Why Are LPs Settling?

The core rationale for institutional private equity allocations has traditionally rested on delivering substantial net outperformance relative to public markets. Between 2010 and 2021, top-quartile buyout strategies consistently generated robust returns, though net IRRs experienced long-term compression—declining from peak levels of ~25% to ~15% by 2025. This trend accelerated during the post-2022 macroeconomic shift, as rapid monetary tightening, persistent inflation, and multiple compression eroded traditional tailwinds of cheap leverage and multiple expansion.

Consequently, private equity lagged public equity benchmarks over three consecutive years. Broad market public equities generated strong double-digit gains, outperforming private equity sub-asset classes even when excluding megacap technology leaders. In response, over 33% of LPs lowered their five-year net private equity return assumptions to an average of 15.7% net IRR or 1.9x MOIC (ILPA Institutional Limited Partners Sentiment Survey 2025–2026).

• 33%+

  of LPs lowered their five-year return assumptions

• 15.7%

  average net IRR now assumed

• 1.9x

  average MOIC now assumed

In hindsight, historical private equity return profiles were significantly supported by ultra-low interest rates and favorable market conditions that minimized asset differentiation. As those tailwinds subside and yield-bearing alternatives emerge, private equity sponsors must adapt through genuine operational transformation. The current market transition favors nimble, operationally focused managers positioned to capture high-conviction value creation opportunities globally.

Central to the current institutional liquidity strain is a systemic exit bottleneck. Buyout distributions as a percentage of Net Asset Value (NAV) dropped to historical lows of 11%–17%, compared to a 10-year baseline of 26% (Bain & Company Global Private Equity Report 2025). Median holding periods extended to 6.1–6.6 years, creating a global overhang of 28,000 to 29,000 active buyout-backed companies representing over $3.6 trillion in unrealized value (Arthur D. Little & Invest Europe Report 2025). In regional markets such as the UK, unsold inventory expanded to 1,810 PE-backed businesses against a five-year average of 297 annual exits (Forvis Mazars UK Private Equity Report 2026).

• 11–17%

  of NAV distributed, against a 26% baseline

• 6.1–6.6

  years, the median holding period

• 1,810

  unsold PE-backed UK businesses

• 297

  UK exits a year, the five-year average

Extended holding horizons introduce significant mathematical drag on internal rates of return through time decay. While recent vintages (2022–2024) reflect double-digit unrealized IRRs (~14.6% to 15.4%), these valuations remain illiquid and subject to market adjustments. Conversely, older vintages (2015–2017) show compressed annualized returns of 2.3%, as aging assets held beyond standard five-year horizons dilute compounded returns without sufficient offsetting earnings growth.

Concurrently, global private capital assets under management expanded to $13.1 trillion, creating an un-deployed dry powder reserve exceeding $2.5 trillion across buyout, credit, and secondary vehicles (McKinsey Global Private Markets Report 2026). This structural accumulation underscores a key dislocation: extensive un-deployed capital coincides with constrained cash distributions to limited partners.

• $13.1T

  global private capital under management

• $2.5T+

  of dry powder, not yet deployed

• 11.9–12.1x

  EBITDA entry multiples in the low-rate era

During the low-rate era, minimal debt costs elevated entry valuations across North American and European buyouts to 11.9x–12.1x EBITDA. As cost of capital normalized, elevated interest rates restricted traditional debt-refinancing and buy-and-build strategies. Bid-ask spreads expanded between carrying valuations and buyer underwriting parameters, slowing overall transaction activity as sellers sought to avoid writing down legacy asset valuations.

To navigate liquidity constraints, the private markets ecosystem has undergone structural adaptation. Secondary transaction volume reached record levels of $162 billion to $240 billion, driven by LPs rebalancing portfolios and seeking liquidity (Moonfare Private Equity Secondaries Report 2024). LP-led stake sales comprise over half of this volume, while GP-led continuation vehicles expanded beyond $115 billion.

Continuation structures remain a subject of institutional discussion. While GPs use continuation vehicles to retain high-performing assets, 30% of surveyed LPs view assets transferred into these vehicles as facing operational or valuation challenges, with only 21% preferring continuation funds over traditional trade sales or IPOs. Additionally, 84% of institutional LPs express caution regarding fund managers expanding into retail capital channels, citing potential liquidity mismatch and governance considerations (ILPA Institutional Limited Partners Sentiment Survey 2025–2026).

• $162–240B

  of secondary volume, a record

• 30%

  of LPs see continuation assets as challenged

• 21%

  prefer continuation funds to a sale or IPO

• 84%

  are wary of GPs moving into retail capital

In response to megacap concentration—where the top 10 funds absorbed approximately 36% of total capital raised—47% of LPs intend to reduce large-cap manager allocations. Instead, institutional capital is pivoting toward specialized mid-market managers, direct co-investments, and independent sponsor structures offering proprietary deal sourcing, conservative entry multiples (<7x EBITDA), and operational value creation capabilities.

• ~36%

  of capital raised went to the top 10 funds

• 47%

  of LPs plan to cut large-cap allocations

As shown in Figure 4, institutional commitment to private equity remains structured and steady despite exit headwinds. Survey data indicates 87% to 90% of global LPs operate at or within target allocation ranges, with 60% precisely at target and 27% slightly above range. Over a five-year horizon, 52% of institutional allocators plan to maintain current exposure while 38% intend to increase allocations. Rather than reducing exposure, allocators are refining manager selection frameworks and focus areas.