Smaller private equity firms face pressure as borrowing costs rise

Smaller private equity firms are under increasing financial and operational strain due to rising borrowing costs, lower portfolio performance and a lack of successful exits, according to a Wall Street Journal report. New State Capital Partners, managing around $2 billion, has experienced a decline in staff, with about a third of its workforce departing in the past year, including two of its original three founders.

The departures coincide with uncertainty surrounding carried interest payments from the firm's second fund, which commenced investments in 2018. Underperforming portfolio companies and higher financing costs have complicated plans for profitable exits. The article emphasizes the distinct challenges faced by private equity firms with assets under $15 billion, who typically lack the diversified income sources and financial backing of larger alternative asset managers like Blackstone and Apollo.

Additionally, fundraising conditions have worsened, with private equity firms raising roughly $222 billion through September 2026, compared to $330 billion raised in 2025, as institutional investors focus more on distributions and established manager relationships. In response, some firms are modifying their investment tactics. New State is broadening its focus to independent sponsorship deals, while Aterian Investment Partners has decided not to raise a new fund.

The exit slowdown is also impacting recruitment and retention throughout the industry, as delayed realizations lower carried interest expectations and put pressure on firms to manage existing investments for extended periods.