Private equity: the evolution of an industry

Since the advent of the modern private equity industry in the early 1980s, private equity houses have traditionally adopted the classic model of a buyout fund, raising capital from a club of large institutional investors to fund acquisitions and drive growth. This model has endured, notwithstanding the global expansion of the industry to accommodate a diverse range of firms and strategies.

However, the playbook is now changing. Against the backdrop of continued geopolitical and economic turbulence – and pressure from LPs to transact – two trends which demonstrate that PE firms are searching for innovative ways to generate value have emerged.

First, sponsors have been looking for ways to tap into the enormous pool of individual investor capital. GPs are raising “evergreen” (or perpetual) funds, alongside traditional (close-ended) vehicles, to facilitate access to the private wealth market.

Second, sponsors are seeking to expand their fee-bearing Assets Under Management (AUM) through consolidations and acquisitions.

What are some of the key drivers of these trends?

Tough exit markets; the denominator effect: While some exit channels started to open up, market conditions in 2024 remained challenging – sponsors were reluctant to sell at low prices (this depresses fund performance) and recovery in the IPO markets was slow. Fewer exits meant that less money was being returned to institutional investors. Additionally, the denominator effect – driven by weak public market valuations – also caused institutional investors to become overallocated to PE. Both of these trends, in turn, restricted sponsors from relying on institutions as the primary source of capital for new funds.

Individual investor source and appetite: Individual investors represent around half of global AUM, but only 16% of the AUM in alternative asset funds (Bain, 2023). They have plenty of appetite to invest in the PE market, which provides a means to diversify and – against the backdrop of public market volatility – generate comparatively (and significantly) higher returns.

Regulatory encouragement: Regulators, following a drive by governments to boost investment in the real economy, have softened their approach. For example, regulations on European Long-Term Investment Funds (ELTIFs) have been loosened to lower the barriers to entry by retail investors (e.g. by allowing redemptions and secondary sales within funds, and reducing minimum investment requirements for retail investors).

The rise of the mega-fund: With both less money and less flexibility to deploy further capital into the PE asset class, institutional investors have become increasingly selective about whom they choose to back. There is an increasing preference for a small group of well-established mega-funds, who can offer a broader range of investment options and services. This leaves smaller players – who have struggled to raise capital – ripe for acquisition by these mega-funds, who themselves see an opportunity for AUM growth.

AUM as a measure of success: the flight to a smaller group of larger funds has, in turn, resulted in an increasing focus on fee-bearing AUM as a key performance indicator, especially for publicly listed asset managers, further driving consolidation in the industry.

The rise of the evergreen fund

Semi-liquid, or evergreen funds, are now increasingly being used by GPs to draw in professional and retail investors. Investors can, on day one, fully deploy their capital into a vehicle which already has a significant portfolio of assets (without having to reserve funds for capital calls). Subscriptions and redemptions can be made on a periodic basis (often monthly or quarterly), with minimum commitments set at relatively low levels (contrast this with long lock-ups and high buy-in costs of traditional buyout funds).

The main advantage of evergreen funds for GPs is their unlimited lifespan: this provides GPs with more flexibility to sell assets when market conditions are favourable, and removes some of the pressures on them to carry out new, lengthy fundraising processes. By the same token, the move away from the traditional close-ended buyout fund structure also presents new challenges. The administration of an evergreen fund often requires a significant step-up in operational capacity (given ongoing subscriptions and redemptions, as well as more frequent valuations and fee calculations) and generates additional compliance costs. The flexibilities afforded to investors also put additional pressures on GPs to both deploy funds quickly (to start earning fees and avoid a drag on returns) and manage the liquidity requirements of investors.

Despite these difficulties, there are plenty of examples of sponsors who have (or are looking to) launch evergreen products. In January 2024, Blackstone launched Blackstone Private Equity Strategies Fund (BXPE), its largest ever fund for wealthy individuals, which has since attracted inflows of around USD6 billion, and currently holds over USD650 million in assets. Others are following suit – Carlyle subsequently launched evergreen private credit and private equity funds for retail investors and Apollo launched its evergreen S3 Private Market Fund to give high net worth individuals access to the secondaries market.

Consolidations and alliances

Consolidation in the PE industry has been rife in recent years, with 2024 seeing the largest wave of GP acquisitions in a decade. Fuelled by an increasing regulatory burden, higher compliance and other costs, and investor preferences for established and diversified managers, sponsors have pursued consolidation opportunities to expand into new asset classes or geographies and grow AUM (without having to build a presence organically). BlackRock’s acquisition of Global Infrastructure Partners and its recent announcement to acquire HPS Investment Partners are notable examples. The rise in public listings and GP stake sales has helped to provide PE firms with the financial firepower and (for listed managers) the ability to use stock to fund these strategic acquisitions (see, for example, Bridgepoint’s acquisition of ECP or CVC’s acquisitions of stakes in DIF and Glendower shortly after CVC’s listing in 2024).

Sponsors are also reacting to competitive pressures by becoming more innovative in how they look to grow and retain AUM, with firms searching for new sources of permanent capital, increasingly open to GP stake sales and looking to team up with other sponsors on liquidity solutions. Moonfare and iCapital are now offering stakes in PE and venture capital allocations to retail investors, while asset managers such as Fidelity Investments and Lexington Partners have partnered with these platforms to make their funds available to a broader range of investors. BlackRock and Partners Group recently launched a joint investment product for retail investors, whilst Apollo and State Street have proposed an ETF (yet to be approved by the SEC) invested in public and private credit.

Outlook

In a challenging fundraising environment and turbulent market, and with political pressures helping to dismantle the traditional barriers to private markets, PE firms looking to grow and retain AUM are gearing up to become full-service providers across a range of strategies, asset classes and investor types. The consolidation trend is widely expected to continue, with sponsors such as EQT and Partners Group predicting a drastic decrease in the number of fund managers from >10,000 currently to just over 100 mega-funds in the next decade. This may lead to a market where fewer, larger houses (increasingly resembling traditional, multi-strategy asset managers) compete for institutional funds, while smaller players are forced to join forces, unless they can show real ability to generate alpha in specialised sectors or niches.

Retail offerings, consolidations and alliances show that, rather than relying solely on the traditional buyout fund model which has served the PE industry well over the years, sponsors are now focusing on the next stage of the industry’s evolution and coming up with innovative ways to achieve it.