Asset Allocation: The Denominator Effect

The classic denominator effect assumes public markets do the damage: equities fall, private marks don't, and PE mechanically balloons to an oversized share of the portfolio.

That's not what's happening this cycle. Public equities have surged, as the strong 5- and 10-year public-market returns show. And yet overallocation is, if anything, worse than it was in 2019. According to Dawson Partners, 40% of institutional North American LPs reported being overallocated to private equity in 2025, an 82% increase from 22% in 2019, even without a public-market crash to blame.

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The real driver is the numerator, not the denominator: distributions, which averaged 25% of NAV annually from 2001 to 2025, fell to just 14% from 2022 through 2025, a 44% decline, making this only the third stretch in the twenty-first century (after the dot-com bust and the GFC) that annual distributions have stayed below 20% of NAV. ORIX's own tracking confirms the scale of the shortfall from an independent data set: 12-month trailing distributions fell to just 6.0% of AUM by June 2025, little more than a third of the pre-2020 average of 17.2%. With so little capital coming back, private allocations keep compounding in place instead of shrinking on their own, regardless of what public markets do.

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That same dynamic shows up mechanically, not just sentimentally, in the fundraising pipeline. LPs' ability to commit fresh capital is constrained by capital they've already promised but not yet funded. In a Private Equity International survey, the share of LPs saying they are "very" or "somewhat" limited from making new PE commitments because of undrawn commitments rose to 53% by late 2025, up from 38% a year earlier. That's a direct consequence of the record 2021–22 fundraising boom: LPs are still funding those vintages while distributions from older funds remain scarce.

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Yet despite the liquidity constraint, conviction in the asset class remains strong. A majority of LPs surveyed by Preqin say they plan to maintain or increase their private equity allocations both in 2026 and over the long term, with only 17% planning to commit less capital in the next 12 months, down from 24% just three years earlier. Simple math dictates that the amount of capital LPs can commit today is capped by the cash they get back from prior investments, not by how much they want to invest.

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