For some private equity funds, 2025 was a fine year.

Investment and exit value rebounded strongly. Dealmakers shook off the springtime tariff panic to complete some of the biggest buyouts of all time. General partners (GPs) took advantage of the boom in corporate M&A to find buyers for their shiniest assets.

Yet, as we detail in Section 1 of this report, 2025’s recovery was also decidedly narrow. A swath of very large buyout funds dominated activity, aided by massive direct equity injections from sovereign wealth funds and corporate partners. Overall deal and exit count declined, and distributions to limited partners (LPs) continued to lag. The average buyout fund seeking new capital is encountering perhaps the most difficult period in fund-raising the industry has ever seen.

The best description of what we’re experiencing is what economists call a K-shaped recovery—a subset of elite funds is on the upswing while everyone else muddles through. It would be comforting to think this is just a delay in getting back to “normal” after a long series of wrenching black swan events over the past several years. But the evidence suggests something bigger is going on: As the new cycle gains steam, the maturing industry has hit an inflection point. The basis of competition has shifted dramatically. Every aspect of raising capital and generating returns has become significantly more challenging.

On a historical basis, the economy is, in fact, settling back into something that looks more like normal. It’s just not the zero-interest-rate, easy money era everyone got used to in the decade leading up to 2021’s orgy of dealmaking. That period, it turns out, was the anomaly. Low interest rates led to steadily rising multiples, which powered over 50% of all buyout returns. That allowed shorter holding periods and quick distributions of profits to LPs, who were then happy to recycle that capital into ever-larger funds.

This virtuous cycle lifted a lot of boats during the easy money days. But it also obscured important changes that were going on in the background—changes around what it takes to compete for deals, talent, and capital in an industry that has exploded in size and sophistication. Now that those tailwinds are gone, the funds that have adapted to the changes are the ones riding the upper arm of the K. For those that didn’t, now is the time to regroup and prepare to compete in a world that will be very different from the one we’ve left behind.

Three major challenges stand out.

12 is the new 5

Rising interest rates and shifting market dynamics have changed deal math dramatically. In a typical 2015 buyout, 50% of the purchase price was borrowed at a 6%–7% interest rate. Asset prices were on a steady climb upward, which allowed sponsors to benefit from multiple expansion to make deals work, even if operational improvements were marginal. That meant a typical investment ultimately required just 5% annual growth in earnings before interest, taxes, depreciation, and amortization (EBITDA) to generate a target 2.5x multiple on invested capital (MOIC) over a five-year holding period. 

Fast-forward to today and borrowing costs are in the 8%–9% range, while leverage ratios are closer to 30%–40%. Purchase multiples, meanwhile, remain in record territory yet largely stagnant. With less leverage and lack of multiple growth, these expensive deals only pencil out if you assume much larger increases in EBITDA—something closer to 10%–12% to generate that 2.5x return over five years (see Figure 1). The assumptions behind these numbers will vary, of course, but the direction of travel is clear.

Figure 1

As a result, most GPs will have to raise their value-creation game substantially. It will only get harder to generate both acceptable returns and strong distributions to paid-in capital (DPI). Already that’s a problem. Buyout funds are sitting on a record $3.8 trillion in unrealized value, and average holding periods at exit have drifted toward seven years. Distributions as a percentage of net asset value (NAV) are well below historical norms.

Not surprisingly, this makes raising the next fund a major challenge for many GPs. Gone is the glorious time in the 2010s when everybody was generating and distributing capital at a record pace. These days, LPs have narrowed their focus to the largest platforms and the top-tier alpha generators while the majority of firms wrestle with smaller closes, longer cycles, and more “noes” than “yeses.” Buyout funds are not only competing among themselves, but LP attention is increasingly focused on the broader alternatives landscape: growth, private credit and special situations, asset‑backed finance, infrastructure, real estate, secondaries, and a growing universe of semiliquid and evergreen vehicles.

The cost of alpha is rising

At the same time, the cost of generating the kind of performance that stands out from the crowd is going up fast. As private equity firms have become more sophisticated and complex, the cost of operating them has risen commensurately (see Figure 2).

Figure 2

Developing a repeatable model to consistently deliver alpha demands heavy investment in specialization, mission-critical capabilities, broad ecosystems, and world-class talent. Raising money has gone from a handshake at lunch to building an investor relations shop that looks a lot like a B2B sales organization—one capable of segmenting the market, developing playbooks, and, when appropriate, tapping into new pools of capital like private wealth and sovereign wealth funds. Technology has always been critical (and expensive), but it’s even more so in the age of AI. GPs are using AI to drive down costs at the firm level while exploring how these technologies can transform everything from deal sourcing and due diligence to value creation. None of this is cheap, but all of it is necessary to compete successfully in private equity’s new era.

Revenue is under pressure

Increasingly, however, the revenue needed to pay for these ever-more-sophisticated organizations is under pressure. Even as costs are rising across the industry, two important trends are eating into firm economics. The first is declining headline management fees. Over the past 15 years, competition for capital has resulted in fee concessions to LPs that have steadily eroded revenue per dollar of assets under management. The level of concession from the headline fee typically correlates with fund size (the bigger the fund, the lower the fee), but the average management fee for a buyout fund was 1.6% in 2025, according to Preqin. That’s down 20% from the industry’s traditional level of 2%.

Declining fees can bite into revenue, as can additional discounts for scale commitments or early-bird funding. But the bigger pressure on fund economics comes from growing LP demands for no-fee coinvestment. Granting investors the opportunity to invest directly (with no fee) in deals a firm originates has become an increasingly common practice among GPs looking to secure regular, fee-bearing capital commitments. The size of the opportunity varies widely and is typically part of a broader negotiation with LPs. But the practice is widespread across fund sizes and can have a major impact on how much revenue a fund gets from its dollars under management.

Respondents to the 2026 StepStone/Bain Private Equity GP Survey said they had offered anywhere from 110 cents of coinvestment per dollar of fee-bearing capital to no coinvestment at all (see Figure 3). The median, however, was 33 cents on the dollar, which translates to a hefty 25% reduction in revenue. Notably, the pressure for more concessions is unlikely to ease. The ILPA LP Sentiment Survey 2025–26 Edition showed that more than half of LPs believe they have more leverage with GPs than they did 12 months earlier.

Figure 3

Winning in a bold new era

Inflection points produce as many opportunities as challenges, and the one we’re describing here is no different. The firms poised to succeed in the coming up cycle are those for whom alpha generation is a habit, not an aspiration. They can articulate for investors a truly defensible, truly differentiated strategy and, critically, can prove with data how well the firm can execute.

The funds being left behind are those with no distinctive advantage, especially at a time when the supply of PE investment capital is exceeding demand. The bread-and-butter generalist firms that dominated the industry’s early decades are struggling to attract interest in this environment. “We sort of do everything” is no longer a persuasive pitch unless you truly do everything well and at global scale. LPs want to know—really—what your strategy is, why it works now, and how you can prove out your repeatable edge. They want data showing strong internal rates of return and steady DPI.

Focusing a firm on what it does best isn’t some sort of dark art. It is a practical exercise that firm leadership should revisit on a regular basis. The firms that get it right do a few things really well.

Defining what makes you special. All funds will tell you they’ve already defined who they are and why investors should love them. But their LPs may tell a different story. The “secret sauce” GPs offer is too often vague or unconvincing. At a firm that has existed for years or decades, sharpening the focus typically involves critically reevaluating its investing history, identifying areas where it has a repeatable edge, and discarding anything that doesn’t fit the bill. LPs are looking for a strategy that can be described in one sentence and backed up with data. If focus requires downsizing in the short term, it is better to make that decision yourself than to have it imposed on you by LPs. 

Building a system, not a slogan. To state the obvious, private equity firms compete for three scarce things: capital, talent, and deals. Less obvious: The most effective firms ensure that their capital, talent, and investment strategies all tell the same, coherent story. Whether the answer is creating real sector depth, building operating expertise, developing data and AI skills, or all of the above, it adds up to a practical, differentiated approach to how you source, how you underwrite, how you build value, and how you exit.  

Putting the system to work proactively. Defining what you do best and building a system around it is critical, but not sufficient, for stepped-up performance. What comes next is putting the system to work in a proactive way, starting with sourcing. The best firms know the kinds of companies they are uniquely suited to own and track them over years, not months. The average deal process today has dozens of PE firms kicking the tires, most of them looking at the same deal book and market information. Proactive firms don’t wait around for an investment bank to deliver the confidential investment memo (CIM). They use their unique strategy to go looking for companies in their sweet spot, often years before there’s a hint they are about to trade. That way, when the company does trade, the firm knows much more than anyone else about what it’s worth—and what can be done to make it worth more.

Too often, GPs leave this last part till later. Due diligence is largely defensive—an exercise in confirming what’s in the CIM and developing a deal model that is conservative enough for a lender to provide debt and aggressive enough to deliver good-enough returns for the GP. But in a world where 12 is the new 5, good enough doesn’t cut it. What’s required is full potential due diligence—a holistic, multidisciplinary effort that not only produces a viable deal case but also focuses on the true full potential of an asset, identifying the revenue levers, operational levers, and technology levers that will produce a real step change in performance (see Figure 4). If you understand best what the asset can be worth, you’re not only smarter about what to bid for it but you enhance speed to value by hitting the ground running on Day 1 of ownership.

Figure 4

This is the kind of process Hg undertook leading up to its $6.4 billion deal to take OneStream Software private in January 2026, with minority investments from General Atlantic and Tidemark. OneStream, a leading cloud-based enterprise finance management platform, had been on Hg’s radar for years. Yet to take it private, Hg and its partners needed to develop next-level conviction that the upside could fully justify a significant premium on the company’s stock price. 

For more than a decade, OneStream’s revenues had grown at double-digit annual rates as the company successfully transitioned on-premise enterprise users to the cloud. Its product was uniquely suited to customers requiring large-scale deployments in ultra-high-complexity financial environments. The question was whether it was positioned to maintain strong growth in the years ahead. 

To find answers, Hg combined commercial, technical, product, AI, and go-to-market diligence into a single, unified inquiry that evaluated OneStream from all angles. With this integrated approach, each team’s insights fed into the others, raising and answering questions step by step, validating and learning along the way.

Product-market fit and commercial analysis were informed by the technical team’s findings, and vice versa. The technical and AI teams evaluated OneStream’s features, and the commercial team verified that users valued them.

The technical experts engaged with core users of the OneStream suite to understand and validate their workflows and interactions, assess the user interface, and reinforce what differentiated the product relative to peers. They evaluated the maturity and strength of the underlying platform architecture, confirming that the stack could support enterprise-scale, mission-critical finance use cases cost effectively while enabling future capability expansion, including AI-driven enhancements.

These inquiries made it clear that customers loved the product’s functionality and that OneStream’s unique approach was especially well suited to the rigorous demands of the financial suite. The company was also well positioned to take advantage of AI—not be overtaken by it. And the product was well supported both organizationally and commercially. 

Having validated a strong base case for value creation, Hg developed a full potential vision for how OneStream could maintain healthy growth well into middle age. While a large majority of its revenue had historically come from moving on-premise ERP customers to the cloud, the company was also building significant business in other high-growth segments. Hg, meanwhile, offered skill sets that would lead to ongoing improvements in areas like technology, AI, commercial excellence, and operational efficiency. 

Hg’s interest played out over several months, with increasingly greater levels of access. Each successful stage led to more value underwritten, justifying continued investment and giving Hg confidence that it had a thoroughly defensible bid. 

As with any maturing industry, private equity is sorting itself into the models that work and those that don’t. What used to be a collection of entrepreneurial dealmakers putting money to work, one deal at a time, has evolved into a hypercompetitive marketplace of increasingly complex organizations with robust strategies to deliver true alpha through specialization. To stay relevant in this new era, every firm needs to answer two strategic questions: What is our unique competitive advantage? And what, precisely, must we do to win—in dealmaking, fund-raising, and talent development—consistent with that competitive advantage?

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