The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Liam Proud

LONDON, March 13 (Reuters Breakingviews) - Private equity managers have a bad case of indigestion. Blackstone BX.N, KKR KKR.N, CVC Capital Partners CVC.AS and their peers are collectively sitting on $3 trillion of unsold assets, tying up cash that can’t be put back to work elsewhere. Optimistic buyout barons reckon it’s just a matter of time before a deal resurgence clears out the backlog. Unfortunately, it may have become too large to dislodge.

The industry relies on constant motion. Big investors that back traditional buyout funds, like pension plans or college endowments, aim to tie up only a certain amount of their money in private equity. If old funds aren’t selling assets and thus returning cash to backers, those investors may struggle to invest in new vintages.

This cycle is indeed sputtering. In 2024, private equity firms offloaded $468 billion worth of companies, with the $18 billion sale of SRS Distribution to Home Depot HD.N by Berkshire Partners and Leonard Green ranking among the largest individual transactions. That beats 2023’s doldrums, but is 15% below the previous five-year annual average, according to Dealogic and Bain & Co. data. Unsurprisingly, fresh fundraising of $401 billion last year was down by a quarter from 2023, judging by numbers from Bain and Preqin.

The hope was that 2025 would be more active. Surging equity markets in the wake of Donald Trump’s presidential election victory seemed to set the stage for big initial public offerings, like the possible $50 billion debut of Blackstone, Carlyle and Hellman & Friedman’s Medline, or Bain Capital and Cinven’s German drugmaker Stada. Instead, trade-war uncertainty and a slowing U.S. economy are now ravaging confidence. Markets have plunged, spelling trouble for IPOs and M&A.

Worse, even a good year may not make a dent. Assume that exits could rebound to $600 billion annually, halfway between the blockbuster 2021 and torrid 2023. At that pace, it would take over five years to work through the industry’s current asset pile, before even factoring new investments. Little wonder that the median buyout-backed company has now been held for 6.1 years, Bain & Co. reckons. A rule of thumb is that firms try to flip assets within three to five years.

Not all exits are equally helpful, either. There are three broad ways to offload a business: find a corporate buyer, list it on public markets, or sell it to a rival private equity firm. Only the first two options inject fresh cash into the system. So-called “secondary buyouts” risk just shifting it between one set of straining fund investors and another.

Such deals are nonetheless on the rise because private equity portfolios are outgrowing the rest of the financial system’s ability to absorb them. The value of unsold assets has more than doubled since 2019, according to Preqin. Global M&A and equity issuance, meanwhile, shows no clear upward trend. In the five years before the pandemic, the volume of buyout-backed IPOs and sales to corporate acquirers equated to about one-third of the industry’s total portfolio value. The average since 2020 has dropped to less than a fifth, according to Breakingviews calculations using data from Bain & Co. and Dealogic.

If stuck assets are the new normal, the industry will look very different to the one pioneered by titans like Blackstone’s Steve Schwarzman and KKR’s Henry Kravis decades ago. Rather than sprucing up businesses and selling them after a few years, like EQT EQTAB.ST did with $26 billion skincare specialist Galderma and Schwarzman’s firm did with financial data group Refinitiv, buyout barons will have to stay invested for much longer. Delayed paydays imply lower returns on an annualized basis, as well as less frequent dollops of carried interest, or the 20% of fund profits that typically flow to private equity managers. Dealmakers will have to focus more on acquiring companies that have the capacity to grow steadily for decades, like Norwegian software seller Visma. Technology specialist Hg first invested in 2006, and in late 2023 brought in new backers at a $21 billion valuation.

The other key consequence would be that traditional investors’ cash crunch will persist, threatening fundraising further. The solution, for managers at least, may involve turning to a new model. Public shareholders in listed private-capital firms like KKR and Blackstone already discount lumpy lucre from asset sales, instead prizing steady, recurring fees from managing investments. As an example, analysts at Morgan Stanley MS.N now base their valuation of Blackstone entirely on its fee-related earnings.

This implies that managers are better off cultivating more staid funds with no set expiration date that charge rich management fees. Vehicles targeting wealthy individuals, like KKR’s K-Prime or Blackstone’s BXPE, particularly fit the bill, and favor the biggest firms that have the capacity to invest in marketing and grab financial advisors’ attention. Over time, these vehicles could grow big enough to scoop up many of the stuck assets from older funds. But that’s a distant prospect for most, and a very difficult task for smaller shops. Buyout barons will be stuck chewing over their current problems for a while.

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(Editing by Jonathan Guilford and Ujjaini Dutta)

((For previous columns by the author, Reuters customers can click on PROUD/liam.proud@thomsonreuters.com))