Beyond PE’s distribution drought

After a long period of subdued distributions, investors have been re-evaluating how they approach the asset class

The flywheel that powered limited-partner (LP) distributions had slowed sharply in recent years, with slower exits, stretched valuations and constrained distributions testing investors’ patience. 

According to Bain & Company’s Global Private Equity Report 2025, distributions as a share of net asset value (NAV) in 2024 had fallen to their lowest level in more than ten years. While Bain was relatively upbeat early this year due to declining inflation and interest rates globally, its midyear report noted that ‘tariff turbulence’ had dashed hopes of a sustained recovery.

During this period, secondary markets and fund-level financing have become critical release valves. Jefferies’ H1 2025 Global Secondary Market Review recorded a record US$103 billion of private-equity stakes traded in the first half – up 51% year-on-year – while continuation vehicles have also seen “notable growth”. Meanwhile, NAV-based lending could grow from $44bn in 2023 to $145bn in 2030, according to data from Oaktree Capital Management and sector specialist 17Capital.

It should be noted that private equity is a cyclical business and the trough in distributions may have already passed. PitchBook data show European distributions as a share of NAV bottomed at 13.7% in early 2024, rebounding to 24.3% by year-end. “Everyone keeps pointing out how distributions have dropped sharply, but it’s important to understand why,” says Nicolas Moura, senior analyst for EMEA private capital at PitchBook. “Fundraising since 2020 translated into heavy deployment that outpaced distributions. More recently, though, distributions have started to rebound.”

Ian McKnight, senior adviser at Cartwright Pension and former CIO of Royal Mail Pensions Trustees, adds that the slowdown should not come as a surprise. “Private equity is cyclical. We’re in a period where several linked cycles have aligned to make conditions look tougher than usual. Liquidity has been an issue for UK institutions – and to some extent in the US too – but that’s part of the normal cycle. Ironically, the best vintages often emerge in times like this.”

Distributions also vary by strategy. Richard Moon, head of private markets at Railpen, says the scheme’s PE programme has been “relatively well insulated” due to its focus on the lower mid-market, where managers buy at lower earnings multiples and do not rely on multiple expansion. “Over a four to five years investment period we typically expect 20–25% per annum in distributions. We’re comfortably ahead of the industry and not running much below 20%.”

Railpen also has an active co-investment programme. “When distributions are slower, we can adjust the pace of deployment. While we lack control over the sell decision, we have valuable levers to control how much goes in.”

Impact on investors

While some indicators suggest improvement, the sector remains under pressure and the usual main investor types are likely to respond differently over the next cycle. 

“UK corporate DB pension funds are no longer the dominant LPs they once were,” says McKnight. “Since October 2022, with higher rates and the shift towards insurance buyouts, they’ve pulled back significantly. Many are focused on de-risking and don’t need high returns anymore.”

Paul Francis, principal investment consultant at Quantum Advisory, sees similar patterns. “Many of the clients we work with are DB pension funds that have been on a de-risking journey and avoiding long lock-ups. That typically means reducing illiquidity, which has pushed them away from private equity and other private markets.”

Public-sector DB schemes and family offices are at different points in their own cycles. “There’s been talk of a resurgence of private family money in the UK,” McKnight notes. “That’s true to an extent – especially among second-generation families diversifying beyond their original business sectors – but liquidity cycles don’t always align with fundraising needs.”

Anna Morrison, managing director and head of private-equity research at bfinance, says institutional investors globally are “slowing commitments to preserve liquidity while modelling longer hold periods and cash-flow stresses”. Re-ups are more selective, she adds, with investors consolidating around trusted managers.

Secondary markets as a release valve

The past two years have seen an unprecedented rise in secondary transactions as investors seek liquidity. “We have seen a rise in secondaries – particularly GP-led continuation vehicles – which are on track for another record year,” says Moura. “With IPOs largely off the table, GP-led secondaries have become an increasingly important channel for generating liquidity and crystallising returns.”

Morrison agrees that secondaries have become a mainstream liquidity tool, attracting more capital and encouraging GPs to launch dedicated strategies. Yet pricing remains a constraint. Julien Barral, senior director within bfinance’s private-markets team, says: “The pricing gap between sellers and buyers remains wide, especially for older vintages or assets with heavy unrealised valuations. The most sophisticated investors use secondaries as a calibrated tool – monetising non-core positions and retaining high-quality assets where continuation can unlock value.”

Valuation discipline has become a focal point. “GPs can ‘mark to myth’ – effectively marking their own homework. With limited distributions, it’s hard to see divergence in performance,” says Moon. “You have to understand each GP’s valuation policy. Managers showing the highest DPI probably have the fairest marks-to-market, as they’re realising assets near book value.”

Moon says that, until recently, sale prices were not attractive to sellers in the LP stakes secondary market. “That’s changing as retail money comes in. Pricing now looks better, good enough that we’re seriously considering selling some assets,” he says.

Francis echoes that sentiment. “Private-market valuations tend to be smoothed over time, unlike public markets where prices are immediate. That smoothing can obscure true volatility and make it harder to know what an asset would fetch in a sale.”

“Some larger investors have struggled to liquidate private market assets, facing gating or steep discounts. That experience has made others more cautious. There’s also policy uncertainty – particularly in DC – about how large capital inflows will affect markets.”

Discounts have deterred many sellers. “Some portfolios have been marked down by 20–30%, which has stopped many from trading,” Francis says. “Even where investors want liquidity, they’re holding out for fair value, which has slowed the secondary market.”

Consultancies are helping facilitate transactions, including XPS among others. “Some firms have launched platforms to match secondary buyers and sellers,” Francis adds. “There are also specialist firms helping larger investors to sell entire portfolios or individual asset holdings.”

According to McKnight, “Pension schemes have two choices: stop re-upping or sell. Selling on the secondary market is possible, but it’s not cheap – discounts of 20% or more are common in tough periods.”

Continuation vehicles

Continuation or run-on funds – where managers buy assets from their own vehicles – have become a defining feature of the cycle. Jefferies estimates they accounted for about 19% of sponsor-backed exits in the first half of 2025.

“Continuation funds are controversial because managers effectively mark their own homework,” McKnight says. “They argue it’s rational, if they’re best placed to manage the assets, but investors rightly question whether performance fees are justified when valuations are negotiated in-house.”

Single-asset continuation vehicles have become a larger part of Railpen’s co-investment programme. “They are a feature of this part of the cycle,” says Moon. “LPs can become comfortable when incentives are properly aligned – the GP and management team both need strong, well-structured incentives.”

“We remain very selective but prefer to be buyers rather than sellers of continuation opportunities. Sellers don’t always get a true market price as there are relatively few buyers – mainly secondary firms leading the transaction.”

Railpen has built relationships with intermediaries who originate and syndicate single asset continuation vehicle transactions. “We’ve originated several transactions and completed a couple this year where we joined the syndicate of a vehicle where we didn’t have a primary relationship with the GP. It’s an attractive market, but we must be very selective,” says Moon.

Rethinking allocations

Rising interest rates and liquidity pressures have prompted many institutional investors to reassess strategic asset allocation. “Within PE, this has meant picking your favourite GPs,” says Moura. “More often than not, investors have picked managers with proven track records from experienced fund houses.”

Morrison notes that investors are showing particular interest in lower mid-market and sector-specialist strategies, which offer operational levers and lower entry multiples. “Exit slowdowns have also been less severe in this part of the market,” she says.

McKnight agrees that mainstream managers still dominate. “Many schemes rely on large consultancies and established managers, so they tend to stick with the mainstream,” he says. “For those entering private equity for the first time, large diversified funds or fund-of-funds structures are often preferred.”

Still, opportunities persist across less-crowded segments. “Private equity offers exposure to sectors under-represented in listed markets,” McKnight says. “Venture and mid-market opportunities are growing in the UK and Europe, though still behind the US. Those who buy when sentiment is weak often find the best opportunities.”

Performance dispersion across managers has widened as market conditions became more challenging. Barral says: “The extended exit environment and uneven mark-downs have highlighted differences in managers’ capability to perform. Managers with genuine value-creation models continue to outperform, while those reliant on financial engineering are struggling.”

Francis sees the same pattern. “There’s always been a wide gap, but perhaps more so now,” he says. “Success depends on skill in actively improving businesses, not just buying undervalued assets. Established, proven firms tend to perform better, though new entrants can still succeed.”

McKnight adds: “Over time, you might expect dispersion to decrease as processes standardise, but performance still varies widely. Some excellent managers struggle to raise funds because of limited brand recognition, while others have investors queuing to get in.”

Moura points out that mid-market fundraising in Europe has been particularly strong in 2025. “With sentiment improving in the second half of the year, we’re also seeing a return of megadeals,” he says.

Future outlook

The outlook remains finely balanced. “LPs want DPI, and GPs are under pressure to deliver it,” says Moon, noting a severe economic downturn could prolong the liquidity squeeze. “A recession would likely mean a further period of weak distributions,” he warns. 

“A 20-40% public market drop would bring marks down and prolong the low-distribution cycle. The question is how the industry would cope with another multi-year downturn – probably with more continuation vehicles, NAV financings and refinancing of portfolio companies. But in a deep recession, those avenues will also become strained.”

Francis believes private equity’s reputation will hold. “It’s made people more realistic about illiquidity,” he says. “There’s now greater realism about how those assets behave in stress scenarios. Long-term confidence isn’t lost, but expectations have adjusted.”

McKnight sees continued opportunity. “There are always interesting areas emerging,” he says. “Certain sectors will thrive through the coming decade of structural change, while others will disappear entirely.”

Morrison agrees that dislocation breeds opportunity. “Periods like this often produce the strongest vintages as valuations recalibrate and capital is deployed with greater discipline,” she says.

Still, Moon cautions that the asset class must keep proving its worth. “Private markets may not outperform public markets by much over this period – yet investors are paying high fees,” he says. “The industry must continue to outperform public markets by several hundred basis points net of fees to justify the model. That’s the key consideration for investors.”