As the number of new PE funds shrinks, search funds gain new appeal to managers

In the early years of this decade, private equity firms in the U.S. accelerated their fundraising at an unprecedented pace. From 2020 to 2022, the annual count of new PE funds more than doubled, as investors rushed to capitalize on a pandemic bull market in which dealmaking of all kinds was unfolding at a furious clip.

But that bull market didn’t last for long. And neither did the PE industry’s fundraising flurry. Since 2022, the annual number of new funds raised has declined in three consecutive years. And 2026 is shaping up to be the slowest year yet.

Through the end of Q3, U.S. PE investors have closed 348 new funds in 2026, on track for the lowest annual total since 2016. Capital invested is falling off, too. Those 348 funds comprise just $222 billion in new commitments from LPs, on pace for the lowest fundraising total since 2020.

And the capital that’s being raised is more likely than ever to go toward large funds managed by established firms. More than 85% of capital committed by LPs so far this year has been concentrated in vehicles larger than $1 billion, the largest share in at least the past decade.

For emerging fund managers and other smaller PE investors who operate far from the world of billion-dollar funds, these numbers paint an intimidating picture. As the overall fundraising pie shrinks, smaller managers find themselves vying with the industry’s biggest names for a limited amount of LP dollars. It’s a difficult fundraising battle for smaller managers to win.

“If you’re a small firm raising your second or third fund, but you haven’t been returning capital to investors, it’s going to be hard to compete against firms with the track record and the relationships with LPs,” says Jack Pitts, co-founder of Salt Creek Advisory, a sell-side investment bank focused on the lower middle market. “In times of uncertainty, people are going to go back to the old safe and reliable thing.”

Diagnosing PE’s fundraising slowdown

As Pitts indicates, whether a PE firm is returning capital to its LPs is a question of great importance in the current fundraising landscape.

Just like in the world of VC, PE exits in recent years have not proceeded at the pace investors might have hoped after the onslaught of deals that occurred earlier in the decade. As of the end of Q3, the average PE portfolio company had been owned for 4.2 years, the longest period on record.

At the same time, PE funds are also sitting on mountains of dry powder. As of the end of 2025, the U.S. PE industry was holding onto nearly $1 trillion of unspent LP capital.

LPs are typically mandated to allocate a certain percentage of their assets toward PE. When large sums of capital are still locked up in active funds and portfolios, they have fewer dollars on hand to invest in new funds. And when LPs have less capital on hand, they’re typically less inclined to take risks. Emerging managers are left to feel the squeeze.

“LPs are definitely being selective,” Pitts says. “A lot of LPs are concentrating their capital with established managers. Instead of spreading, say, $100 million across five smaller funds, they’re allocating that entire $100 million to one fund.”

A surge in search funds fills the gap

So, what’s an emerging manager to do? Some will still try to raise new funds. Others might postpone planned new fundraising processes into the future. Still others may decide against raising new capital and devote their energies to their current portfolios, joining the growing ranks of PE zombie funds.

Increasingly, though, Pitts says he’s seeing some of these small managers pivot to a different model for buying companies: search funds, where the manager (also known as an independent sponsor) raises money from LPs to back a single acquisition, rather than a whole portfolio of investments.

“Independent sponsors have taken off like wildfire,” Pitts says. “That’s a huge thing we’re seeing in the lower middle market.”

Search funds usually require investors to raise a much smaller sum of capital than a standard buyout fund. They only need enough capital for one deal, and that one deal is also typically smaller than most PE investments. A standard search fund target might still be below $1 million in EBITDA, according to Scott Yenor, the CEO of Dealade, an M&A advisory firm that works with companies considering a sale.

The typical search fund also tends to be a riskier proposition than a diversified buyout fund, for the simple reason that performance is tied to one asset, rather than being spread out across many.

For these reasons—a smaller capital outlay and a higher risk profile—search funds are often a good fit for different kinds of LPs than buyout funds. Specifically, they can make for an attractive bet for high-net-worth individuals and family offices, who often are looking to deploy smaller sums and assume more risk than the sorts of massive pension funds and endowments that tend to make up the LP base at billion-dollar buyout funds. In this sense, search funds can be a way for PE managers to raise capital outside the narrowing confines of the standard fundraising market.

“The search fund is solving for a size that not a lot of investors are willing to do,” Yenor says.

As a fund manager, a search fund can also be a way to start building the sort of track record that many larger LPs want to see before they’re willing to write a check to a standard buyout fund.

But raising a search fund is no panacea for PE managers. Eventually, they’ll still need to find an exit. No matter what type of vehicle they raise or how much capital they bring in, a PE investor’s ability to raise their next fund will always rely on their ability to return capital to their LPs, whoever those LPs might be.

“For an LP, it just depends on, ‘What are you actually going to do with our money?’” Pitts says. “Are you going to return it? Or are you just going to collect a nice fee?”

Subscribe to the Data Minute newsletter