Raising a fund used to be hard. Today, it looks nearly impossible for anyone outside the top tier of private equity. Private equity and venture capital fundraising has dropped for four consecutive years. Mid-sized firms and new fund managers have absorbed almost all of the damage.
According to KPMG’s Q4 2025 Pulse of Private Equity, the top 10 U.S. PE groups captured roughly 46 percent of all domestic fundraising in 2025. Names like Blackstone, KKR, and Bain Capital are still closing multibillion-dollar vehicles without much trouble. Everyone else is competing for what is left.
That is the capital race mid-market firms are losing.
And it is not just a fundraising story; it is a liquidity story that is choking the entire system from both ends.
LPs have been retreating on one end. Institutional investors allocate based on distributions and have historically viewed them as low. When LPs cannot redeploy capital from existing investments, they cannot commit new capital. Hence, midmarket fund managers without an established track record or brand names are the first to be left behind.
On the other side, exits have stalled. Private equity firms are holding a record backlog of unsold companies, which is projected to take about nine years to liquidate at the prevailing pace of deal-making based on PitchBook data analysis by PwC as reported in the Wall Street Journal.
Almost one-third of those firms have already held investments for more than six years. This capital is trapped on the balance sheet instead of flowing back to investors, and it is a major reason why the next round of fundraising becomes more challenging each year.
Combine these two pressures, and mid-market GPs are trapped in an endless cycle: No distribution, no new capital inflows, no fresh capital, and portfolio companies that require hard-to-acquire growth capital. Meanwhile, top-tier investment funds continue to raise, invest, and sell off their stakes, widening the gap further.
A cost-cutting approach, a typical PE strategy, can cover the gap only up to certain limits. PE firms require capital that does not rely on the LP’s sentiment, does not compete with mega-funds for the same dollars, and does not dilute the ownership.
The Opportunity
This source already exists, and most PE firms are not using it.
The federal government spends over $7.1 trillion a year. Almost $2 trillion of that goes directly toward procuring goods and services before even counting the roughly $1.1 trillion the government distributes annually in grants.
Add state and local incentive programs, workforce development funding, tax credit programs, and economic development packages, and there is a parallel capital market sitting outside the traditional fundraising cycle. It does not touch cap tables, require an LP conversation, or compete with Blackstone for the same commitments.
This capital does three things a traditional raise cannot:
Grants, tax credits, and economic development incentives add capital directly onto a portfolio company’s balance sheet, protecting the equity position a fund already holds.
Workforce training grants, site-selection incentives, and R&D funding lower the operating cost of growth initiatives that would otherwise come out of the fund’s own reserves.
Businesses with steady, diversified revenue tied to government contracts or manufacturing incentives often command a stronger multiple, because that income is viewed as more durable than a purely consumer-facing revenue base.
None of this is a secret line item buried in a government budget. These funds are both public and substantial, yet most go unclaimed. That is largely because the specialized application and compliance requirements exceed the bandwidth of standard accounting and legal teams.
Since 2000, more than $81 billion in federal new market tax credits has gone unclaimed because businesses did not navigate the paperwork.
The real leverage for a PE firm is not a single grant for a single portfolio company. It is deploying government relations strategy across an entire portfolio at once.
A GP managing five, ten, or twenty companies can coordinate site selection, workforce incentives, and tax credit capture across all of them simultaneously, turning what would be a series of one-off applications into a repeatable, portfolio-wide process.
That is exactly the kind of economy of scale mid-market firms need when they cannot out-fundraise the mega-funds.
It also means the firm’s government relations investment gets amortized across every company it touches rather than one at a time.
This is also where timing matters most.
Grant criteria, agency priorities, and site-selection competitions are shaped well before an application window opens, and firms that build relationships with agency officials early are positioned to influence how those programs are written.
Firms that wait until a portfolio company needs the money are negotiating from a much weaker position, if they get a seat at the table at all.
Mid-market PE firms are not losing the capital race because they lack good companies or good strategy. They are losing because traditional fundraising math has shifted permanently in favor of a handful of mega-funds, while LPs, exits, and distributions all move slower than they used to.
Non-dilutive government capital doesn’t eliminate the need for fundraising; it changes its purpose. Because non-dilutive funding can cover major costs like expanding, hiring, or relocating, portfolio companies can raise less equity while preserving their cap tables.
Shepherd Strategies works with private equity firms and their portfolio companies to identify, apply for, and secure federal, state, and local non-dilutive capital.
This includes everything from grants and tax credits to site-selection incentives across an entire portfolio.
We’ve put together a full white paper breaking down exactly where this capital sits, how much is available, and how PE firms are already using it to close the gap.
Request the full white paper from Shepherd Strategies to see the complete breakdown.
© 2026 Shepherd Strategies LLC.
All Rights Reserved.
