Private equity funds must accelerate investment of idle capital or face investor exodus risk
After the private equity industry saw its first decline in assets under management in 2024, it now faces dual pressures from approximately $3 trillion in unsold deal backlog and $500 billion in idle capital. Industry experts urge funds to accelerate investment and pivot to overlooked high-growth sectors such as business services and utilities to avoid further deterioration in investor confidence.
The following is a guest post by Kade Thomas, CEO of Emory Oak Partners. The views expressed are solely those of the author.
There is no denying that private equity experienced a difficult period in 2024. But now that the fog has lifted, our industry as a whole cannot afford to rest on its laurels. There are countless opportunities right now for firms to reinvigorate deal activity and deliver substantial returns for investors, but action must be taken immediately. Delaying could push limited partners (LPs) to the brink of withdrawal.
The sluggish deal activity has left its mark. Last year, private equity assets under management declined for the first time in decades,down 2% from 2023, as LPs reduced new capital commitments to the industry.
Investor sentiment cannot continue to deteriorate.
There are currently two fundamental problems. First, firms face a backlog of approximately $3 trillion in unsold deals, partly due to the macroeconomic environment hindering exit channels. Without clear exit paths, some general partners (GPs) are trapped in the deal cycle, unable to return profits to investors.
Second, private equity firms currently hold a large amount of dry powder,amounting to $500 billion. It is not just the trillions of dollars in unsold deals that are preventing firms from returning cash to investors, but also billions in uncommitted capital.
The investment periods of these funds are ticking down, and if last year's decline in assets under management is any indication, LP patience is wearing thin. Firms must ignite action, ramp up deal-making, and deploy capital into new high-potential enterprises.
We had expected deal activity to pick up at the start of this year, with many predicting a rebound in M&A following the Federal Reserve's series of rate cuts in 2024. Although the dealreboundseen at the end of last year hinted at a positive outlook, the performance in the first few months of 2025 has been underwhelming. For example, the volume of deals between $100 million and $100 billion in Februaryfell 7% year-over-year。
High-Growth Opportunities
However, while some private equity firms may be deterred by economic headwinds, I believe there are still worthwhile deals to pursue. Firms are simply looking in the wrong places.
For years, many firms have chased the allure of sectors like technology and financial services, while overlooking businesses that are integral to the daily lives of everyday Americans.
These businesses, primarily active in commercial and residential services, real estate, and oil and gas, are high-growth opportunities where private equity can leverage the technical knowledge these firms typically lack.
Of course, economic obstacles pose challenges across all industries, but there is no doubt that some sectors are more defensive than others. Sectors such as utilities, maintenance, and repair are deeply embedded with stable demand, and firms can empower them through operational knowledge, professional management, and technology.
By bringing marketing and branding expertise, digital skills, and technology-driven sales tools into these undervalued industries, private equity firms can stay ahead of competitors, making a tangible impact not only on investment returns but also benefiting portfolio companies and their customers.
I have personally witnessed how driving sustainable organic growth in these long-overlooked industries can maximize returns. Their strong potential proves that our industry still has options during this challenging period.
Given that $3 trillion in capital is tied up in aging deals, the industry can no longer delay deal activity. Firms must find opportunities to unlock capital, drive portfolio growth, and demonstrate to investors the potential of private equity.
Admittedly, a confluence of factors means firms—especially industry giants—face complex challenges that cannot be solved overnight. But without swift action, LP withdrawals could accelerate, and the ensuing severe challenges are self-evident.
We all know that private equity has the ability to propel companies to new heights, providing the resources and expertise needed to reach new customers and maximize revenue. It can drive sustainable growth and deliver strong returns for LPs, but firms cannot take this for granted.
Private equity must reignite its deal-making passion, get creative, and pivot to new industries. We can still achieve the anticipated M&A peak—we just need to think outside the box.