely fee-free co-investment being demanded for every dollar invested in funds — equivalent to a further 25 per cent revenue contraction versus the counterfactual, according to the authors. Still, PE managers seem to be getting richer and the superyacht market is booming so ¯\_(ツ)_/¯.
Where does this leave us?
Totting up our scores we get 20/40. So not all cylinders are firing in the PE buyout machine, but things could be a lot worse for investors and managers alike.
The authors point to the pick-up in deals and exits in the second half of 2025 (after the Trump tariff shock waned) as evidence that the thaw could already be upon us. Like buyout fund investors, we’ll wait to see the money.
Further reading:
— Private equity logjam hits record as firms struggle to sell (MainFT)
— The delusion of private equity IRRs (FTAV)
— How’s the PE Winter looking? (FTAV)
— Is private equity actually worth it? (FTAV)