The Federal Reserve’s recent decision to raise interest rates is expected to exacerbate ongoing challenges for private-equity firms, deepening difficulties in managing portfolios tied to buyout deals from a prior decade. These so-called “zombie funds,” which have surpassed their typical 10-year investment horizon without exits, accounted for a record $349 billion, a figure likely to grow as higher borrowing costs hinder deal-making and asset sales.
Private-equity firms rely heavily on raising new funds to generate fee income, but the accumulating backlog of aging investments is constraining their ability to secure fresh capital. Scott Kleinman, co-president of Apollo Global Management, indicated that the industry might face a contraction, especially among managers who expanded rapidly over the past decade. Apollo itself continues to attract investors, citing stronger recent fund performance compared to the industry average.
The sector entered 2026 with cautious optimism, anticipating easing interest rates under Federal Reserve Chairman Kevin Warsh, newly appointed by President Trump. That expectation helped fuel deal activity early in the year. However, the decision to increase rates has since reversed these gains. Stock prices of major private-equity firms such as Apollo, Blackstone, and KKR declined amid renewed concerns over borrowing costs.
Rising interest rates impact private equity in multiple ways. Companies acquired with leveraged loans face higher debt servicing expenses, reducing profitability and complicating exit strategies. Elevated borrowing costs discourage prospective buyers, making it more difficult for firms to sell portfolio companies at favorable valuations. Sales pace of private-equity owned businesses slowed notably after rate hikes began in 2022, contributing to a 65% increase in investments stuck in funds beyond their target lifespan from late 2021 through 2025.
In addition to financing headwinds, many firms are contending with risks in their technology portfolios. Heavy investments in software companies made during periods of low interest rates now confront disruption from advances in artificial intelligence and rising default risks as debt maturities approach. For example, Thoma Bravo faced the loss of a $5 billion investment in Medallia following a borrower default. Meanwhile, Clearlake Capital has seen significant markdowns on loans to software firms Cornerstone OnDemand and Symplr Software amidst tightening credit conditions.
According to industry data, private equity currently manages over $2 trillion in the U.S., and the sector’s struggles have wider implications for institutional investors, including pension plans and insurers. These investors are contending with below-average returns—approximately 7% in 2025, the weakest since 2011—and the difficulty of redeploying capital trapped in stagnant funds. This dynamic threatens their ability to meet growth targets.
Fundraising activity is also declining, with private-equity firms on track for their lowest capital raise since at least 2020. Through early September, $211.9 billion had been raised in 2026, compared with $334.4 billion for all of 2025 and $376.9 billion in 2024. Industry experts suggest future commitments will be reserved for select managers with strong track records and trusted investor relationships, while others may face closure.
Private credit, another key private-equity business line, is likewise under strain from the rising rate environment. Portfolio managers warn of increased default risk among leveraged companies if elevated borrowing costs persist, intensifying pressure on both firms and their investors.
Overall, the combination of higher interest rates, technical challenges in portfolio companies, and deteriorating fundraising conditions poses a significant test for private equity in the near term, disrupting an industry that has grown rapidly over the past decade. Though market cycles may eventually provide relief, the immediate outlook underscores a period of contraction and revaluation across the sector.