Several short-term factors are combining to put pressure on fund launches and leading some LPs to allocate to secondaries
Financial markets were on a rollercoaster ride during the first half of the year and private markets funds did not escaped the fallout. A combination of geopolitical risk, unpredictable tariff announcements and credit market turbulence has resulted in a highly constrained fundraising environment, with too many managers chasing depleted pools of capital.
Global private equity fundraising in the first quarter was 35% lower year-on-year, according to Pitchbook data, and market turbulence during the second quarter means its total is likely to be even lower.
Bain & Co’s Private Equity Midyear Report found in June that the “early signs indicate that tariff turmoil has held back deals and exits” and the “slowdown has exacerbated the urgent need to improve liquidity by accelerating full exits”.
This negativity has fed into LPs’ intentions for the coming months. Coller Capital’s biannual Global Private Capital Barometer, also in June, found that LPs plan to increase their allocations to the relatively defensive asset classes of private credit (45%) and secondaries (37%). This shift was a response to growing macro-economic uncertainty, including geo-political changes and trade tensions. These intentions increased, respectively, from 37% and 29% six months ago.
Almost half LPs (44%) reported a heightened focus on geopolitical risks as a key factor in portfolio construction, with 88% expecting them to be a significant risk to returns over the next two to three years.
Delayed distributions
LPs thinking about their 2026 allocations needs to factor in how much cash has come back in 2025. Fundraising periods entail new capital commitments that, without distributions, LPs may not have the liquidity to support.
Managers are having difficulty in exiting companies, which mean distributions have slowed – which this in turn means they are struggling to raise new primary funds.
“The pace of distributions has been a real consideration for many LPs, which have needs within their own ecosystem,” says Bosa Adeghe, partner, at London-based secondaries specialist Coller Capital. “Endowments and pension schemes have hard liabilities.”
The decreased availability of debt and higher interest rates have put pressure on sponsor-to-sponsor transactions, in particular. Says Adeghe: “It has been a good thing that businesses have been able to withstand higher rates, refinance and push out maturities, but for exit activity financing availability is still far scarcer than 2021, and that impacts the size of the businesses that can find an exit for through M&A.”
Scott Voss, chief market strategist at private markets allocator HarbourVest, says: “Buying a company requires building a balance sheet, and two-thirds of the capital structure is going to come from debt. If debt becomes more expensive or harder to come by, it’s harder to buy an asset.”
Without the ability to sell their stakes in companies at strong prices, managers have been more likely to hold on beyond the planned end of their vehicles, waiting for better circumstances.
The pace of distributions has been a real consideration for many LPs, which have needs within their own ecosystem.
Bosa Adeghe, Coller Capital
Shifting sentiment
Heading in 2025, many commentators expected deal activity to pick up, supported by a more business-friendly regime in the US and a steady decline from peak interest rates. “Overall, a return to confidence,” says Adeghe.
Voss says: “The second half of 2024 was a very good six months. Liquidity, a concern for many, was picking up. We carried that momentum into Q1 2025 – but going into Q2 everything hit pause.”
Even before April, there was a lot of uncertainty around tariffs, says Adeghe. “The significant step-up in M&A everyone hoped for has not happened. However, everyone feels better about the path of inflation and rates now than they did in 2022 or 2023, when the direction of travel was firmly up.”
There are now strong signs of recovery in public markets, with the main US indices hitting new all-time highs at start of July. German medical technology firm Brainlab will be the year’s first Frankfurt IPO in July and Norwegian software firm Visma has provisionally chosen to list in the UK next year.
Going into Q3, Voss says more conviction is entering markets. “Things take time to spin up and get going. Where we land at the end of the year will be interesting.”
While tariffs dominated public market moves in the second quarter, a fragile stability appears to have returned to the market. “Everything can change with a headline or social media post,” says Adeghe. “Everyone recognises the elevated risk environment. Higher baseline tariffs are not helpful, but to what degree?”
He says that the acceptance of tariffs is also filtering through to into M&A, with it becoming just another diligence topic to be addressed.
Things take time to spin up and get going. Where we land at the end of the year will be interesting.
Scott Voss, HarbourVest
Secondaries surge
The difficulty in completing exits has at least had a positive knock-on effect on one type of strategy. The strategy having “its day in the sun” is secondaries, according to Voss. “They emerged as source of liquidity over the last couple of years, when it has been scarce. LPs have doubled-down, as it’s just not clear where the market’s going.”
Last year secondaries transacted about $160-170 billion according to HarbourVest. Voss says institutional investors have become increasingly enamoured with secondaries, “as they provide the ability to step into existing assets in an illiquid asset class, usually at a discount. This cycles capital faster.”
Credit markets are the “third player in the room” that dictates who has advantage in a trade, says Voss. “If the credit markets are wide open and willing to lend at attractive rates, especially the syndicated loan market, a sponsor may gain the ability to put a price forward that convinces the owner to sell, rather than creating a secondary transaction for their LPs.”
HarbourVest started to see sponsor-to-sponsor trades pick up the second half of 2024 and first quarter of 2025, “before the syndicated loan market effectively shut down”, says Voss. “That market has since come back. I’m curious to see the secondary vs sponsor-to-sponsor trade dynamic play out in the second half of 2025.”
Adeghe says the overarching driver of secondaries volume is a recognition among LPs that decade-old commitments may no longer be optimal, and they can use the market to adjust their allocations. There is also ongoing activity from those seeking to unwind previous over-allocations and DB pension funds de-risking ahead of a buyout.
“Secondaries are also a way of raising capital to make sure that you’re in line with cash forecasts. Making up for the shortfall in distributions from M&A and IPOs was a real consideration last year,” says Adeghe.
He says secondaries are on track for a record year in 2025, exceeding the record set in 2024. He notes that in 2021 the discount on NAV for a diversified portfolio was in the low-single-digits whereas it has widened to 10% today. “It’s just a very different rate and risk environment,” he says. “We are in a new equilibrium with bigger discounts but also significantly more volume. Some of that is liquidity driven, but the biggest driver is increased awareness.”
Adeghe says this growth in volumes helps to reduce market friction and transaction costs. “It is definitely more efficient,” says Adeghe. “From the seller’s perspective, there is a bigger universe of buyers to help you achieve a better price.”
As a private market asset class becomes established, the formation of a secondary market is the next natural evolution. “When an asset class scales over a decade, it builds inventory for secondary funds,” says Voss, noting that both traditional and GP-led secondary opportunities are emerging in infrastructure, private credit and venture capital.
Voss says it is a “big question” whether the growth in secondaries will lead to fewer primary funds being launched. “Rather than accessing via a blind pool, will LPs increasingly opt to buy into an existing portfolio? It’s an ecosystem, so a different supply-demand balance may exist going forward. Primary funds ultimately become secondaries inventory.”
So are we witnessing a structural shift? “That’s to-be-determined,” says Voss. “If private markets follow the path of public markets, secondaries will take a much larger share of capital. Maybe the model of buying, owning for five years and selling needs to evolve to the Warren Buffett approach of intending to own companies forever. But there would still need to be a liquidity solution.”
Voss notes that the vast majority of public market transactions are secondary trades – every trade after the IPO. Given secondaries only make up 10% of private market trades “you could argue that there is a lot of room to grow”, he says. “It’s getting increasingly competitive, and more capital continues to come in. It seems to be the strategy of the day.”
Everyone is seemingly waiting to see how the rest of the year plays out. “We all hope that there’ll be more M&A and IPO activity. Everyone will be proceeding with a different set of diligence questions than they had at back end of 2024,” adds Adeghe.