Private equity (PE) caught some traction in 2024 as investments and exits finally reversed their two-years of declines. Like most capital, the challenging economic environment impacted capital markets in the past few years. Yet according to a recent report by Bain, things could turn around in 2025, but this largely depends on “macro conditions and policy.”
Simon Tang, Head of North America at Accelex – a private markets data firm says there is a lot of money on the sidelines but high valuations and few exits is harming the sector.
“Private equity AUM is contracting for the first time in decades—perhaps this is the start of a market correction for the industry. With rising interest rates between 2022 and the highest levels in 2024 since the runup to the Global Financial Crisis, institutional investors are rethinking the risk-reward of locking capital into opaque, long-term primary PE funds when safer returns are available in more traditional and liquid assets like bonds.”
Tang says investors are turning towards secondaries in the private securities markets – a growing asset class as technology and platforms cater to this market.
“This isn’t just about rebalancing portfolios to more traditional asset classes, but it’s also a structural shift toward private investments with more transparency, clearer exit paths and lower perceived risk,” said Tang. “Adding to the pressure, PE firms are sitting on record levels of dry powder, while high valuations and slow exits make new commitments harder to justify. LPs need meaningful net distributions to paid-in (DPI) improvements before committing fresh capital, yet the sheer scale of recent mega-funds raises concerns about whether target returns are even achievable.”
Tang says that after fees and expenses, a $2 billion PE fund needs to generate over $2 billion in realized value just to return the original capital. Given the current market conditions, this is a challenging goal.
“…for LPs to justify their commitment, they’re looking for at least a 1.5-2x net DPI, meaning the fund must generate $3-4 billion or more in gross realized proceeds. With slowing exits, stretched holding periods, and high entry valuations, achieving these numbers isn’t just difficult—it’s becoming increasingly unrealistic,” stated Tang. “Now scale this across the flood of multi-billion-dollar funds raised in recent years, and the problem compounds. If primary funds can’t deliver timely returns, LPs will hesitate to reinvest, creating a capital logjam. Secondaries might offer a short-term fix, but without strong exits, they risk becoming a contributor to the liquidity conundrum. At the end of the day, everything hinges on exits, without them, the cracks in the PE model will only widen.”
The Bain report explains that PE funds aspiring to deliver top tier performance has never been more challenging and “strong performance is getting harder, not easier.”