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

The economics of private equity have fundamentally shifted. A decade of cheap leverage and steady multiple expansion once produced target returns on only modest operating growth; today, with borrowing costs higher and leverage lower, GPs need roughly twice the annual earnings growth to reach the same outcome, a change the industry now calls "12 is the new 5." At the same time, slow distributions are leaving portfolios to age into so-called zombie funds, while fundraising concentrates around a shrinking set of the largest managers and GP economics come under pressure from thinner fees and rising commitment requirements. Yet the same forces are opening new ground: operational value creation is displacing financial engineering, reopening credit markets are reviving platform deals, and specialists, complex take-privates and carve-outs, and an emerging private wealth channel are becoming meaningful sources of return. The result is a more demanding environment, where the ability to create value operationally rather than financially is likely to separate the winners from the rest.

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: PE vs. Public Markets, 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