Billionaires Are Dumping PE Funds for Direct Deals: A Structural Shift Reshaping Private Capital Markets

What makes this finding particularly significant, however, is the counterbalancing shift: roughly half of respondents plan to increase their direct private equity exposure, pivoting away from the traditional limited-partner model toward hands-on, selective deal participation.[1] This bifurcation is not merely tactical noise; it represents a fundamental loss of confidence in the fee-laden, black-box nature of traditional fund structures at a moment when those structures are delivering measurably inferior returns. UBS emphasized that entrepreneurial investors are viewing this transition as an opportunity to deploy capital with greater selectivity and control, a posture that speaks to renewed conviction in underlying deal quality alongside deep skepticism about fund manager economics and execution discipline.[1]

The timing of this shift is anything but coincidental. Private equity has experienced what McKinsey characterizes as “two years of murky conditions,” punctuated by a long-awaited but still inadequate uptick in distributions in 2024.[19][26] For the first time since 2015, sponsors’ distributions to LPs exceeded capital contributions in aggregate.[19][26] Yet this apparent recovery masks a deeper pathology: distributions remain at historically low levels relative to net asset value, with five-year distributions-to-paid-in-capital ratios now the lowest in over a decade.[58] LPs are waiting substantially longer to see their capital returned, with median hold periods now stretching to 6.7 years—a full year longer than the two-decade average of 5.7 years.[25] In this environment, the calculus for ultra-high-net-worth investors has shifted decisively. Why allocate capital to funds charging 2% management fees and 20% carried interest when direct deals offer alignment, transparency, and the prospect of avoiding the administrative overhead that has systematically eroded net returns?

The Fundraising Crisis: 18,000 Funds Chasing $3.3 Trillion

To understand the significance of the UBS findings, it is essential to contextualize them within the broader fundraising environment confronting the private equity industry. According to Bain & Company’s midyear 2025 analysis, more than 18,000 private capital funds are currently on the road seeking investor commitments, with a collective target of $3.3 trillion in capital.[17][20] This staggering supply of fund vehicles competing for capital has created a supply-demand imbalance of historic proportions: there is approximately $3 of capital demand for every $1 of available capital supply.[17][20] This disproportionality reflects years of accumulating dry powder—capital committed but not yet deployed—combined with a persistent inability among most fund managers to exit portfolio companies at attractive prices.

The implications of this supply shock are profound and multifaceted. Fundraising in traditional private equity has declined for five consecutive quarters heading into 2025, with global buyout fund-raising down 23% in 2024 compared to a record 2023, and down 11% below the five-year average.[11][20] For the first quarter of 2025, no buyout fund exceeding $5 billion in size achieved a final close—a milestone not seen in a decade and a stark illustration of the market’s bifurcation.[17][20] Across the broader fundraising landscape, closed-end fund fundraising globally declined 28% in 2024 to $104 billion, the lowest annual total since 2012.[14] For mid-market and emerging managers in particular, the fundraising environment has become nearly prohibitive, with many smaller firms facing the unpalatable choice between strategic consolidation, shift to run-off mode, or outright closure.

Capital consolidation among top-tier performers has accelerated, with the top 10 global funds capturing 36% of all capital raised globally.[2] In Europe, the story is even more stark: the continent’s top five private equity funds captured over half of all capital raised.[2] Mega-funds—those targeting commitments of $5 billion or greater—raised $88 billion in early 2025 but represented only 6% of all funds launched.[2] This architecture creates a two-tiered market that increasingly resembles an oligopolistic structure: established, mega-cap managers continue to attract capital at attractive terms and can sustain their capital-raising cadence, while hundreds of smaller and mid-sized firms face protracted fundraising timelines, often exceeding 32 months, and struggle to secure commitments from risk-averse LPs.[12]

The Liquidity Impasse: 30,000 Portfolio Companies in Waiting

At the core of the fundraising crisis lies a fundamental liquidity problem that has metastasized over the past three years. As of mid-2025, private equity sponsors globally are sitting on a portfolio of more than 30,000 companies awaiting monetization.[6][22][30] This inventory of aging assets—nearly half of which were acquired since 2020 at elevated valuations—is equivalent to 8.5 to 9 years of exits at recent pace, according to PwC and Cherry Bekaert analysis.[21][30] The exit backlog represents a structural impediment to LP confidence, reduced fundraising capacity, and compressed distributions that collectively undermine the value proposition of traditional PE funds.

While exit activity accelerated in Q3 2025 to levels last seen in late 2021 and early 2022, the recovery remains insufficient relative to the scale of the problem.[13] Through October 2025, buyout firms completed 1,300 exits raising an estimated $621.7 billion—an impressive figure on its surface, but one that translates to roughly two years of required exit velocity to clear the current backlog at current holding-period rates.[13] EY’s Q3 2025 Private Equity Pulse reported that sponsors have announced exits totaling $470 billion year-to-date, representing a 40% increase compared to the same period in 2024, yet the growth trajectory remains insufficient to materially reduce NAV growth outpacing distributions.[22][29] LPs, observing this dynamic, have intensified their pressure on GPs: whereas one year ago roughly three-quarters of GPs rated LP pressure for distributions between 5 and 7 on a 10-point scale, today the majority rate it between 6 and 8.[6][22][29]

The structural constraint driving the exit backlog is multifaceted. Higher interest rates, which climbed more than 500 basis points in the United States between 2022 and 2023, fundamentally altered the economics of leveraged buyouts and strategic acquisitions.[14] A company financed at 6x leverage in a 2.5% rate environment requires substantially different operational performance to sustain debt service costs in a 5.5% environment. Many portfolio companies purchased at euphoric valuations during the post-pandemic low-rate era are now burdened by debt levels that strategic acquirers find unpalatable, creating a wide bid-ask spread that forces sellers to accept material discounts or extend hold periods in hopes of multiple expansion.

The Strategic Shift: Direct Deals Over Funds

The behavior documented in the UBS survey—billionaire clients rotating away from LP commitments toward direct deal participation—reflects a calculated response to these market dynamics. Direct investing, once the province of mega-cap family offices with dedicated investment infrastructure, has democratized over the past five years, with platforms and aggregators now facilitating smaller check sizes and syndicated deals.[37][40] For ultra-high-net-worth entrepreneurs, direct dealing offers several compelling advantages that are not available through traditional fund vehicles.

First, direct deals eliminate the fee burden inherent in the 2/20 fund model. While a typical private equity fund charges 2% in annual management fees and 20% in carried interest on profits, a direct co-investment or separately structured transaction can dramatically reduce or eliminate management fees, with carried interest—if applicable—often capped at 10-12% and weighted toward actual performance rather than reported valuations.[2][56] For a $100 million direct investment returning 2.5x over seven years, the fee savings can amount to $8-12 million relative to a fund structure, a material sum that flows directly to the investor’s net IRR.

Second, direct deals provide transparency, control, and alignment that are absent in blind-pool fund structures. An investor committing to a traditional fund has limited visibility into deal terms, management fee allocations, or operational priorities until well into the fund’s lifecycle. Conversely, a direct deal investor can conduct bespoke due diligence, negotiate governance rights, obtain board seats, and maintain real-time visibility into operational performance. For experienced entrepreneurs—the demographic that constitutes the core of the ultra-high-net-worth cohort surveyed by UBS—this transparency and control premium far outweighs the convenience of passive LP status.

Third, the exit environment has shifted in favor of direct investors. With traditional fund exits constrained by mark-to-market pressures and limited liquidity channels, direct investors can pursue bespoke exit strategies: continuation vehicles (which have surged to represent 90% of GP-led secondary volume), secondary transactions, or sponsor-to-sponsor M&A that may not be available to blind-pool LP investors.[2][56] Moreover, direct investors can participate in the thriving secondaries market, which has grown at a 22% year-over-year pace to raise $122.6 billion in 2025, providing an alternative liquidity valve absent for traditional fund vehicles.[8][56]

The Wealth Transfer Amplification Effect

The strategic recalibration documented in the UBS survey is further amplified by a secular demographic shift that will redefine capital flows to private markets for the next two decades: the Great Wealth Transfer. According to UBS’s analysis, 91 heirs became billionaires in 2025 by inheriting $297.8 billion—a staggering 36% increase compared to 2024’s figure of $218.9 billion, achieved despite fewer total heirs inheriting.[1][5][43] These new billionaires, predominantly based in the United States and Asia-Pacific and substantially younger than their predecessor cohort, are confronting the question of how to deploy inherited capital in an environment of elevated asset valuations, geopolitical uncertainty, and compressed returns.

For this emerging generation of wealth inheritors, the traditional PE fund model is particularly unappealing. These investors have grown up in a technological environment characterized by transparency, real-time analytics, and democratized access to information. The opacity of traditional fund structures—where LPs receive quarterly or semi-annual reports and have limited visibility into portfolio company performance until exit—feels anachronistic. Moreover, newer billionaires are more likely to possess specialized knowledge in specific sectors (technology, industrial, healthcare) derived from operating experience, making direct investing more aligned with their comparative advantage than passive exposure through diversified fund vehicles.

UBS estimates that $6.9 trillion in global wealth will transfer by 2040, with at least $5.9 trillion passed to children either directly or through spouses.[1][5] The vast majority of these inheritors, UBS found, desire independence and control over their capital: 80% want their children to “follow their own path” rather than relying solely on inherited wealth, while 67% hope their children pursue independent passions.[1] This generational philosophy is incompatible with passive LP status; it demands active engagement, real-time visibility, and the ability to shape outcomes—precisely what direct deals provide.

The Mega-Fund Consolidation Paradox

While the UBS findings document a rotational movement among billionaire investors away from traditional fund allocations, the fundraising environment paradoxically reveals extraordinary continued appetite for mega-cap managers. Thoma Bravo’s 16th flagship fund closed at $24.3 billion, the largest PE fund raised in 2024 or 2025.[11][12] Blackstone successfully raised a $20 billion vehicle in early 2025.[2] At the same time, the top 10 funds globally captured 36% of all PE capital raised, up from approximately 35% in 2024, while the median fund closing period compressed to 18 months in 2025 from 32 months in 2024.[12]

This bifurcation reflects a deliberate LP strategy to concentrate capital among proven performers while starving mid-market and emerging managers. The rationale is straightforward: in an environment of extended holding periods, compressed distributions, and limited exit channels, LPs prefer to partner with managers who possess the scale to navigate complexity, the operational capabilities to drive value creation independent of multiple expansion, and the secondary market expertise to engineer liquidity solutions (continuation vehicles, dividend recaps, syndicated sales) that smaller managers cannot execute.

However, this concentration strategy creates second-order effects that ultimately undermine the value proposition of even mega-scale managers. As dry powder accumulates among top-tier managers—McKinsey estimates $418 billion of dry powder as of H1 2024—deployment pressure intensifies, potentially forcing entry into deals at compressed multiples and reduced conviction levels.[14] Simultaneously, mega-fund managers are increasingly competing with each other for a shrinking pool of premium assets, compressing deal multiples and heightening execution risk for all market participants.

Exit Velocity and Valuation Dynamics

One of the most striking developments in 2025 has been the divergence between exit count and exit value. While the number of exits accelerated through Q3 2025—reaching 817 globally in Q3, the second-highest quarterly total since Q4 2021—the average transaction size declined materially.[49] Disclosed transaction values in Q3 reached $78.68 billion, down 24% from $103.70 billion in Q2, signaling that managers are accepting lower multiples for aging assets or exiting smaller holdings to maintain velocity and generate distributions.[49]

This pattern reflects a strategic calculus by GPs: faced with mounting LP pressure for distributions and the reality of extended holding periods eroding IRR profiles, managers are increasingly willing to accept 5-10% markdowns on long-held assets to generate liquidity, with nearly a quarter willing to accept discounts of 10-20%.[30] While this approach provides near-term relief by improving the DPI metric—the most critical performance measurement for increasingly impatient LPs—it simultaneously validates the thesis that traditional fund economics are broken. If GPs are willing to exit at discounts merely to return capital, how much operational value creation has actually been delivered?

The bifurcation is stark: a small number of premium assets (high-quality software businesses, essential infrastructure platforms, defensible industrials) continue to attract multiple bidders and command strong multiples, while the vast middle market of portfolio companies faces a significantly constrained buyer universe. This dynamic underscores why billionaire investors are pivoting toward direct deals: they can identify and participate in the premium asset transactions while avoiding the bottom quartile of PE exits, where valuations are increasingly compressed and capital erosion a material risk.

Alternative Liquidity Mechanisms: The Secondary and Co-Investment Boom

In response to the fundamental liquidity crisis, GPs and their institutional partners have engineered alternative monetization channels that are reshaping the private capital ecosystem. The secondaries market—once a niche strategy for offloading underperforming fund stakes at distressed prices—has evolved into a core portfolio management tool. In H1 2025, the secondaries market eclipsed $100 billion in aggregate transaction value, a 42% increase compared to the first half of 2024, with record growth expected to continue through year-end.[3][32]

Continuation funds have emerged as the dominant secondary market vehicle, representing approximately 90% of GP-led secondary volume.[2][56] Single-asset continuation funds (SACFs), which roll a specific mature portfolio company from an exiting fund into a new vehicle with fresh capital and extended time horizons, jumped 54% in volume in 2024 with 73 completed transactions, and the trend has accelerated through 2025.[2][56] These structures allow GPs to extend value-creation timelines without forced sales, provide existing LPs with liquidity optionality (they can exit for cash or roll proceeds into the new fund), and attract new capital from investors seeking de-risked, relatively mature assets with clearer paths to exit.

Simultaneously, co-investment activity—where LPs deploy additional capital directly alongside fund vehicles in specific transactions—has surged. Co-investment funds raised $43.5 billion in 2025, a 24% increase year-over-year.[8] Nearly 90% of LPs plan to allocate up to 20% of their capital to co-investment strategies, driven by the elimination of management and performance fees on those incremental capital deployments.[2][56] For mega-cap GPs, co-investment capacity has become a critical tool for expanding fund size beyond LP concentration limits and for attracting capital from investors skeptical of traditional blind-pool fund economics.

These alternative structures, while improving short-term cash flow dynamics, mask a deeper systemic issue: the deteriorating economics of the traditional 10-year fund model. If GPs require continuation vehicles to achieve target IRRs, if secondaries must step in to provide liquidity when traditional exits are constrained, and if co-investments are necessary to attract capital, then the baseline fund model is functionally broken. This reality is not lost on the billionaire cohort surveyed by UBS; it directly informs their shift toward direct deals and away from traditional fund allocations.

Sector and Strategic Considerations: Where Capital Is Flowing

Within private equity, capital is concentrating not just by fund size but also by strategy and sector. Growth equity, bucking the broader fundraising slowdown, raised capital up 14% year-over-year in H1 2025, with four of the 10 largest fund closes derived from growth strategies.[11] Technology and healthcare sectors continue to dominate investor attention, representing the targets of 44% of capital allocations according to Houlihan Lokey’s LP Compass survey.[27] These sectors are perceived as secular growth engines less correlated to macro volatility, making them appealing in an environment of geopolitical uncertainty.

Conversely, consumer and retail-focused funds are struggling, with consumer deal activity declining 10% year-over-year through Q3 2025 as traditional consumer goods companies face margin pressures, channel disruption, and weakening dollar dynamics.[12] Media and telecom have declined 13% in deal count, reflecting the secular pressures confronting legacy broadcast and telecommunications assets.[12] Within real estate, a sector that has absorbed substantial PE capital over the past three decades, dealmakers are increasingly selective: closed-end real estate funds posted negative IRRs of –1.1% through Q3 2024, but data centers—positioning themselves as the essential infrastructure backbone for AI deployment—generated 11.2% returns and attracted capital at scale.[14][26]

This sector-level bifurcation mirrors the dynamics visible in broader market allocations. Billionaires surveyed by UBS cited technology wealth growth of 23.8% in 2025, substantially outpacing consumer and retail (up 5.3%) and approaching industrial wealth growth of 27.1%.[5] These sectoral trends directly inform capital allocation decisions; investors naturally gravitate toward areas of demonstrated value creation rather than declining or structurally challenged industries.

Geopolitical Headwinds and the Reassessment of Global Allocations

A critical undercurrent in the UBS billionaire survey and broader private capital markets is the reassessment of geopolitical risk and capital deployment geography. Tariffs emerged as the top concern for 66% of billionaire respondents, with major geopolitical conflict cited by 63% as a market headwind and policy uncertainty flagged by 59%.[5] This risk awareness is translating into tactical reallocation decisions: whereas North America remained the preferred destination for 63% of billionaires in prior years, the appetite for emerging markets equities—particularly Greater China—is moderating as political uncertainty and trade tensions escalate.

For institutional allocators managing large PE portfolios, geopolitical considerations are prompting a pivot toward diversified, multi-jurisdiction deployment. Morningstar’s survey of over 500 global asset owners with $19 trillion in combined assets found that four in 10 are either reducing or planning to reduce their allocation to U.S. assets directly in response to policy uncertainty and tariff risk.[24] This geographic reallocation has implications for which GPs and fund vehicles attract capital: managers with established platforms across North America, Western Europe, and Asia-Pacific are better positioned to capture globally diversified capital flows than single-geography specialists.

For direct investors—the constituency toward which billionaires are increasingly gravitating according to UBS—geopolitical risk is often more manageable through selective deal sourcing and bespoke structuring. A direct investment in a defensive infrastructure asset with inflation-linked revenue streams and long-term contracted cash flows presents different geopolitical risk characteristics than a broad fund exposure to a diversified portfolio of companies across multiple jurisdictions and sectors.

Strategic Implications for General Partners

The UBS findings and underlying market dynamics carry profound strategic implications for general partners across the private capital spectrum. For mega-cap managers, the message is clear: fundraising will remain viable through scale, proven operational value creation, and demonstrated secondary market sophistication, but at the cost of modestly compressed economics and heightened scrutiny from increasingly demanding LPs

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