Joe Bae, co-chief executive officer of KKR & Co., during the Global Financial Leaders’ Investment Summit in Hong Kong, China, on Tuesday, Nov. 4, 2025.
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Private equity fund managers are bracing for a wave of consolidation as investors demand higher returns and stronger governance, forcing a shakeout in an overcrowded industry, several industry veterans said at a high-level finance summit in Hong Kong on Tuesday.
“How is it that there are more private equity funds in North America than there are McDonald’s franchises,” said KKR & Co’s co-CEO Joe Bae on Tuesday, noting that the U.S. has about 14,000 of the fast-food outlets and 19,000 private equity funds.
The bifurcation of funds’ performance has become more “extreme” than at any time in the past decade, Bae said at the Global Financial Leaders’ Investment Summit. “You have to be very disciplined in a market like this and focus on … fundamental, operational value creation in companies, bring better governance to the table,” he said.
The widening gap followed a private equity spending spree in 2021, as firms rushed to deploy unspent funds, with activity also boosted by ultra-low interest rates. As PE firms typically hold portfolio companies for more than five years before exiting, many of those investments are now harder to sell or revalue in a higher-rate environment.
In an interview with CNBC’s The China Connection, Howard Marks, co-founder and co-chairman of Oaktree Capital Management, cautioned that “the era of ultra-low rates is over.”
He estimated that the current easing cycle will see U.S. interest rates fall to just 3%-3.5%, which would be “neither stimulative nor restrictive.” The Federal Reserve lowered its interest rates to a range of 3.75%-4% last week.
Firms that had stayed disciplined during the post-pandemic liquidity rush — holding back from inflated valuations and cheap leverage — are the ones outperforming, according to Bae.
Private equity groups have struggled in recent years to raise new funds, with a significant backlog of unsold assets and a slowdown in cash returns to investors. Limited partners — the fund investors — are also scrutinizing managers more closely than ever, demanding stronger performance and tighter governance.
Only about 5,000 of the private equity firms that exist today had successfully raised funds in the past seven years, Per Franzen, CEO of Sweden’s EQT said in an interview with Financial Times earlier this week. He added that 80% of these companies were likely to turn into zombie firms within the next decade, managing only the existing investments because they cannot raise fresh capital.
Less than 100 globally diversified firms could capture around 90% of capital flowing into private markets in the next fundraising cycle, according to Franzen.
While that may sound dire, private equity industry veterans say that consolidation will ultimately strengthen the asset class, weeding out weaker players and restoring discipline to the industry.
“There are going to be winners and losers … it’ll all come down to performance,” Rob Lucas, CEO of CVC Capital Partners, said at the Hong Kong summit panel, noting that consolidation is inevitable and is a “sign of strength” rather than “in any way a negative aspect.”
Renewed optimism
PE giants are optimistic about the rising demand for capital and signs of returning liquidity, supported by the growing popularity of secondary funds, or secondaries, that buy stakes or assets from primary private equity fund investors.
“The demand for capital of all forms for the next 5, 10, 15 years in the business that we’re in is only growing,” said Harvey Schwartz, CEO of Carlyle, citing global economic growth and an inflection point for technology that’s creating fresh investment opportunities.
Secondaries, one of Carlyle’s fastest growing businesses, is “just in the beginning of creating a more dynamic flow of capital for the entire industry,” Schwartz noted.
The secondaries market has exploded in popularity, with transaction volumes on track to top $200 billion this year, up from $160 billion last year, and could reach $381 billion in 2029, according to an industry report by iCapital.
While experts forecast ultra-low interest rates are no longer on the horizon, prospects of relatively lower borrowing costs, as the Fed announced the end of quantitative tightening last week, delivered two rate cuts since September, would further improve the financing environment for dealmaking.
In another sign of renewed optimism, private equity activity rebounded in the third quarter, achieving a record $310 billion in deal value as companies capitalized on narrowing valuation gaps and renewed market confidence, according to EY.
Private capital groups are increasingly widening their reach to the U.S. pensions and endowments after the Trump administration earlier this year issued an executive order that enabled 401(k) retirement plans to invest in a range of alternative assets.
According to a survey conducted by AlphaSights and EY, 90% of private equity firms surveyed said they are at least “somewhat interested” in developing products for the 401(k) market.
