(Bloomberg) — Outside the chandelier-laden function rooms, away from the cameras and far from the stuffy booths in the main conference halls, the giants of private equity were getting honest with each other.

Most Read from Bloomberg

Despite many public proclamations that the industry has made it through the worst of this new world of higher interest rates relatively unscathed, life is actually not that great, they whispered. Investors are getting antsy, they added, and the pressure to return their money back to them is becoming so intense it may spell a make-or-break moment for many general partners.

“About every ten years we have some sort of financial crisis or reckoning and during this time it’s typical that about 20% of the GPs don’t re-raise another fund,” said Hugh MacArthur, chairman of Bain & Co’s private equity practice. “The debate is how many firms are stuck in this area right now.”

MacArthur was on the sidelines of the SuperReturn International conference held this week in Berlin, one of private equity’s most lavish annual gatherings in Europe. Tickets for the four-day affair can go for nearly $11,000.

Still, thousands of attendees donned their high-end suits and packed into the city’s InterContinental Hotel, sipping on bubbles and beer as endless trays of drinks and canapes passed around them at networking events. Some executives flocked to private clubs, boat parties and rooftop garden dinners around the city in the evening. The rappers Flo Rida and Fatboy Slim performed a smoke-filled set at one such party held in a Berlin warehouse.

On stage, the mood was upbeat, with a chorus of executives announcing that the industry may have gone through a rough patch but that’s all coming to an end and it will soon be stronger than ever. The fact that this edition was the most attended in SuperReturn’s history with more than 5,000 participants should be proof of PE’s health, the thinking was. Some nearby hotels even ran out of meeting rooms to rent.

But behind closed doors, executives didn’t try to escape the facts: Distributions — the return of capital to investors — are at their lowest level in more than a decade. That’s been a problem for the industry ever since the Federal Reserve and other central banks around the world began ratcheting up interest rates, but attendees said the pressure is intensifying and the tone from limited partners is getting harsher.

Story continues

“I’m here to tell you everything is not going to be OK,” Scott Kleinman, co-president at Apollo Global Management Inc., said at the event, in a rare admission from a leading figure about the challenges the industry faces. “The types of PE returns it enjoyed for many years, you know, up to 2022, you’re not going to see that until the pig moves through the python. And that is just the reality of where we are.”

High rates present a problem for the private equity industry on multiple fronts. On the one hand, they make it more costly to refinance existing debt. They also tend to crimp dealmaking and hinder valuations, leaving many private equity giants unable, or unwilling, to sell their portfolio companies.

It’s all putting pressure on the pension funds and endowments and other investors that backed them, known as limited partners in industry parlance. Strapped for cash, these investors can’t pour money in any future funds unless they see some returns now.

Here’s the thing, though: Private equity relies on the endless cycle of raising money to make acquisitions, exiting via a sale or initial public offering and then returning money to investors. With one key piece of that process gummed up, many buyout funds worry it will cause a breakdown of the whole machine.

“There’s a growing number of GPs that have not done a deal in 12 months — you’re not buying and you’re not selling.”’ Sunaina Sinha, global head of Raymond James’ private capital advisory group. “Private equity runs on a clock of investment period and harvest or exit period. That clock is ticking.”

It’s not just the private equity executives that were fretting at this week’s event. In hallways and wooden huts dotted around the conference their counterparts focused on private credit had similar worries. Many are struggling to return cash to their investors with banks flooding back into the market, contesting deals and undercutting direct lenders on margins.

To be sure, many buyout shops have recently raised funds and won’t need to come to market for another couple of years, which allows for some breathing room. Still, the SuperReturn attendance ratios showcased some of the pressure the industry is facing: Far fewer limited partners attend than general partners.

Of those that did, many opted to conceal their name badges when walking though hotel lobbies to avoid being hounded by buyout fund managers.

Buyout firms aren’t holding still. In their hunt for financing, many have turned to net-asset-value loans, which is, at times, considered a controversial form of financing because it lets managers layer more leverage on their funds late in their cycle. The borrowing comes on top of loans taken out by many managers when they first acquire a company for their funds.

Longtime backers of private equity have grown critical of such moves and are also now putting greater scrutiny on buyout funds’ existing portfolios. As they negotiate potentially supporting future funds, institutional investors are increasingly asking private equity managers to explain why so many aging companies are piling up in their existing portfolios.

“There’s hunger for capital,” said Georg Wunderlin, global head of private assets at Schroders Plc. “But availability of capital is no longer what it was.”

Ever the optimists, private equity managers took to the stage this week and crowed that dealmaking would rebound in the coming months with rates poised to fall around the world. Huddled in conference rooms all across Berlin, they pointed to the fact that the European Central Bank delivered the long-awaited interest-rate reduction it’s been flagging for months on Thursday.

Still, the year’s early data show that rebound isn’t necessarily in the offing, with 2024 still on track to be the second-worst year for exit value since 2016, according to an analysis by Bain & Co.

Besides, as one SuperReturn attendee put it: if everyone who says they’re going to do a deal in the next year manages to do so, there wouldn’t be enough bankers to execute them anyways.

–With assistance from Kat Hidalgo.

Most Read from Bloomberg Businessweek

©2024 Bloomberg L.P.