Private equity has never lagged so far behind publicly listed equities in terms of returns. The asset class faces major challenges, including disappointing distributions, higher financing costs, and geopolitical uncertainty. Has private equity lost its shine, or is this just a temporary phase in a cyclical pattern?
Since 2000, the private equity (PE) market has delivered an annual premium of 5.0 percent compared to public equities (12.5 percent versus 7.5 percent per year in US dollars). Over the past three years, however, that picture has reversed entirely: global equities have generated annual returns of 19 percent in dollars, compared to just 6 percent for PE (see chart). Investors are also seeing these underwhelming results reflected in the interim performance of their PE investments, raising concerns about the segment’s outlook.
Source: Preqin (December 2000 – June 2025), 3-year rolling return (USD).
PE investors assess the added value of their private equity portfolios relative to public equities through the so-called direct alpha. This metric calculates the performance difference between a PE investment and an appropriate equity benchmark, adjusting for the irregular cash flows inherent to PE. With listed equities performing strongly in recent years, PE’s relative advantage has declined—meaning direct alpha is falling. Does this suggest that PE is fundamentally underperforming, or is the gap with public markets merely temporary?
Challenges for private equity
PE’s relative performance has also been dampened by a wide range of challenges facing fund managers. After inflation peaked around 10 percent in 2022, central banks were forced to raise interest rates, increasing financing costs for the debt-dependent PE sector. Geopolitical uncertainty and mixed macroeconomic signals further reduced deal activity, leading to fewer exits and lower distributions. As a result, the unrealized value (NAV) in portfolios has continued to rise.
Since 2019, the total NAV of the global PE market has doubled from 6.5 trillion dollar to 13 trillion dollar by the end of 2024—a historic record. For investors, the key question is to what extent this paper value can translate into tangible cash distributions and, ideally, outperformance versus listed equities. Because the underlying investments are not freely tradable, market forces contribute little to precise valuations. The reliability of these figures therefore depends heavily on the valuation methodology used by each fund manager.
Artificial calm in valuations?
Although various general guidelines have been introduced to reduce discrepancies between GP valuation methods, accurately and objectively valuing private holdings remains challenging. The lack of comparable listed companies often leads managers to rely on simplified heuristics for valuation multiples and illiquidity discounts. In practice, valuations are typically adjusted only after concrete external events such as a refinancing, an acquisition offer, or sustained earnings growth.
As a result, fund managers tend to take a conservative approach to valuations. Over a fund’s life cycle, valuations typically trail actual distributions by about 35 percent on average. Beyond practical limitations, this conservatism also has a behavioral component, as described by Nobel laureate Daniel Kahneman in his Prospect Theory. According to the theory, losses weigh more heavily on human psychology than equally sized gains provide satisfaction. Fund managers are aware of this bias and therefore often delay upward revisions: no one complains about a missed upward adjustment, but everyone notices a markdown. The outcome is a deliberate dampening of volatility in reports, which in turn reduces how representative interim valuations are of a PE fund’s true long-term performance.
In short, NAV valuations are generally more cautious than optimistic. In other words, given the current lag in distributions and the growing share of unrealized value, it’s quite possible that final returns will end up higher than interim metrics suggest. It’s therefore too early to conclude that PE has definitively lost its shine.
Renewed optimism
Moreover, market sentiment toward private equity appears to be improving again. The year 2025 is on track to become the strongest year for transaction activity since 2021. In Europe and the United States, equity valuations have risen by 7 percent and 5 percent respectively this year. These gains have reignited the IPO market, with high-profile listings such as Klarna and Verisure leading the way. The popular fitness app Strava is also exploring various routes to go public.
Meanwhile, the financing market could receive a boost as well. The US Federal Reserve appears to be moving toward monetary easing, with markets now pricing in a rate cut of roughly one percentage point toward 3 percent by 2026. In short, there’s plenty of tailwind for PE to demonstrate its value.
The decisive moment
The private equity market is under intense scrutiny. Recent underperformance and weak distributions have raised concerns among investors. At the same time, elevated portfolio values and improving sentiment present opportunities for the asset class to reaffirm its long-term value. The coming period will be a crucial test for PE funds to convert book value into tangible cash returns for investors. Continued underperformance could have far-reaching consequences for the industry—from fundraising challenges to pressure on the lucrative fee structures that fund managers enjoy.
Daniël Helder is a client advisor at Bluemetric, an advisor to, among others, family offices, and a member of the Investment Officer expert panel.
