What's happening in PE?

Much of the recent focus has been on private credit, but the more consequential developments may be unfolding in private equity. The latest Bain Global Private Equity Report provides a great overview of how the PE system is faring as a whole. (Global Private Equity Report 2026 | Bain & Company).

Across podcast conversations on The CIO Chair (The CIO Chair), a recurring theme has been the role of private markets in institutional portfolios. Global pension funds now represent over a third of private equity commitments, with the remainder largely made up of endowments and sovereign wealth funds. Understanding these capital flows i.e. what investors own and their expectations is essential.

The business model

Buyout funds remain the core of private equity. Acquire control of businesses with leverage, create value through operational improvement and then exit. The features are illiquidity and very active asset management.

Around 70% of the direct lending market is sponsor-backed, creating tight linkage between private credit and private equity. Developments in buyouts transmit across the whole private markets ecosystem and is attracting attention from both allocators and regulators.

Why do institutional asset owners allocate to PE?

Private equity offers access to businesses and opportunities that are unavailable in public markets with the ability to influence outcomes through active ownership.

PE is not without its critics. A long-running critique is that private equity ultimately resembles levered public equity with higher fees. There is academic support for this view.

But the conclusion is less clear in today’s market. The investable universe outside public markets has expanded materially and public indices have become increasingly concentrated. Access, sector exposure, and control is the key difference to the listed equity alone and a core part of the allocation case.

The central issue right now - liquidity

The key challenge in PE markets is liquidity.

Exit activity remains subdued, leaving a large stock of assets held well beyond their original underwriting horizon. What was once a five-year hold is increasingly stretching towards seven years plus. This has three direct consequences:

• IRRs decrease as holding periods extend

• Distributions slow, delaying cash back to investors

• Fundraising becomes more difficult, as investor capital remains tied up

With $4trillion dollars of unrealised value still within the system, the industry faces a clear trade-off: maximise exit valuations or return capital.

The growing use of continuation vehicles reflects this trade-off. They provide liquidity for some investors, but do not free up value into the wider markets.

This has the impact of slowing down deal-making.

The prospect of future returns

Given the volume of assets seeking liquidity, it is reasonable to ask why the dry powder is not deploying more aggressively.

The answer lies in the entry point. Multiples remain elevated by historical standards and financing costs are higher than in the previous cycle. The traditional drivers of private equity returns leverage and exit multiple are more challenging. This shifts the value proposition towards greater operating performance impact.

That is more demanding and requires genuine value creation, rather than restructuring cap stacks. It also explains why new deal flow is concentrating in sectors with stronger growth characteristics, such as technology, energy, and healthcare.

New fundraising

Against this backdrop, fundraising is rotating away from venture, real estate, and distressed strategies, and towards infrastructure and secondaries.

Secondary markets are playing a more prominent role. Providing liquidity to investors seeking to rebalance or reduce exposure without waiting for underlying exits.

Despite the pressure, most institutional investors are not materially reducing their private equity allocations. That is an important signal that underpins the health of the overall system. I see the issue as cyclical, working through exits in a challenging period rather than a fundamental loss of confidence in the asset class.

Scale and access

At the same time large asset owners are investing more directly. Sovereign wealth funds and large pension plans, once seen more as allocators are increasingly deploying capital alongside traditional fund structures. As scale builds, so does in-house resource. In Fixed Income, asset owners that have reached critical mass tend to manage the allocation in-house. This dynamic is starting to happen in Private Equity too.

This has implications for overall industry economics:

• Larger investors can negotiate harder on fund fees

• Co-investment is more prevalent, diluting fund returns

• Strong co-investment relationships might create unique access to deals for larger PE houses.

What does this mean for CIOs?

Private equity remains a core allocation. The question is how allocators and firms respond to the liquidity challenge. Liquidity in the ecosystem will remain constrained until exit markets clear. Expect to see more secondaries, partial sales, and continuation funds.

Over the medium term, three key takeaways stand out:

• Return drivers are evolving towards operational value creation

• The underperforming players will consolidate or exit

• The mega allocators will increasingly play a direct role

For CIOs, allocation will boil down to:

• Liquidity management

• Manager selection will focus on access to deals and operational excellence

I expect PE to rise to the challenge, but it will take a fairly fundamental shift to achieve that.