Private equity fundraising has become a story of haves and have-nots, as a prolonged slowdown in firms selling portfolio companies leaves investors with less cash to put into new funds. Giants like Blackstone are still raking in capital while some smaller firms struggle to attract investors, forcing newcomers to find creative ways to stand out.

Some firms are betting that they can differentiate themselves by pushing AI to transform companies and boost returns. While larger private equity firms are also using AI across portfolio companies, such newcomers are making it central to their investment strategies.

That includes Aldaron, which has dubbed itself a “transformation equity firm.” The 12-person firm uses an in-house team of engineers to deploy AI at the companies it acquires, though it emphasizes that its goal is to use the technology to grow businesses without cutting jobs.

In a challenging private equity fundraising environment, “the core message that resonated with people is this transformation equity story,” said Aldaron Partners co-founder Evan Mendez, who previously worked on technology investments at the Carlyle Group. He said the firm has a “hybrid group of investors and engineers that source a company, build the thesis together, cocreate a vision with the management team, underwrite the deal, put their own capital into the deal, and then embed into that company to go execute the road map.”

Aldaron completed its first acquisition in March, buying a majority stake in Oak Point Partners, an investment firm that buys remnant assets like IP and recovery claims. Aldaron funded that deal with money from early investors, some of which also made direct investments in Oak Point. Aldaron continued raising money afterward, closing its first fund in October with $884 million from outside investors and more than $950 million in total including the coinvestments, Mendez said.

The broader fundraising squeeze comes amid a yearslong slump in sales and initial public offerings of private equity–backed companies, leaving many firms with holdings they picked up in the low-interest-rate years of 2020 and 2021. Private equity firms are sitting on nearly 4,600 U.S. companies they’ve owned for at least five years, according to an August PitchBook report, longer than the industry’s typical three- to five-year holding period. That means less cash is returning to the pension funds, endowments and other investors, known as limited partners, leaving them with less money to commit to new funds.

The biggest private equity firms often have an edge in competing for fresh capital thanks to their long track records, along with their sizable sales teams that allow them to reach various pools of capital including wealthy individual investors. Smaller fund managers, particularly those that are trying to raise their second or third funds after struggling to return money to investors, could be squeezed out entirely.

“We expect many managers to exit the market, and we are already seeing this as fundraising becomes more challenging,” said Mitchell Mansfield, a managing director at Kroll and global head of fund solutions, which advises fund managers on restructuring and winding down funds.

To be sure, leaning into AI is just one way smaller private equity firms are finding ways to distinguish themselves. Some are narrowing their focus to a particular sector rather than competing with funds that invest across industries. They can also offer investors more attractive terms, such as opportunities to coinvest in deals, often with lower fees. Fund managers can also put more of their own money into investments.

Broadwing Capital Management, for instance, started buying companies before completing its first institutional fundraising, betting that an existing portfolio would help win over investors. “It’s a lot easier to talk about an investment with folks than about the theory of a new firm,” said co-founder and managing partner Eliot Kerlin, who launched Broadwing after 15 years at middle-market private equity firm Insight Equity.

Broadwing, which focuses on manufacturing, industrial services and distribution businesses, launched in 2022 and made its first three acquisitions using money from outside investors and some of the founders’ own capital before hiring a placement agent to raise a larger fund. The firm structured its early investments so they could become part of a growing fund as Broadwing raised more money. The strategy paid off—Broadwing closed its $440 million inaugural fund this August, surpassing its fundraising goal by $90 million. By then it already owned six companies.

Goldman Sachs Says CEOs Are ‘Leaning In’ on Strategic M&A

Strategic megadeals are dominating the tech mergers and acquisitions landscape right now, Kim Posnett, Goldman Sachs’ global co-head of investment banking, said at The Information’s WTF Summit on Tuesday. That will likely continue, Posnett said, and the bank has a robust pipeline of deal talks across the board.

“They’re talking about really big deals, industry consolidation. They’re talking about M&A to bridge strategic gaps. They’re talking about M&A to drive growth. They’re talking about M&A to help reposition themselves in this new AI landscape,” she said.

“CEOs are leaning in right now and they want to make big strategic bets,” she said, noting that there’s “a ton of” strategic activity in tech specifically. Posnett’s comments came ahead of DoorDash’s Thursday announcement of a $17 billion deal to buy Instacart. (The Information was first to report last week that Instacart was in sale talks.)

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