Private Equity’s Funding Gap Widens: How LP Exit Demands & Macro Risks Reshape the Secondaries Market

The latest data signal a major inflection point for private equity fundraising dynamics. According to a recent Institutional Investor summary of Bain & Company’s mid-year 2025 report, there is now a roughly 3-to-1 imbalance between capital being sought and capital LPs are willing or able to commit. Some 18,000 funds are on the road targeting $3.3 trillion in total, yet the supply side falls far short. [1]

LPs appear increasingly frustrated with subdued liquidity and weak distributions. A survey shows 63 % would prefer a full exit—even if that means accepting a valuation haircut—to alternatives like dividend recaps (preferred by only 33 %), LP-led secondaries (20 %), continuation vehicles (17 %), NAV financing (7 %) or leveraged distribution methods (3 %). This suggests pressure will mount on GPs to increase exit activity and improve DPI (distributions to paid-in capital) ratios. [2]

Secondaries are growing in clout: while the market is still small relative to total PE AUM (under 5 %), they are seen as a key liquidity lever for LPs with less severe constraints. Nonetheless, only top-tier LP stakes are finding buyers without steep discounts—stangely leaving majority of LP positions illiquid. [1][3]

The policy environment, especially U.S. tariffs, has depressed deal announcements (April saw a 24 % drop vs Q1 average) and further weakened exits through IPOs. Q1 2025 saw no buy-out fund close above $5 billion—a ten-year first—highlighting shrinking fund sizes and fewer large deals.[1]

Other sources corroborate the general weakness in fundraising. S&P Global reports ~$424.6 billion raised globally across 1,081 funds in H1 2025, which is only 56 % of the full-year 2024 total ($763.9 billion), suggesting H2 will need to deliver substantial gains to make up ground. [related] Meanwhile, PwC notes ~$1 trillion in unsold PE assets lingering on balance sheets in mid-2025 due to exit difficulties. These dynamics together paint a picture of capital deployment and return pressure across the PE ecosystem.

Strategic Implications: First, GPs with strong track records, differentiated strategy or sector exposure will benefit disproportionately, as LPs narrow the circle of capital allocation. Second, liquidity solutions (secondaries, continuation vehicles, full exits) will become central themes; yet many LPs are uneasy with the compromises those require. Third, policy and macro risks (e.g., tariffs, interest rates) are real constraints on exit valuation and volume; GPs must plan under lower-valuation regimes. Lastly, LPs may reallocate some capital toward less illiquid alternatives, or reduce overall PE exposure if DPI remains weak.

Open Questions: Will private wealth inflows or retailization meaningfully boost supply of allocation capital? Can policy contraction (tariffs, regulatory) stabilize or reverse; will IPO markets reopen sufficiently to support exits? How will valuation multiples adjust in, say, software, tech, infrastructure sectors given rising cost of capital? And, what is the resilience of mid-market and emerging managers under this pressure?