A lack of asset sales is causing ripple effects in the private-equity industry, hindering fundraising, boosting the secondary market for fund stakes, and encouraging junior dealmakers at larger firms to strike out on their own, according to partners at advisory firm Monument Group.

Private-equity firms have found it harder to sell portfolio companies since interest rates began rising in early 2022. The value of exit deals across the U.S. fell 12% to $293.7 billion this year through June compared with last year's first half, according to research provider PitchBook. U.S. buyout fund managers ended June holding a record 13,509 companies, the data show.

Fewer exits means fund managers return less capital to the limited partners who invest in their funds than when deal flow is unimpaired, while the general partners see their carried interest, or share of deal profits, dwindle.

"We're in this world where LP capital is generally constrained because they haven't been getting [cash] distributions," said Lori Campana, a Monument partner.

"The lack of liquidity is hitting the GPs too," added partner John McCormick. "There are these junior partners [who] are waiting for their carry checks. They're not seeing that capital...being monetized."

Campana and McCormick spoke during a meeting with reporters that the Boston-based placement agent and secondaries adviser held in New York last week. The discussion highlighted the changes reshaping the industry as both investors and fund managers adjust to disrupted fundraising cycles, investment flows and capital distributions. Here are some of the main effects described by the executives during the meeting:

Capital concentrates among established managers

With less capital sent back to fund investors, they have become more selective in making new commitments, typically favoring established, familiar private-equity managers. That preference makes it harder for younger or less-known buyout shops to raise fresh capital, even some with strong performance records.

"They're just backing their top names," McCormick said of private-markets investors. "There's some managers that have done probably pretty well but haven't maybe made the cut."

Chris Webber, a fellow Monument partner, added that investors might disregard firm size to focus on those they see as the best performers in each segment, from shops that pursue lower midmarket deals to managers of large funds that aim for bigger transactions.

"The [fundraising] bifurcation is happening up and down the private-equity spectrum," Webber said. "In each market there are winners and losers."

Junior partners jump from larger firms to set up their own shops

As many private-equity firms struggled to sell assets and raise new funds in recent years, some dealmakers see fewer opportunities to use their skills and get in line for big payouts from profitable exits. More are departing to form their own shops, hoping they can attract investors based on their experience.

"In a lot of these larger firms, succession is a big issue and there's a ceiling on a lot of younger professionals," Webber said. "If they don't see a way to get their carry or move up to the next level, then they are going to strike out on their own."

The trend is fueling a rising number of spinouts from larger firms and the creation of other first-time fund managers, as well as independent sponsors that raise capital deal-by-deal rather than collecting a fund for several investments, the Monument partners said.

"More and more investors who've co-invested behind GPs now are comfortable...going further out the risk curve and backing individual deals with certain [independent] sponsors," Webber added.

As the secondary market heats up, use of continuation vehicles surges

The dearth of exits is also driving demand for so-called continuation vehicles that scoop up older assets and enable private-equity firms to extend ownership of valued holdings while giving LPs in mature funds the option of cashing out. Once considered a last resort, continuation deals are becoming more common and now represent a critical tool for fund managers to generate liquidity.

Asked whether some fund investors are seeking to limit buyout firms' use of continuation funds, Christine Patrinos, a Monument partner who co-leads the firm's secondaries group, said recent fund contracts show "quite the opposite."

"GPs are beginning to build in their docs the ability to make sure they can" set up continuation vehicles, she said.