They Earn Billions of Won a Year, Yet Tremble at Rate Hikes? [PE Now]

Global PE Firms Lose Talent as High Rates Squeeze Carry Payouts
Acquisition Loans Taken Out at Low Rates Are Coming Due
High Rates Are Concentrating Investment in Larger Firms

"Even after this fund is wound down, it may be difficult to pay out carried interest."

When these words were heard in a private equity (PE) firm's conference room, the mood in the room quickly turned tense. The reason was that Fund A, which had been investing since 2018, had fallen short of expectations. Employees began to worry that Fund B, which started investing in 2021, might follow the same path. One by one, employees began to resign, and within a year, one-third of the firm's workforce had left. Two of its three founding partners were among them. This happened at New State Capital Partners, a PE firm based in New York State. The Wall Street Journal (WSJ) reported on the case, saying that "high interest rates are causing significant difficulties, particularly for mid-market funds."

The PE market is groaning under the weight of high interest rates. For PE firms that borrow money to acquire companies, interest rates affect far more than just interest expenses. The value of their portfolio companies falls, the pool of potential buyers shrinks, making it harder to sell, and cash available to return to limited partners (LPs) dries up. Ultimately, carried interest disappears, too. The case above is the final stage in this chain reaction. In South Korea, disputes over carried interest have not yet led to resignations or departures, but similar conditions are building, leaving the industry on edge.

The Reality Behind Salaries Worth Billions of Won: "Carry"

PE is known in the financial industry for offering some of the highest salaries. There have even been reports of a recruitment falling through after a candidate with six or seven years of experience asked for an annual salary of KRW 500 million. An executive at STIC Investments also made headlines after receiving about KRW 17 billion in 2021, when the firm's investment in HYBE generated a return of more than nine times its investment.

PE investment professionals earn their base salaries and bonuses from management fees, which typically amount to 1% to 2% of a fund's committed capital each year. The big money comes from carry, or carried interest, which is typically around 20% of the fund's profits. Reports of PE industry professionals receiving bonuses worth tens of billions of won refer to this carry. But earning carry is not easy. The firm only gets its share after returning investors' principal and a preferred return, or hurdle, of around 8% a year to LPs. Even if book profits exceed the hurdle, there is nothing to distribute unless the firm sells its portfolio companies and receives cash.

In other words, carry can only be realized by selling portfolio companies at a fair price, and high interest rates are undermining this condition at every turn. As borrowing costs rise, the outlook for portfolio companies worsens. Buyers, too, must borrow at higher rates to make acquisitions, so they set higher required returns. This means they are willing to pay less for the same company. This is why mid-market firms focused solely on buyouts are the first to feel the strain, unlike larger firms that can offset losses with other businesses.

Debt Gets More Expensive, Buyers Disappear... and Funding Dries Up

The funds feeling the greatest pain are those that acquired companies around 2020 to 2022, when interest rates were near rock bottom. Most acquisition financing carries fixed interest rates, so these funds can weather the situation for now. The problem is maturity. Loans taken out in 2021, typically with five-year terms, start coming due this year. Refinancing acquisition financing that was secured at rates in the 4% range at the time of the 2021 acquisitions now means accepting rates of around 7%. For a loan of KRW 100 billion, annual interest expenses would rise by more than KRW 2 billion. Some large portfolios also have acquisition financing worth hundreds of billions of won coming due at the end of this year. More firms are buying time by extending loan maturities rather than refinancing.

Sellers do not want to lock in losses. The result is a strategy of "holding on instead of selling." According to global consulting firm McKinsey, the average PE holding period was 6.6 years last year, longer than the 6.1-year average from 2011 to 2020. Only 19% of companies acquired in 2021 had been sold by the end of 2025. Continuation funds, which transfer assets to new funds to extend holding periods, have also become more common. But in a high-interest-rate environment, simply holding on comes at a cost. Interest expenses pile up, and the hurdle rises every year.

Without sales, there is no money to return to LPs. In the year through June 2025, PE firms distributed an amount equal to 6% of their assets under management to LPs, one-third of the 16% average from 2015 to 2019. LPs that have not received their money back are closing their wallets to new funds. According to PitchBook, 523 global PE funds had been raised by September 2026, fewer than one-third of the 1,840 raised in 2023. And the money is flowing mainly to larger firms, doubling the average fund size from about $360 million to $700 million. Fundraising has fallen sharply, particularly for funds in the $250 million to $500 million range. This is the core size range for mid-market firms like those behind Funds A and B mentioned above.

The High-Interest-Rate Burden Is Building in South Korea, Too... Rates This Month in Focus

The trend of money flowing only to places considered safe is also evident across countries. South Korea's share of PE investment in the Asia-Pacific region fell from 14.2% in 2020 to 8.3% in the first half of 2026. Japan filled the gap. Samjong KPMG cited the National Pension Service's suspension of new investments in domestic PE funds, along with rising borrowing costs, as key reasons.

At a foreign PE firm that invested at high valuations during the low-interest-rate period and has been unable to exit its assets, founding members and key executives have left to establish independent businesses one after another over the past year. An investment banking (IB) industry source said, "There were a number of departures among key personnel at major domestic PE firms early this year, but as far as I know, they were not cases driven by disputes over carry like those in the United States." The source added, "The effects of high interest rates are building up in South Korea as well, so there is no reason something like that could not happen here."

Meanwhile, the Bank of Korea will decide on interest rates on October 22, and the U.S. Federal Reserve (Fed) will make its decision on October 28.

This content was produced with the assistance of AI translation services.