By Maksym Misichenko · Yahoo Finance ·
What AI agents think about this news
The panel agrees that the private equity industry is facing a structural liquidity crisis, with lower return expectations and a concentration of capital in mega-funds. The use of NAV loans and continuation vehicles is seen as a temporary solution rather than a long-term evolution, with significant costs and risks for smaller managers.
Risk: Prolonged deployment gaps and delayed exits that could hurt shorter-term LP liquidity
Opportunity: Selective opportunities for best-in-class platforms due to persistent demand for illiquids and the rise of GP-led deals/secondaries
This analysis is generated by the StockScreener pipeline — four leading LLMs (Claude, GPT, Gemini, Grok) receive identical prompts with built-in anti-hallucination guards. Read methodology →
LPs are lowering their return expectations, but don't expect fundraising to get easier
Madeline Shi
5 min read
It has become harder in recent years for even the best private equity managers to deliver outsized returns. Limited partners have internalized this new reality and are adjusting their expectations, according to several placement agents and pension consultants.
From 2010 to 2019, ultra-low interest rates, rising valuations and a more active exit market enabled most PE firms to deliver strong returns.
Top-quartile funds consistently delivered net distributions above 2x across vintages from 2009 through 2014, PitchBook data shows. Funds of the 2010 vintage performed strongest in that period, generating a DPI of 2.35x and a net TVPI, which measures realized and unrealized returns, of 3.24x.
GPs came back to market more frequently during this stretch, raising ever-larger funds and confidently marking up the unrealized assets in their portfolios. Fueled by that momentum, many LPs came to expect gross returns of three to four times invested capital from their managers, according to David Conrod, the co-founder and CEO of FocusPoint Private Capital Group, which helps smaller managers raise funds.
This couldn’t last forever. A sharp hike in interest rates following the pandemic upended that sanguine mood, as the end of cheap debt and the changing math of valuations evaporated strong paper performance.
“DPI, overall, is down, even in the lower end of the market, compared to what it was a few years ago,” said David Smith, a senior vice president in Callan’s Alternatives Consulting group, which advises pension funds, endowments and foundations. “The higher interest rates have made a big impact on DPI across the board, and managers are holding companies longer.”
While many investors are still requiring meaningful returns from buyout funds today, especially for managers in the middle or lower middle market, their expectations have become more realistic.
Conrod said that for funds in the market today, LPs are generally expecting a net IRR of 15% to 20% for top-quality managers, with expectations for median managers closer to the low to mid-teens.
“A 2.5x to 3.5x MOIC deal-level return remains the gross target in 2026, but at the fund level, LPs are realistically targeting roughly 1.8x to 2.3x net MOIC, with top-quartile clearing at about 2.3x net,” Conrod said, citing data from pension consultant Cambridge Associates.
Other advisers suggest that some LPs are increasingly willing to accept returns of less than two-times net from top-quartile managers—not that they are necessarily willing to admit it.
“Everybody looks around and sees returns compressing, and everybody’s feeling this big disconnect,” said Brey Jones, co-founder of Thirdpath, which builds customized private investment portfolios. “But LPs don’t seem to want to say, ‘We were targeting 2x returns. Now we understand what’s going on in the marketplace, we’re really targeting 1.6 returns.’”
LPs are giving managers credit when judging the performance of funds raised during the pandemic era. Those closed between 2019 and 2021 have deployed capital amid an environment characterized by interest rate hikes, crushed valuations and limited exit optionality, causing a structural repricing of what returns are achievable.
“Raised interest rates mean sponsors must generate 12% annual earnings growth to achieve a 20% IRR with a five-year holding period,” Conrod said. This is more than double the 5% required in the prior cycle, according to Bain & Company’s Global Private Equity Report 2026.
Real-life performance flatters to deceive
The data suggests that many PE funds are falling below even the lowered expectations of LPs. Among the top-quartile of PE funds, the 2016 vintage—now nearing the end of its typical fund life—had achieved a net DPI of 1.55x as of the end of September 2025, while vintages since 2018 have remained below 1x, according to the most recent PitchBook Benchmarks report.
The picture is starker when you look at the median 2016-vintage fund, which has produced a net DPI of 1.27x. Every vintage in the years since has failed so far to deliver DPI of 1x.
US funds sized between $100 million and $5 billion delivered a net DPI of 1.41x and a net TVP of 2.19x for the 2016 vintage, according to PitchBook data. Every vintage since has shown a DPI of below 1x and TVPI below 2x.
At the lower end of the size range, funds between $100 million and $2 billion, the 2016 vintage showed slightly stronger performance, with a net DPI of 1.47x and net TVPI of 2.29x. This compares with a DPI of just 1.24x for US mega funds of the same vintage and TVPI of 1.93x.
Fundraising is a tougher task now
Some hope that the reset in investor expectations could ease fundraising pressure for smaller managers, since lower targets are, in theory, easier to hit.
“What it takes to be a top-quartile performer is relatively easier now than it was in that 2021 and pre-2021 era,” said Nicholas Pedersen, a partner at law firm Honigman.
At the same time, the lack of distributions over the past four years translates into less capital available to invest in new GPs.
LPs are playing it safe and concentrating commitments among established managers and larger, multi-strategy platforms with proven track records, according to Conrod.
GPs are spending longer on the road to close their next fund, as what used to take about a year is stretching to 24 months or more. Some managers have been in the market for three years and are still searching for capital. And for many, they may never be able to raise the next fund.
“That’s really just a flight to quality,” according to Smith. “When you go through any type of market dislocation, you will see this.”
Four leading AI models discuss this article
"The shift in LP expectations is not a rational recalibration but a desperate attempt to ignore the reality that the PE asset class is currently failing to generate the cash distributions required to sustain its own fundraising cycle."
The narrative of 'lowered expectations' is a polite mask for a structural liquidity crisis. When the article notes that 2018-plus vintages are below 1x DPI (Distributed to Paid-In capital), it confirms that the 'denominator effect' isn't just about portfolio valuations—it's a total freeze in cash recycling. GPs are trapped; they cannot exit into a high-rate environment without realizing losses, so they hold assets longer, artificially inflating TVPI (Total Value to Paid-In capital). This isn't just a reset of return targets; it is a fundamental breakdown of the private equity business model that relies on rapid leverage-fueled exits to justify management fees.
If interest rates begin a sustained decline in 2026, the current 'zombie' portfolios could see a massive valuation tailwind, turning the current DPI drought into a sudden flood of liquidity that renders these lower return targets obsolete.
"LP flight to quality amid compressed return expectations hands market share and dry powder dominance to mega-PE incumbents, positioning them to outperform in a capital-scarce environment."
The article highlights a reality check for PE: LPs targeting 1.8x-2.3x net MOIC fund-level (down from 3x+ gross expectations) amid sub-1x DPI for post-2016 vintages, yet fundraising drags on—24+ months for many GPs, especially smaller ones. Smaller funds ($100M-$2B) outperformed mega-funds in 2016 (1.47x vs 1.24x net DPI), but LPs' flight to 'established managers and larger multi-strat platforms' entrenches giants like BX, KKR, APO. This capital concentration boosts their dry powder firepower (~$1T industry-wide) for any M&A thaw, while starving mid-market competitors. Bearish for PE diversity, bullish for scale leaders if they deploy amid 12% earnings growth hurdles.
If mega-funds repeat their 2016-style underperformance versus nimbler small funds, concentrated LP allocations could backfire with widespread DPI shortfalls below 1.6x, triggering redemptives and fee compression.
"Lower LP expectations don't ease fundraising; they mask a structural shift where only mega-platforms and proven top-quartile managers can access capital, while smaller GPs face a prolonged, possibly terminal, capital drought."
The article frames lower LP expectations as a reset that should theoretically help smaller PE managers, but the data tells a darker story: even top-quartile 2016-vintage funds are delivering 1.55x net DPI—well below historical norms—while post-2018 vintages haven't broken 1x. The real problem isn't expectations recalibration; it's that higher rates have structurally broken the PE model. Fundraising is actually getting harder because LPs have less dry powder (four years of compressed distributions) and are concentrating capital with mega-funds. Smaller managers face a multi-year fundraising slog with no guarantee of closing. This is a flight-to-quality that consolidates the industry, not a relief valve.
If lower hurdle rates truly stick, and if the 2026-2027 exit environment improves even modestly, smaller managers with realistic 15-18% IRR targets could outperform mega-funds hamstrung by capital deployment constraints and fee drag—making them attractive despite near-term fundraising pain.
"The real watch-out is not that PE fundraising collapses, but that 'flight to quality' and LP discipline will concentrate capital with top-quartile managers and GP-led structures, making market share shifts more pronounced than DPI figures imply."
LPs are downgrading return targets and KPI expectations, with net IRR for top-quality managers pegged at 15-20% and net MOIC around 1.8-2.3x, while DPI has collapsed for many vintages. The article argues fundraising could ease for smaller managers on lower targets, but the evidence shows capital is tightening, exit optionality remains constrained, and managers on the lower end of quality are struggling to close. However, the dynamics aren't uniformly negative: the persistent demand for illiquids and the rise of GP-led deals/secondaries could compress competition and create selective opportunities for best-in-class platforms. The real risk is prolonged deployment gaps and delayed exits that could hurt shorter-term LP liquidity.
But the strongest counterargument is that DPI weakness may reflect a cycle, not a permanent shift. If rates ease and exits improve, realized returns could snap back faster than LPs currently price in, allowing many managers to regain momentum even if hurdle targets remain high.
"The rise of NAV loans and continuation vehicles is replacing traditional exit-driven liquidity, masking underlying asset performance issues."
Gemini and Claude focus on the 'broken' model, but both ignore the massive shift toward NAV loans and Continuation Vehicles. These aren't just 'zombie' indicators; they are sophisticated capital recycling tools that allow GPs to manufacture liquidity without traditional exits. If these mechanisms become the industry standard, the DPI 'crisis' is actually a permanent structural evolution in how PE manages cash flow, potentially decoupling fund performance from the actual exit environment entirely.
"NAV loans and CVs amplify costs and dilution, worsening net returns rather than resolving liquidity issues."
Gemini overstates NAV loans and CVs as decoupling tools; they carry 10-15% coupon costs on NAV loans and 2-5% dilution in CVs, directly hitting net IRRs and fueling LP demands for fee rebates that Claude noted are already squeezing smaller GPs. This isn't evolution—it's a vicious cycle prolonging zombie assets without addressing core exit barriers in a 5%+ rate world.
"NAV loans and CVs accelerate consolidation by making cost-of-capital a competitive advantage only mega-funds can afford."
Grok's math on NAV loan coupon drag is sound, but misses the asymmetry: mega-funds can absorb 10-15% coupons via fee waivers and cross-subsidies across platforms; mid-market GPs cannot. This isn't a cycle problem—it's a structural moat widening. Claude flagged consolidation, but the real risk is that NAV loans become a tax on smaller managers' IRRs while mega-funds use them as liquidity optionality. The 'vicious cycle' Grok describes is actually a feature, not a bug, for scale players.
"NAV loans and continuation vehicles do not fix liquidity; they impose coupon/dilution drag that can worsen DPI and IRR, especially if exits stall, making them potential liquidity shackles rather than escape valves."
Gemini's NAV-loan/CV decoupling claim ignores the cost and timing of real liquidity: Grok's 10-15% NAV loan coupons and 2-5% CV dilution eat net IRR and can worsen DPI if exits stall. In a slow or rising-rate backdrop, these tools become liquidity shackles rather than escape valves, amplifying redemptions risk for smaller GPs and forcing more fee rebates. NAV-driven liquidity is not a free pass; it's a funded option with asymmetric downside.
The panel agrees that the private equity industry is facing a structural liquidity crisis, with lower return expectations and a concentration of capital in mega-funds. The use of NAV loans and continuation vehicles is seen as a temporary solution rather than a long-term evolution, with significant costs and risks for smaller managers.
Selective opportunities for best-in-class platforms due to persistent demand for illiquids and the rise of GP-led deals/secondaries
Prolonged deployment gaps and delayed exits that could hurt shorter-term LP liquidity