Private equity has been tested in recent years: Investors earned strong returns on stocks while PE struggled and alternative managers and investors couldn’t even agree on valuations. All of this has prompted a flight to safety, with investors committing most of their capital to the largest, brand name funds last year.
Venture capital continues to operate under considerable pressure, according to Sarah Samuels, a partner at NEPC. In a recent interview, Samuels highlighted the challenges facing the private equity industry, especially in VC, which may decline further.
“I believe there’s more pain to come in venture capital marks,” Samuels told Institutional Investor.
New data from S&P Global Market Intelligence shows the weak exit environment led global private equity fundraising to fall for the third year in a row. Private equity funds worldwide secured $680 billion in 2024, down 30 percent from the roughly $966 billion raised in 2023. In 2024, 1,783 funds closed, down 40 percent year-over-year. Fund closings peaked in 2021 at 6,132.
According to Samuels, the relationship between managers and investors has been strained because LPs aren’t getting the distributions they’re expecting and therefore have less money to commit to GPs. Additionally, many VC firms are keeping the valuations of holdings at 2021 and 2022 levels, which were peak years for the market. Instead of marking down valuations, firms have resorted to alternative methods to make distributions to investors, such as bridge financing, insider rounds, and tender offers.
“There’s a lot of goodwill that’s been destroyed between GPs and LPs,” Samuels said before adding, “I’m a little worried about some of the dollars in the ground today for further down marks.”
Within buyouts, NEPC isn’t seeing deals happen fast enough due to “an impasse between buyers and sellers.”
“They don’t want to meet on price,” she said. “The sellers don’t want to come down, the buyers don’t want to come up further.” Samuels added that the IPO market is open, but private companies need to be properly priced before going public.
With the goodwill that’s been tested, the vast majority of capital committed in 2024 went to mega-funds, leading many newer or smaller funds to struggle raising capital. “There’s a flight to perceived safety and quality, and not wanting to take a risk,” Samuels said.
While cautious about the potential of investments that have already been made, Samuels is optimistic about current opportunities for capital providers. “We think it’s a great time to be a provider of capital,” she said, highlighting strategies such as traditional and direct lending (both private and public), real estate and infrastructure debt, as well as secondaries, GP stakes, and continuation vehicles, which have recently gained momentum.
Going forward, Samuels expects private equity to outperform public markets after two years of double-digit outperformance from stocks. However, while PE is still expected to outperform public markets, she thinks that absolute returns could be lower than they have been historically due to the “cost of debt, where valuations are at, and the competition of our capital.”