Are US megafunds reshaping private equity in Europe?

When considering these questions, the natural starting point is to view the capital concentration in US megafunds in the broader market context. After all, data shows that smaller and mid-market funds typically offer greater potential for outperformance than megafunds when it comes to return on investment. So, why would limited partners (LPs) choose to put their money in funds with potentially lower returns? 

There’s an argument to be made that this focus on US megafunds is a result of many LPs prioritising operational convenience, brand recognition and risk aversion – preferring to invest with managers who demonstrate consistent distribution discipline. From an operational perspective, it's easier for LPs to manage a lower number of GP relationships, as this not only reduces the due diligence burden, but also results in reporting simplicity. 

This approach also has a tendency to become cyclical. Once LPs get into relationships with the larger general partners (GPs), they are often ‘locked in’ (in a positive way). Those GPs can then propose other platforms, such as co-investment vehicles, secondaries and other options, which LPs can opt into, within the relative security of an already established relationship.

This doesn’t mean, of course, that LPs are ignoring GPs outside of the US megafund ecosystem – money is still going to smaller and mid-market managers. However, it’s a shift that is clearly gathering momentum.

With this increased level of LP engagement, US megafund managers have a considerable pool of funds at their disposal. As such, they are able to cast their nets widely for investment opportunities. And, as the data shows, many are broadening out their activities into Europe – with a number of factors driving this move. 

One key element is that European capital markets are fragmented, making scaling harder for firms in the Continent – which has been clearly demonstrated by the recent drop-off in EU megafund fundraising. US funds increasingly have larger pools of permanent capital that European markets can’t match. 

Alongside this, Europe is creating the perfect market for US GPs. To begin with, Europe is generally offering cheaper valuations than the US, especially in software, industrials, healthcare and defence. The latter is especially creating significant opportunities – according to a report from McKinsey & Co, European defence spending could reach about €800bn by 2030, creating very fertile ground for US GPs.

All of this is creating an environment that is very attractive to US megafunds, with a range of opportunities coming into play.

With US megafunds attracting LP capital, arguably at the expense of European megafunds, it’s important to consider whether this shift will continue, and what this means for the entire European PE industry.

It’s worth re-emphasising at this point, how overall PE fundraising in Europe increased by 16% to €147bn in 2025. Of particular interest here also is that US LPs are actively investing in European funds. This data would clearly seem to indicate that European funds are still highly attractive – it’s just that there is a move away from megafunds into smaller and mid-market funds. Indeed, in the year to September 2025, around 32% of deal value in Europe came from deals between €1bn and €5bn, an increase on the previous two years.

So why is this the case?

It could be argued that in the European mid-market, local firms remain highly competitive because they understand the markets better than US funds. They have the local expertise, they know how the fragmented regulations in each country works, they know the various local markets, they know the sector niches that require deep local knowledge. So this is their advantage. 

Another reality is that they have the performance advantage. As a rule, mid-market funds outperform the megafunds. This, allied with the local expertise and knowledge, allows them to  earn the confidence of those LPs who are willing to accept any associated investment risk.

If we follow the data, we have to ask whether the current situation will lead to a permanent reshaping of the European PE market. And that is perhaps a harder question to answer.

On the face of it, what has happened recently appears to be a natural evolution of the market – a structural shift with cyclical elements. LPs are looking for convenience and certainty, so they may well be happy to have fewer relationships but with larger GPs. On the GP side, having these established relationships and larger pools of capital means that US megafunds can focus on operational efficiency and higher-quality servicing of LPs – all of which may create a virtuous circle.

While this may well have a direct impact on EU megafunds, it’s unlikely that US megafunds will gain a full market monopoly. Indeed, European GPs in the smaller and mid-market space have the distinct advantage that comes with local expertise. And it maybe that US megafunds will benefit from collaborating with these managers.

That said, the structural challenges facing European GPs should not be underestimated. Many firms are reporting talent shortgages and understaffing, and with there also being a surge in demand for transformation professionals – combined with senior hiring cycles exceeding 180 days – the capacity to modernise operations is constrained at precisely the moment it is most needed.

What’s more, the smaller players will likely continue to perform better than the megafunds – although they may have to focus much more on niche and specialist markets. The challenge they may come up against, however, is in scaling their operations in the face of US megafunds and strong local mid-market GPs.

In light of this apparent reshaping of the US/EU PE market, exactly what actions should European GPs of all sizes be thinking of taking right now?

First of all, it’s essential to accept that Europe is, for the foreseeable future, becoming a deployment destination for US megafunds, potentially at the expense of domestic megafunds. Those GPs who lean into this to create partnership and co-investment opportunities could well reap the rewards of doing so.

Concentrating on competitive differentiators will also be key. This could be via a strong focus on AIFMD and DORA compliance, or specialising in certain sectors such as defence, aerospace and industrials where regulations and local relationships can involve barriers to entry.

What’s more, the rise of automation and artificial intelligence (AI) can’t be ignored as part of building broader operational efficiency, and the sequencing of this transformation is critical. Firms that attempt AI deployment before having core system stability will risk amplyfing existing data problems, not solving them.

GPs will need to look at which processes they can automate, and whether they outsource those processes and systems (among others) to a third party or build them in house. Modern fund administrators are evolving from back-office processors to real-time strategic partners, with AI-driven workflows capable of materially reducing NAV preparation time. For firms facing the talent constraints, this outsourcing route may be the most pragmatic path to operational parity.

On the surface, there’s room for everyone in the European PE market, providing that they're offering something for which there is a demand, and that they're doing it well. The potential losers are the one who don’t get the message from the market. Otherwise, this is just another step in the evolution in the industry, albeit one that could have far-reaching ramifications.