Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
In private equity, big is not necessarily better. Smaller buyout funds tend to outperform megafunds, according to Preqin data, albeit with much dispersion. Covering niche strategies and focusing on less combed-over market segments is no bad way to earn a living.
Despite this, the minnows often find it hard to raise new money. One issue is that there is less cash sloshing around overall. Private equity funds worldwide raised $680bn in 2024, down 30 per cent compared with the previous year, according to S&P Global Market Intelligence.
In some markets, too, whales are capturing an ever larger share of the money available. About three-quarters of the capital raised in Europe went to funds that raised more than €1bn, according to PitchBook. That’s up from half a decade ago.
This trend is likely to continue. Institutions — the traditional private equity investors — are largely tapped out, especially in the US. And because it’s hard to sell or float portfolio companies, they are left short of money to recycle into new vehicles.
As a result, institutional investors are becoming more selective. And private equity groups keen to grow their assets under management are chasing sovereign wealth funds and high net worth individuals. Neither is a good match for the smaller private equity manager — for diametrically opposed reasons.
Sovereign wealth funds — such as Adia, Mubadala and Temasek — are big beasts, with several hundred billion dollars of assets under management. They need to write really large cheques if they are to move the needle on their future returns.
Retail funds such as Blackstone’s BXPE and KKR’s K-Prime, meanwhile, need high profiles to attract a lot of smaller cheques. Given that such vehicles are often made up of small slices of the buyouts that the firm pursues for its institutional clients, it also helps if they are part of a larger universe that can generate a lot of deal flow.
That leaves the private equity minnow with unappealing options. One is to slowly shrink to nothingness, running out the clock on their existing investments and gradually returning money to their investors. Another is to try to crawl under a larger fund’s wing.
In a world where everyone is trying to become a one-stop shop, private credit funds may be interested in expanding their equity offerings. And even private equity giants may be willing to scoop up a small fund with a genuinely niche angle. The rewards for good performance may not be straightforward, but they do exist.
