Private equity’s path to riches is getting harder to follow

Dealmakers are missing out on the personal windfalls they used to score by hitting investing home runs

At all levels of private equity, the dearth of distributions from carry means more people are looking for new jobs. Photo by ANGELA WEISS/AFP via Getty Images

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Grinding on private equity deals through the winter, Garrett Werner used to gaze out at the Rockefeller Center’s Christmas tree in Midtown Manhattan. Nowadays, the view from his office in small-town Oklahoma takes in hundreds of truck beds.

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He has quit the buyout business to run his own company fitting equipment on trucks. “I traded wearing a sport coat every day for steel-toed boots,” Werner, 32, said in an interview.

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He’s not the only private equity rainmaker to look elsewhere for better opportunities. For many years, the industry was ascendant on Wall Street. With cheap debt in abundance and big investors clamouring to back funds, buyout firms gobbled up an ever-larger swathe of the economy, and their leaders ascended the ranks of the global ultra-wealthy.

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Now, however, the industry is in the doldrums after higher interest rates made it harder to resell companies and return cash to investors. And where private equity’s fortunes once largely waxed and waned alongside the rest of finance, it’s out of step with a boom in trading and investment banking, and with the AI gold rush electrifying venture capital.

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Dealmakers are missing out on the personal windfalls they used to score by hitting investing home runs. These payments — known as carried interest or simply carry — are the slice of profits that investment professionals reap on winning bets, and helped make private equity among the most sought-after careers in finance.

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The theoretical backlog of payouts due to dealmakers is huge. Investments that are in the black but that haven’t yet been sold would generate almost US$17 billion of carry if they can be realized, according to combined 2025 figures from Blackstone Inc., KKR & Co. and Carlyle Group Inc. The comparable tally for the trio, three of the largest publicly traded private equity managers, is up from about US$5 billion at the end of 2018.

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Some mid-level dealmakers like Werner are quitting to become entrepreneurs or jumping ship for rival firms if they see better prospects. Others are boomeranging back to investment banks, where most started out before seeking greater riches in private equity.

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Sloan Klein, an executive and career coach with a focus on private equity, said she’s had more calls from investors looking to chart a new path.

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“These people have modelled their financial futures on a reality that isn’t materializing now,” Klein said. “And that’s really stressful.”

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Higher up the chain, some senior professionals are leveraging up so they can meet financial obligations despite the liquidity squeeze, borrowing against future expected carry and hard assets like vacation homes in the Hamptons.

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Forklift Repair

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At all levels of private equity, the dearth of distributions from carry means more people are looking for new jobs, said Jonathan Goldstein, of the recruitment firm Heidrick & Struggles.

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“You have any number of investment professionals at private equity firms whose career has stalled,” he said.

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Options can include moving laterally to another firm, going into corporate development or investing in a business and putting themselves in as chief executive, said Goldstein, regional managing partner of the recruiter’s Americas private capital practice.

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Werner, the former financier, was raised in Texas as a member of a Tennessee business dynasty and said he had always wanted to run his own company. But his prospects in private equity also played a role in his decision-making, he said in the interview, which was briefly interrupted to deal with a forklift repair.

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Shortly after being promoted to vice president, Werner quit his job at Palladium Equity Partners. He took the earnings from his New York finance career to buy DJ Trailers & Truck Beds last September. It felt like the right time to make the jump, Werner said.

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He and his business partner, another private equity alumnus, raised no outside money other than a loan that they personally guaranteed. They’re in day-to-day charge of the business, which sells equipment and upfitting services, or customizing trucks to suit client needs.

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“I loved working in the private equity field,” said Werner, whose business is based in the sparsely populated town of Wayne, Oklahoma, saying he’d benefited from his private equity experience and the mentors he had.

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But “as firms mature, carry becomes disproportionately weighted toward the senior members of a firm,” he said.

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Senior executives typically get more carry than junior colleagues. The lull makes that worse, because veterans usually have interests in multiple funds that were invested over a range of market conditions. Newer arrivals depend on more recent funds, which can be filled with investments that are hard to sell, or not yet ready to be sold.

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“Palladium has continued to generate liquidity for our investors even in a difficult exit environment,” Daniel Ilundain, president and co-head of funds at Palladium, said in a statement. Entrepreneurship is essential to the industry, and it should be expected that some people look to run their own businesses, he added.

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Palladium funds have returned more than US$1 billion over the past 2-½ years, said a person with knowledge of the matter, who asked not to be identified discussing confidential information.

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Nine-Year Backlog

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Carry works like this: a typical fund sets out minimum performance goals for investors, such as generating eight per cent-plus annual returns. Once the fund beats those hurdles, 20 per cent of profits go to the private equity team. Spoils are usually divided using a points system, with senior dealmakers getting more.

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Tax rates that are lower than regular pay add to the appeal. That’s despite repeated efforts by United States policymakers — including Presidents Donald Trump, Joe Biden and Barack Obama — to change or end the system. The long-term tax rate in the U.S. on carried interest is 23.8 per cent, including a charge known as the net investment income tax.

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For industry leaders, payouts have topped US$500 million apiece in just the past decade. Steve Schwarzman, Blackstone’s chief executive officer, took home more than US$970 million of carried interest and other incentive fees in the 10 years through 2025, filings show. President Jon Gray earned about $749 million. Over the same span, KKR co-founders Henry Kravis and George Roberts each reaped about $550 million.

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Industry titans also minted money by publicly listing and growing their management firms, and from co-investing in funds alongside outside investors.

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But the carry system started to sputter in 2022, after the Federal Reserve lifted interest rates from historic lows. That put pressure on asset prices and left the industry sitting on a huge pile of unsold assets: some 13,500 companies in the U.S. alone that could take nine years to exit, according to  PwC and PitchBook estimates.

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If the logjam eventually clears, the rewards could be substantial — provided exits at good valuations are eventually possible. Partners in US$10 billion-plus funds have a mean US$37 million of carry allocated to them, a survey by Heidrick & Struggles found last year. This average reflects the expected totals due over the lifetime of the investment vehicle.

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The pain isn’t spread evenly among firms. The biggest are touting a nascent recovery in exits and carry, while smaller groups focusing on so-called middle-market deals are less well-placed.

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In its most-recent quarter, for instance, KKR pointed to record asset sales. “Our industry is increasingly K-shaped, and most of the external focus is going to be on the unhappy part of the K,” co-chief executive Scott Nuttall told investors.

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Quarterly exits at Blackstone beat Wall Street estimates and Gray said he’s confident exits will pick up toward year-end. Carlyle said it has the best track record for returning money to fund investors and continues to prioritize distributions.

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In contrast, life is harder for privately held middle-market firms that are struggling to sell assets or have had bets go sideways.

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Businesses in L Catterton’s ninth private equity fund have been battered by tariffs and the economic effects of the pandemic. The firm, created in partnership with LVMH Moët Hennessy Louis Vuitton SE, is known for consumer-facing bets such as Birkenstock sandals.

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L Catterton has yet to receive any carried interest on that 2020 fund, and some investment professionals have left the firm, according to people with knowledge of the matter.

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The firm’s 10th private equity fund has returned 70 per cent of investors’ capital after its sale of Thorne, the vitamin maker, for US$3.8 billion, according to an August letter to investors.

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A spokeswoman for L Catterton declined to comment.

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The lack of exits is also making it harder to secure new money from cash-strapped investors. Some middle-market firms have struggled to raise a new fund, or are raising smaller vehicles than before, meaning there could be less future profit to go around.

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Crestview Partners, Madison Dearborn Partners, Onex Partners, Trilantic Capital and Vestar Capital Partners are among firms that have either paused fundraising efforts, missed targets or scaled back the size of new investment vehicles in recent years.

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Crestview generated more than US$3 billion of realizations since the start of 2024, and it recycled more than US$1 billion of that into new and follow-on deals made in its sixth fund, a spokesperson said.

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Onex Corp. chief executive Bobby Le Blanc has said the firm expects a first close for Onex Partners VI later this year. Onex has focused on increasing distributions from its fourth and fifth funds, he said on an August earnings call.

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Trilantic declined to comment.  Madison Dearborn and Vestar didn’t comment.

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‘Lottery Ticket’

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Banking has become an increasingly attractive alternative. Many aspiring private equity professionals start out with a two-year stint in investment banking, updating deal pitch decks until the wee hours of the morning. That means banking has long been viewed as a slog to be endured before switching to make real money on the buy side.

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Now, however, investment banking is booming. Pay and bonuses appear more predictable than the money in private equity, and regulatory pressure has eased.

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Private equity looks like a “lottery ticket” at present, Alan Johnson, founder of the compensation consulting firm Johnson Associates, said. For the first time in a decade or longer, he said, “you’re looking outside from private equity saying, ‘Yeah, maybe I’d be better off at a bank.’”

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First-year analysts ranking private equity among their top-three post-banking career choices has slipped to 86 per cent this year from 91 per cent in 2024, although it is still the most popular option, according to data from recruiter Odyssey Search Partners. Interest in corporate development and strategy roles, which includes startups and AI companies, has increased to 35 per cent.

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The gulf shows up in high-end property. Mark Jovanovic, a luxury residential real estate broker and co-founder of Paradigm Advisory, a team at Compass Inc., said bankers, along with buyers whose wealth stems from tech and artificial intelligence, are driving demand for top properties in New York.

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While private equity investors from the biggest firms are starting to re-emerge, investment banking is “definitely stronger,” he said. “The public markets are open, and there’s just so many IPOs.”

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One private equity investor, who left his firm after almost 10 years and returned to banking, said he had lost faith in the industry’s ability to keep generating blockbuster returns. His team was told to focus on selling assets to improve distributions to investors, he said.

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Johnson Associates forecasts investment-banking bonuses will rise 10 per cent to 15 per cent this year, compared with no growth in middle-market private equity, and a 2.5 per cent to 7.5 per cent increase for those working at large buyout firms. The figures exclude carry.

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Buying Yachts

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Some are leveraging up while they don’t see windfalls from selling assets. Dealmakers are turning to private bankers to borrow against future carry payouts and their other assets to manage longer hold periods on investments, said Joe Koontz at First Citizens Bank, who provides loans to wealthy clients.

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“We’re going to look across at all assets,” Koontz said. First Citizens aims to leverage clients’ assets without disrupting their long-term goals or creating tax headaches, he said.

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First Citizens Bank generally gets called by junior investors looking to borrow against future carry so they can make commitments to the next fund while they’re not getting distributions from current investments, he said. Senior investors may need cash to build a new home, buy a yacht or even to acquire a stake in a sports team, he said.

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Inquiries from executives at smaller private equity firms looking to borrow against carry have doubled this year, said Tim Ivers, the founder and chief executive of Warana Capital, which offers loans of as much as US$25 million.

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It has become harder to value future carry because of the uncertainty around when assets will be sold, he said. Even when a dealmaker is confident they’ll get cash in the next few years, Warana will typically only lend 20 per cent to 30 per cent of the carry’s value, Ivers said.

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More dealmakers are including second and third liens on their homes in the Hamptons, and vacation homes in other tony locales, so they can borrow more against carried interest, Ivers said. Their real estate serves as collateral for the loan, alongside the theoretical fund payouts, because it’s easier to assess the value of the property.

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“You could sell real estate,” Ivers said. “It’s hard to sell carried interest.”

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—With assistance from Preeti Singh.

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