2 days ago
Private-capital funds: Depressed distributions with no end in sight
AFTER a bacchanal of deal activity lasting into 2021, private-market participants are still nursing a hangover. Assets acquired at premium valuations at the market peak have been creating headaches for general partners (GPs), who must decide whether to hold out for buyers at current valuations or stomach write-downs for a shot at quick liquidity.
Net asset value (NAV) is increasingly bottled up in old funds that should otherwise be liquidating. For now, it seems only top-shelf assets are finding buyers, while assets with weaker fundamentals are still on ice.
In this column, we take a sober look at how private-capital markets are adjusting to a world of depressed distributions, with no exits in sight. Limited partners (LPs), hoping for an outpouring of liquidity in 2025, may instead want to brace themselves for another dry year.
Recent vintages falling further behind
Private-capital distributions remain subdued, extending a slowdown that began in the wake of 2021's exit boom. What once looked like a brief pause increasingly feels like a prolonged holding pattern and a test of patience for LPs.
This slowdown is especially apparent in the divergence of the net-cash-flow paths between vintage cohorts. While cash flows for most historical vintages follow remarkably similar paths, recent vintages are drifting from the script. The traditional cadence of investment, ramp-up and harvest appears to be slipping out of rhythm.
In some cases, as with the 2015-2017 vintages, this slowdown looks like mean reversion, dragging these vintages back down after a period of unusually strong liquidity – particularly in venture capital and buyout. In others, like the 2018-2020 vintages, the drop appears more acute, suggesting not just a return to historical norms but also a deeper pullback in realisations.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
Sign Up
Sign Up
Structural shifts may be reinforcing the deviations from long-run averages. Strategy evolution in areas such as private credit, shifting exit dynamics in buyouts, and a valuation overhang in venture and real estate all suggest that today's market environment is markedly different from past cycles. Historical analogues are becoming less-reliable guides.
But the message is clear: Recent vintages aren't just behind the curve – they're navigating a new course.
Water everywhere, but not a drop to drink
Across private-capital strategies, NAVs in old funds (those that have outlived the average liquidation age of their asset class) are at or near record levels, reaching US$250 billion in the fourth quarter of 2024, according to data from the MSCI Private Capital Universe. For LPs anticipating liquidity from their more mature private-equity (PE) commitments, some unwelcome news: This rise in late-life NAV is largely attributable to distribution rates, which have fallen to record lows, rather than to strong growth.
PE distribution rates remain depressed, with specific implications for funds that are over the hill. The dearth of distributions is bottling up assets that were once reliable candidates for exits. This has meant fund lives that drag on longer than expected, and LPs are increasingly looking to more mature corners of their portfolios for liquidity.
The same can't be said for private credit and private real estate. In the former, the self-liquidating nature of loans has stabilised distributions and kept NAVs in check through funds' golden years. For the latter, write-downs kept a lid on valuations coming out of 2020, even as transaction activity remained depressed.
For PE distribution rates to revert to historical norms and old NAVs to run off, there are two options: one hopeful, one not. In the optimistic scenario, deal activity recovers and a wave of exits provides some much-needed liquidity. In the other, GPs come to believe that many of these long-held assets are overvalued and accept write-downs as the cost of winding down a fund, as we've seen in real estate.
Tempering cash-flow expectations
Across PE and private real estate, distribution rates are near historic lows, and recent market volatility may put cash flows under further pressure when we start to see data for 2025.
Historically, prolonged downturns in public-equity markets have been reflected in private-capital distributions. The dotcom bust and 2008 global financial crisis both hit distributions hard; but in recent years, distributions have remained depressed despite a rebound in public equities.
For LPs counting on distributions to fund capital calls from other private commitments, this combination of public-equity sell-offs and falling distribution rates presents a challenge: if forced to sell liquid assets to meet capital calls, it's likely to be when prices are down.
Private credit, in contrast, has continued to distribute more or less apace, benefiting from elevated interest rates passing through to lenders. This cash-flow diversification may become an increasingly important benefit of private-credit allocations.
Not everything is rosy in private credit, however. GPs are increasingly writing down loan values as borrowers struggle under the weight of persistently high interest rates and new-found uncertainty around the economy's trajectory.
Valuation multiples in free fall may call for an Ebitda parachute
Between 2022 and 2024, buyout exits were sold at lower median-valuation multiples than assets still held in portfolios – an inversion from historical norms – despite exhibiting stronger margin growth and lower leverage. In contrast, held assets, carried at higher multiples, are grappling with contracting profitability and rising leverage, raising questions about valuations and their paths to exit.
These questions are amplified by the macro backdrop: sticky inflation risk, higher-for-longer interest rates and growth uncertainty that could tip into stagflation. Held assets confront these macro headwinds with little balance-sheet cushion, given their narrowing-since-entry margins and rising leverage.
Over the past decade, exited assets have consistently exhibited stronger median Ebitda (earnings before interest, tax, depreciation, and amortisation) margin growth since their entry and more contained median net-debt-to-Ebitda ratios than held assets, which reflect GPs' tendency to prioritise exiting higher-performing assets.
This selection trend proved especially relevant between 2022 and 2024, as exited assets' robust fundamentals cushioned the impact of falling valuations. In 2025, with multiples under pressure and rising macro uncertainty, strong fundamentals may be the last line of defence against deeper erosion in exit proceeds and more strain on LPs.
Is the party over?
Recent vintages of private-capital funds have plenty of ground to cover if they're going to catch up with their older peers' cash-flow patterns, and the surprising volatility in public markets of early 2025 is unlikely to help them close the gap.
Returns for older private-equity funds have been flat, but more assets are accumulating in funds that are struggling to liquidate their holdings. GPs are preferentially exiting portfolio companies with strong fundamentals, leaving an unclear path for selling those remaining assets.
LPs who were hoping for a rebound in transaction activity, and thus liquidity, in 2025 may need to adjust their plans.
The writers are vice-presidents, MSCI Private Capital Research. Written with the assistance of Uday Karri, vice-president, and Daniel Hadley, senior associate.
