Which industry trend highlights a challenge faced by private equity firms?

Increased fee compression is a significant challenge faced by private equity firms due to multiple factors. The environment of rising competition among funds has led to pressure on management fees and carried interest, which directly impacts profitability. As more investors enter the private equity space, limited partners have become more discerning, demanding better terms and lower fees. This trend has been exacerbated by the growing popularity of alternative investment vehicles, such as direct lending and real estate, which often offer lower costs.

Additionally, the proliferation of data and increased transparency has made it easier for investors to compare performance and fees across different funds, further compelling private equity firms to adjust their pricing structures. As a result, fee compression can significantly affect the financial viability of existing funds and the ability of firms to generate returns for their investors, making it a pressing concern within the industry.

In contrast, the other trends mentioned—such as the rapid growth of new startups, decreased interest in small-cap investments, and higher liquidity in public markets—do not universally pose the same level of systemic challenge across the entire private equity landscape. While these trends may influence specific strategies or investment decisions, they do not directly impact the operational and profitability dynamics of private equity firms in the same way that fee compression does.