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Institutional Investors · Liquidity Crisis · Private Equity · Underperformance
Private equity funds, a $7 trillion industry, have significantly underperformed the S&P 500 since 2006, with US PE funds seeing annualized returns of 5.8% between 2022 and Q3 2025 compared to 11.6% for the S&P 500, leading to growing skepticism among institutional investors.
PE funds initially outperformed from 1995-2000 and briefly after the 2000-2001 tech bubble, but have largely tracked the S&P 500 since 2006, with MSCI data confirming the S&P 500's superior performance from 2022 to Q3 2025. Weak exit activity, exacerbated by a 5.25% increase in interest rates from March 2022 to July 2023 and a persistent buyer-seller valuation gap, has created a severe liquidity crunch.
Exits declined to 321 in 2025 from a 2021 peak of 1,210, leaving PE funds with an inventory of 31,000 companies valued at $3.7 trillion, as reported by The New York Times. This situation has led to a rise in "zombie funds," with 2014 funds having 77% of capital still unrealized in 2024, and low distributions to investors, with the median fund launched in 2019 showing a distribution to paid-in capital (DPI) of 22% in 2024, down from 47% for 2016 funds.
PE firms are increasingly using financial engineering tactics like dividend recapitalizations, which reached $28.7 billion in November 2025, and continuation vehicles, accounting for a fifth of all private equity sales in 2025 and totaling $100 billion in assets by the end of 2025. NAV loans also surged to $100 billion in 2024.
These strategies raise concerns among investors such as the Alaska Permanent Fund Corporation and the Teacher Retirement System of Texas regarding valuations and potential fiduciary breaches, as evidenced by the Abu Dhabi sovereign wealth fund's lawsuit against EMG. Fundraising declined in 2025 due to these systemic issues.
