Will capital concentration in US megafunds irrevocably change private equity?

In the early days of the PE ‘boom’ – arguably going back 15 years or so – there was a low barrier to entry, with multiple new and exciting themes available to investors. At the same time, the pool of institutional investors was growing significantly – not least following the financial crisis, when a prolonged period of historically low interest rates saw many looking to diversify into asset classes with the potential for higher returns than traditional fixed-interest. 

This environment conspired to favour those GPs who, during this time, consolidated a huge amount of capital and created robust processes, turning them into the megafunds of today. This then provided investors with a golden opportunity – a combination of diversification, relatively consistent performance, lower dispersion, scale and manager certainty. 

Move forward to more recent years and family offices and high-net-worth investors have entered the private equity market. In taking their first steps, many have been looking for the certainty they’ve seen in the retail funds universe, so it’s natural that they will be drawn to the relative security of the bigger PE players.

In the case of institutional investors, such as pension funds, it’s notable that many have built up a relationship with the megafunds over time, not least because of the very long nature of their investment horizons. This can become cyclical, with those LPs taking advantage of further opportunities presented by the megafunds, such as co-investment vehicles, secondaries and other options, within the relative security of that already established relationship. As a result, many LPs have been consistently loyal to the megafunds. 

Ultimately, success has bred success.

So, with this heavy capital concentration in US megafunds, is the industry at a bifurcation point that is going to permanently split megafunds from the rest, with no possibility of non-megafunds ever breaching the divide?

It’s a difficult question to answer because there are so many imponderables that could come into play. Take inflows, for example. While megafunds took a large proportion of capital raised in 2025, the total for that year - $286bn – was much lower than in the previous four years (with $405.1bn raised in 2023). So, are inflows going to keep falling or will funds start flowing back into PE – and if they did the latter, would they be more equally distributed across PE fund sizes?

And what about the bigger global economic and geopolitical picture? At present we’re seeing tariff wars, supply chain challenges and conflicts in key regions that are all impacting trade. Might this lead to a decline in the interest rate environment, which, as we can see historically, was at least in part responsible for the boom in PE? If so, that could well generate a huge upswing in capital deployment again. Conversely, however, if interest rates remain where they are (or go higher) the story will only likely get more challenging for the non-megafunds.

Then consider what would happen if there was a real dislocation in the marketplace, where there's a huge swathe of distressed assets. After all, the whole PE theory is based on buying assets that are either cheaply financed or cheap to begin with and then realising value over time. It could be argued that megafunds would have an advantage because they would aim to achieve that value over a five-year or a 10-year horizon, which is typically more attractive to institutional investors. 

All this said, and even weighing up a range of possible outcomes, it really does seem like US PE is at an inflection point that will see megafunds continue to attract fundraising, not least because of the comfort level that they can offer their investors in terms of certainty.

So, if the bifurcation is permanent and megafunds are going to keep gaining ground, it’s natural to ask whether mid-market and smaller funds are going to fade into obsolescence. The answer to this is always going to be no. If megafunds captured 49.2% of the market in 2025, then non-megafunds captured the remainder.

The reality is that there will always be appetite for non-megafunds. While megafunds have their distinct advantages, so do their smaller counterparts, not least investment flexibility, access to a larger opportunity set, lower entry valuations and the potential to create more value through operational improvements and add-ons.

It’s been argued in certain quarters that the way forward for non-megafunds is to become more specialised, to operate in more niche markets. And while that’s the approach that some may take, it’s not necessarily a route to success.

To succeed in the current environment, PE funds, irrespective of size, are going to have to do what they do with utmost operational efficiency. At the end of the day, it's about margins. Whether they’re an emerging manager or a megafund, the better they are at running a lean, high-quality efficient operating model that can deliver returns to their investors and still make money for themselves, the more likely the chance of success.

And this has to be achieved in a market that is not without its challenges, irrespective of fund size. With 48% of PE firms reporting understaffing and a 279% 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.

Central to operational efficiency will be technology and data – something that is already a pressure point for funds of all sizes. LPs are increasingly expecting data to be provided in more granular detail in ways that are easy to access, but this is often in an environment where GPs are struggling with disconnected data across systems and third-parties.

Perhaps more significant is how artificial intelligence (AI) can be best deployed in helping deliver efficiencies. This is already a clear priority for many US PE firms, with an EY survey from Q4 2025 indicating that 84% of PE firms have already appointed a Chief AI Officer (CAIO). What’s more, nearly half of PE respondents are investing between 25% and 50% of their budgets in AI projects, with 38% expecting to spend more than half of their total budget on AI, highlighting just how central it has become to their strategy.

It’s around technology that megafunds have traditionally had an advantage in that they have the money to spend on solutions, be that from external providers or ones they build in-house. However, third-party AI and tech providers can potentially provide solutions that will democratise the advantages of scale, which may well benefit the non-megafunds.

Ultimately what matters here is strategy, across every aspect of operations, but perhaps most specifically in tech and AI. Technology isn’t going to deliver the benefits possible if there isn’t a cohesive strategy sitting across all verticals as well as third-parties. The winners – be they megafunds or non-megafunds – are going to be the ones who leverage AI and tools in a way that helps them operate efficiently and move up the value chain.