A renewed rise in interest rates risks adding to the pressure already facing private equity firms, making it harder to exit portfolio companies, return capital to investors, and raise new funds, according to a report by the Wall Street Journal.
The Federal Reserve’s decision to increase rates has complicated a market that had shown signs of recovering after the sharp tightening cycle that began in 2022. Higher borrowing costs put pressure on companies owned by buyout firms while also making prospective buyers more cautious about valuations.
The consequences are particularly significant for older private equity vehicles that have struggled to sell assets within their intended investment periods. Investors were seeking to recover a record $349bn held in so-called “zombie funds”, according to PitchBook data cited in the report.
The backlog could create a further challenge for fund managers. Delayed exits limit distributions to limited partners, potentially making investors more selective when deciding which managers and strategies to back with new commitments.
Apollo Global Management co-president Scott Kleinman said the market could result in a contraction in the number of private equity managers, particularly among firms that expanded rapidly during the previous decade.
The experience following the Federal Reserve’s rate increases from 2022 provides an indication of the potential impact. PitchBook data shows that private equity investments stranded in funds more than a decade old increased by roughly 65% between the end of 2021 and the end of 2025.
The pool of ageing funds could expand further. Approximately $500bn of private equity funds are currently seven to 10 years old, increasing the potential number of vehicles that could move into the “zombie” category if managers remain unable to realise investments.
Private equity returns have also weakened. Funds generated average returns of about 7% in 2025, according to PitchBook, representing the sector’s weakest annual performance since 2011.
That backdrop is weighing on fundraising. Private equity managers had raised $211.9bn up to 11 September this year, putting the industry on course for its weakest fundraising year since at least 2020. The comparable totals were $334.4bn for the full year of 2025 and $376.9bn in 2024.
The challenges extend beyond financing costs. Private equity’s substantial exposure to software companies has come under pressure from the rapid development of artificial intelligence, with many firms having built large technology portfolios during the low-interest-rate period of 2020 and 2021.
PitchBook estimates that private equity firms allocated an average of 14% of their capital to software over the past decade. Some of those investments are now facing refinancing and valuation pressures, with defaults expected to increase as loans backing earlier buyouts mature.
Thoma Bravo, one of the sector’s largest technology investors, suffered a significant setback this year when customer-service software company Medallia defaulted on its debt, resulting in lenders taking control of the business. The firm is also working with creditors on extending loans associated with other software investments, including cybersecurity company Sophos.
Clearlake Capital is facing similar pressure across parts of its software portfolio. Lenders have reduced their valuations of loans supporting human-resources software provider Cornerstone OnDemand and healthcare software company Symplr Software by more than 30%, according to regulatory filings by private-credit funds.
