Since the Fed began increasing interest rates in 2022, the private equity landscape “has been marked by lower asset valuations, lower dealmaking activity and lower fundraising than in prior years,” according to a recent Wall Street Journal story.

Thus PE firms, struggling to sell their assets at the prices they want, are instead holding them in their portfolios: over the past decade, in fact, the median holding period has nearly doubled, with PE funds in North America averaging 7.1 years in 2023. This in turn inhibits PE players’ ability to deliver returns to investors and raise money for new funds.

Lower interest rates should help, but this alone may not be enough to raise valuations to the point where PE firms are willing to exit their investments. As the cost of debt has decreased making targets more expensive for buyers, PE exits totaled only $155 billion globally in the first half of the year, 26% below the same period in 2023. It follows, then, that respondents say economic and market volatility (47%), limited exit opportunities (35%), and misaligned valuations (34%) are the three top factors most likely to deter PE firms from exiting their investments in the year to come.

However, dealmakers remain bullish when it comes to PE funds, which still have $2.5 trillion in capital to deploy. Nearly 70% believe PE investors will boost deal activity in the next 12 months.

“Since PE firms aren’t exiting their investments and returning capital to their limited partners, they have to be more creative—be it dividend recaps, starting new funds, or other tactics,” says Ballantine. “Though interest rates play a role, the long hold period is really the key factor undermining these firms’ risk-taking and ability to put all that dry powder to work.”