Why Private Equity Is Losing to the S&P 500: Key Risks & LP Pressure

This article’s depiction of private equity’s current crisis is well supported by recent data. PE fund returns have trailed the public markets; exit volume and values have collapsed from the 2021 peak; Institutional investors are increasingly wary as cash distribution (DPI) falls, and financial engineering tools have proliferated in lieu of real exits. Below is a breakdown of core trends, drivers, risks, and what to watch in 2026.

1. Underperformance Relative to Public Markets

Multiple sources corroborate that PE returns have fallen below benchmarks. For example, the State Street private markets index returned ~7.08% in 2024 while the S&P 500 delivered ~25%, across 1-, 3-, 5- and 10-year horizons. The MSCI Private Capital Universe shows private equity funds earned roughly 5.6% in 2024, while private credit funds posted ~6.9%. These figures mirror the article’s claim about median funds failing to beat the S&P even using IRR.

2. Exit Bottlenecks and Liquidity Pressures

Exit value globally fell to approximately USD 392.5 billion in 2024—its lowest level in five years—with trade sales making up half that total and IPOs only ~12%. Exit volume rose modestly in 2024 compared to 2023 but remains suppressed relative to historical averages. Quarterly data show that Q1 2025 exits fell sharply (473 exits, USD 80.8B) — the lowest in two years. However, as of Q3 2025, exit values are recovering: US exit value reached USD 485.5B across 846 exits, including a strong reopening of IPO exits. Still, these are concentrated in high-quality or large assets, leaving many smaller or underperforming portfolio companies stuck.

3. Aging Portfolios, Zombie Funds, and Cash Distribution Decline

PE firms are holding large inventories: estimates indicate ~12,900 portfolio companies in U.S. PE at end-September 2025, many held well past pre-pandemic norms. Median holding periods hover near 6-7 years. “Zombie funds”—PE vehicles over 10 years without full exits—have grown in asset size, and their remaining assets often return modest recovery only (i.e. 44-53¢ on the dollar claimed for unsold legacy assets)[Primary article]. Cash distributions have dropped sharply: DPI metrics for funds launched in 2019 are much lower than for earlier vintage years, indicating less cash returned relative to capital invested [Primary article]. This squeezes LP liquidity and dampens ability to commit to new funds[Primary].

4. Rise of Alternative Liquidity Mechanisms and Consequent Risks

Given the difficulty in executing traditional exits, GPs are increasingly employing tools such as continuation vehicles (self-deals), NAV loans, and dividend recapitalizations to provide liquidity [Primary article]. According to related data, continuation vehicle exits account for ~20% of PE exits in 2025 up from previous years; NAV loans reached USD 100B in 2024 and are growing rapidly [Primary article]. However, these mechanisms often feature conflicts of interest (GP setting valuations on both sides) and risk that LPs receive less than fair value, or that they are locked into additional fees or further illiquidity [Primary article].

5. Fundraising and Strategic Shifts: Private Credit & Sector Focus

Fundraising for buyout PE funds is sharply down: global PE fundraising across all strategies is projected under USD 600B in 2025 vs USD 734.5B in 2019, and buyout funds raised just USD 190.2B H1 2025 [Primary article]. PitchBook data shows US buyout funds raised USD 214B through Q3 2025 vs USD 360B in 2024 [Primary article]. In contrast, private credit has expanded—tripled over the past decade—and outperformed PE in 2024 in MSCI indices. There is also sector tilting: strong investment in tech/TMT, infrastructure aligned to AI/data centers, energy transition, and stable cash flow assets are attracting LP interest[Primary article].

6. Strategic Implications & Open Questions

For LPs:

• Due diligence must intensify around liquidity risk, valuation practices (especially for continuation vehicle transactions), rollover mechanics, and GP fee structures tied to engineered “exits.”
• Evaluations must shift emphasis to DPI (distributions to paid-in) rather than IRR or TVPI alone.
• Rebalancing required given illiquid exposure and liquidity needs (e.g., for pension cashflow).

For GPs and fund managers:

• Need to manage expectations: realistic fundraising scenarios, delayed exit timetables, and compression of valuation multiples.
• Focus on assets likely to see true exits: tech, AI infrastructure, energy, regulated utilities, healthcare carve-outs.
• Innovate around structures (e.g., GP-led secondaries, co-investment, continuation vehicles) but with transparent governance to avoid litigation or LP backlash.

Open questions include:

• Will interest rates begin to decline significantly in 2026, easing the cost of capital and valuations? If so, when and by how much?
• Can the IPO market sustain momentum across sectors beyond high-profile names? Are buyers willing to bridge price expectations?
• What will happen to underperforming or lower-tier portfolio companies that are difficult to exit—will write-downs accelerate, or will GPs employ more aggressive continuation strategies?