Private Equity Has Fallen Out of Favor with Some Institutional Investors

Broadcast Retirement Network's Jeffrey Snyder discusses private equity performance with the Center for Economic and Policy Research's Eileen Appelbaum, PhD.

Jeffrey Snyder, Broadcast Retirement Network

Dr. Appelbaum it's so great to see you again. Happy New Year and thanks for joining us this morning. I'm glad to be back with you.

Let's talk about some additional research that you and the team have done. And I want to start by looking back at 2025. How did private equity do last year in general?

Eileen Appelbaum, PhD., Center for Economic and Policy Research

Private equity did not do too well and the buyout funds in particular have been suffering. The whole segment of private equity is overloaded with companies that they're unable to sell. This has been a problem for them since the middle of 2022.

And we see that the inability to sell the companies to return cash to your investors means they have less cash to invest in subsequent funds. And also they're a little gun shy because they are invested in funds now that frequently have companies that are 12, 13, 15 years old. Zombie funds where it's pretty clear that the companies are never going to be sold.

This does not really make investing in private equity that enticing for institutional investors. And I'm not saying that there's no fundraising going on. It's just been down every year, 23, 24, and 25.

The fundraising was worse than the year before and it fell off a cliff in 23. So that's really their problem, the big problem.

Jeffrey Snyder, Broadcast Retirement Network

And what are some of the headwinds that they're facing? I mean, I understand that maybe they're not turning around these companies and selling them off to raise capital and realizing their investment but is it the economic environment? Is it interest rates?

What is kind of going into the reason?

Eileen Appelbaum, PhD., Center for Economic and Policy Research

I think part of it is a self-inflicted wound. Back in 2022, when the public markets tanked the private equity funds whose unsold companies, portfolio companies, the value of them is determined by the general partner which has an obligation as part of the private equity firm that sponsored the fund. And so they all said, oh, we didn't suffer at all or we hardly suffered.

The market went down by 20%. Our companies went down by 4%. Aren't you glad you're invested with us?

It looked really good on the books but in the end, everybody knew that those companies are overvalued. You really cannot sell overvalued companies. Who wants to buy them?

But the second thing is you're right about the interest rates. At the same time that the private equity funds did not mark to market, the Fed fighting the inflation coming out of the pandemic raised interest rates by more than 5% between March of 2022 and July of 2023. Well, if you have high interest rates and overvalued companies, it's really a formula for not being able to sell them.

And then that's a formula for few exits, no cash back, not no cash, but limited cash back to institutional investors who then re-up on a limited basis as well. And the fundraising in 2025 is actually worse than it looks because the 10 largest private equity companies got almost all of the fundraising. So the other 4,000 funds out there are not doing too well.

Not all of them were raising funds but those that were are not doing too well. So this is a serious problem for the industry.

Jeffrey Snyder, Broadcast Retirement Network

Yeah. And I think, well, I wanna ask you, you mentioned institutional investors. And when I think of institutional investors, I think of pensions, I think of endowments, I think of foundations.

They're based on what you wrote in your study and what you articulated this morning, there seem to be pulling back a little bit. Why is that? Do they see something that maybe the rest of us don't see or maybe something that you see?

Eileen Appelbaum, PhD., Center for Economic and Policy Research

Well, no, I think it's exactly the fact that cash has not been returned. And then if you're gonna invest at all, you're gonna try to find the private equity firms that you think will do the best. And this is a handful of well-known names.

Maybe it's just the brand that attracts the money. But in general, the fundraising is way down compared to prior to 2022. So that's really their issue.

Jeffrey Snyder, Broadcast Retirement Network

Is there any semblance of hope with 2026? I mean, we're just into the new year. So I don't know if we can be predictive of future results.

When I worked in a mutual fund company, they said past performance is not indicative of future results. But in all seriousness, are there less economic headwinds now or what would you expect?

Eileen Appelbaum, PhD., Center for Economic and Policy Research

So I think there's been some adjustment to the new interest rate environment and interest rates are lower than they were in 2022 and 2023, substantially lower from about five and a quarter to three and a half percent at the federal funds rate. So I think that might be a bit of an improvement. I think that if the economy, if the AI bubble doesn't burst, there's no reason to think that there's going to be a recession.

So there's going to be a relatively strong economy. Interest rates are still high. They're not back to the zero interest rate environment that private equity loves.

But I think they've adjusted. So I do think that 2026 will be better than 2025. But the overhang of unsold companies is huge.

It's huge. You're not going to work it down in just another year. It's likely to take a few years to really get back to anywhere near normal.

And I don't know where this part of the industry will be by then.

Jeffrey Snyder, Broadcast Retirement Network

Let me ask you, I want to spend, I want to give you a minute to kind of recap our conversation. But let me go back to asking you a question. Last week, we had a program talking about kind of the state of alternative investments.

That's crypto, private markets, real estate in defined contribution or what most people would consider a 401k plan. I want to get your, and we're still waiting on regulations and other information, I guess, from the federal government, specifically the Department of Labor. What's the reaction that you have to that?

Will that inflow, potential inflow of cash help these companies?

Eileen Appelbaum, PhD., Center for Economic and Policy Research

It will definitely help the industry, but is it good for the workers? I doubt that it's good for the workers. These are high fee funds.

They have all of these unsold portfolio companies that they can't get rid of that they'd like to sell to somebody or to have money to improve them perhaps. I do not believe that the funds that these workers are, their retirement money is going to be invested in are going to be the top flight funds. We know that lots of funds have what are called dogs, companies that have been in the portfolio more than 10 years and are either unlikely to sell at all or will sell at a steep discount.

So this is not the time to get into private equity if you're not a really sophisticated investor. As far as the other things, I mean, my view of crypto is that that is a situation that is going to lead to disaster for that industry. It really has no use value other than criminal activity and it operates on momentum.

Everybody thinks it will go up, it goes up. Everybody thinks it will go down, it goes down. There's no use value.

It does not have something that you could, it's not like gold that you could use for jewelry or for electronic parts. It has no use other than for illegal or activities you'd like to hide from somebody, maybe your wife, I don't know. But anyway, from the public for sure.

So crypto is not a good bet. Real assets like infrastructure and real estate, they may be worthwhile. But I just think that people need to be able to know that their retirement will be there.

They need to have transparency. They need to have liquidity. Private equity has a very hard time in any of these alternative strategies providing that.

I don't think it's a good deal for the workers.

Jeffrey Snyder, Broadcast Retirement Network

Dr. Appelbaum, we've had a great discussion this morning. I wanna give you about a minute to kind of recap. What do you think are some of the key takeaways from our conversation?

Eileen Appelbaum, PhD., Center for Economic and Policy Research

Well, I think the key takeaway is that exits are not up enough and that cash is not being returned and we didn't really get to talk about it. But the private equity general partners of the private equity funds are engaging in financial engineering. And I don't believe that's going to end better for the investors than it has for the companies where they engaged in financial engineering.

They are finding ways to return cash to investors that really greatly increase the risk to those investors but make lots of money for the general partner and the private equity firm. I'm thinking specifically of what are called continuation vehicles which pay off very nicely for the general partner and put the limited partners at risk.

Jeffrey Snyder, Broadcast Retirement Network

Well, Dr. Appelbaum, I appreciate you coming on the program. I think I'm gonna have to do some more education for myself. This is a marketplace that I've dabbled in but I wanna learn more about.

I appreciate you coming on and we'll bring you back again very soon. Okay, thank you very much.