So traditional Venture firms are not part of this (1). VC buys equity in their start-ups, not debt, so interest rates aren't a direct concern of theirs. And VC firms generally do not borrow, they raise investment funds of investors money and because it is high risk, generally speaking no one lends money to these funds.

Private Equity firms on the other hand do generally take on a lot of debt- they have their own money but they borrow even more (2) and use that amount of money to buy out the current owners of a company. Basically they borrow to turn a steady stream of revenue into the future (an existing software company that is profitable) into a big pile of cash today for the current owners. And then they need to pay off that borrowing over time, from the steady stream of revenue that the software company generates. And if they are wrong about the size of the steady stream of revenue, they basically declare bankruptcy and the people who loaned the money (banks but also pension firms etc.) now run the company.

1: The way that VC changes is that the rising interest rates mean that the returns to safe investments are higher, so in order to attract new capital VC firms have to promise even higher returns as well.

2: They borrow money to get higher returns- if you have 5 dollars in a stock and it goes up 20% you have 6 dollars. If you have 5 dollars and borrow 5 dollars and invest it in a stock that goes up 20% you have 7 dollars after you pay back the loan. The catch is, if the stock instead goes down by 20%, after you pay back the loan you only have 3 dollars. (And if the stock goes down 50% you are wiped out.) But PE firms are confident that their investments will always be winners, so they take out loans like that.

There is some variety, but a very common model in Private Equity is to acquire an asset (a company), and fund that acquisition through either equity or debt.

The ability to purchase often comes in through either Private fund investments or via Debt.

* Private funds are most often drawdown funds (Private equity funds, VC Funds, Real Estate Funds, etc.). These are managed funds not available on public markets, typically require a substantial commitment of funds, and generally in return these investors can expect a significant return on their capital.

* Debt was a very popular way to finance these purchases as well when interests rate were lower, and you expect to sell the asset/company before the debt comes due. Basically cheap money made this feasible/possible.

The expectations are typically 5-10 years for both of these funding models; with private funds, they expect to run for X years, long enough to acquire the assets, clean them up, and resell them at a profit. For debt, the expectation was to sell before the debt came due, along the same timeline.

So that's the backdrop.

The primary concern here is around investments in tech and SaaS companies impacting both models. SaaS has contracted quite a bit with pressure from AI and valuations are lower.

The article is focused on the debt financed path; PE hasn't been able to sell companies as quickly as they would like or at a price they would like, so they are sitting on the books. And for companies purchased using a combination or private funds, they have companies they can't unload for the price they would like. The funds that are in this state where they cannot sell remaining portfolio companies without realizing losses are called zombie funds.

Their debt comes due. Most likely they get debt from a different bank or private credit firm to pay down the old debt.

Those who can’t refinance will sell assets or the business.