The State of Private Equity, Part 2B: Challenges and Opportunities for LPs

Four years after public stocks and bonds fell together in 2022, many LP portfolios remain stuck. Distributions as a share of NAV have held below 15% for four consecutive years, the industry's stock of unsold companies has swelled to roughly 32,000 businesses worth $3.8 trillion, and 40% of institutional North American LPs reported being overallocated to private equity in 2025, not because public markets fell, but because so little capital is coming back. Undrawn commitments are constraining new allocations, software, long the industry's favorite sector, faces its first real valuation test, and continuation vehicles have drawn growing scrutiny. Yet the tools to get unstuck are maturing quickly: secondaries have evolved into mainstream market infrastructure, infrastructure and data centers were the standout fundraising story of 2025, and private equity's long-run return case versus public markets remains intact. We believe the LPs likely to come out ahead are those who use these new liquidity tools and treat manager selection, where dispersion is widest in private equity and AI capability is emerging as a new criterion, as their primary lever.

Table of Contents

SECTION I: CHALLENGES FOR LPs

1. Portfolio Liquidity: Distributions Still the Bottleneck
2. Asset Allocation: The Denominator Effect
3. Asset Quality: The Software Reset, PE's Favorite Sector Under Pressure
4. Continuation Vehicles: Liquidity Tool or Conflict of Interest?

SECTION II: OPPORTUNITIES FOR LPs

1. New Tools: Secondaries & Continuation Vehicles Go Mainstream
2. New Segment: Infrastructure and Data Centers: The Standout Opportunity
3. Asset Allocation: Public vs. Private Equity, Diversification Is Still a Good Pitch
4. Manager Selection: Dispersion Is Highest in PE vs. Other Asset Classes
5. New Approach: Backing the AI-Forward GPs, A New Selection Criterion