Megatrends in Private Capital
Private capital in 2025 is at a fascinating juncture. On the one hand, we see kind of normal cyclic ebb-and-flow dynamics that have characterised the industry from at least the 1950s. On the other hand, some ongoing changes seem to presage a more profound evolution of the sector.
Both venture and later-stage investing have been characterised by intense cyclicality since the earliest days of the industry. A period of exuberance is often followed by a downturn, often triggered by unforeseen macroeconomic tidings. Depressed valuations, reduced transaction activity, and less fundraising typically follow.
Recent years have shown all the features of such a cycle. The government-provided liquidity that flooded economies around the globe led to an extraordinary period in 2020 and 2021, during which a vibrant IPO market, limited partners’ search for higher-returning assets, and a lack of investor discipline led to a classic bubble in many segments of the private capital industry. Just as surely, the drying up of this excess liquidity and rising interest rates led to a much more austere environment in the years that followed.
These negative dynamics now seem to be reversing in many markets. At least in the U.S., the prospects of a lighter regulatory touch of the new administration seems to be stimulating a wave of merger announcements and proposed initial public offerings. Recovery on the venture side—at least outside the super-hot artificial intelligence market—and in other markets is likely to be more gradual but will surely arrive.
At the same time, we have seen what appear to be more structural shifts in private capital. One has seen the increased interest of investors in “alternatives to traditional alternatives.” Interests in co-investments, secondaries (particularly GP-led transactions), GP stakes sales, and new facets of private capital such as private debt are soaring. These newly popular transactions share the feature of promising a more attractive risk-return trade-off, whether because of lower volatility, greater certainty of cash flows, or a reduced fee drag. Whether these promises will be fulfilled remains to be seen.
A second change in the past few years has been the increasing concentration, as manifested in the growing share of assets garnered by older and larger funds. Despite the considerable evidence suggesting the superior returns associated with younger funds and smaller transactions, there has been a flight to (at least perceived) safety on the part of many limited partners. How to scale while generating attractive returns is a challenge facing many of the “winners” in today’s market. While tools such as operating partners and in-house venture studios hold considerable promise, it is clear that the relationship between private capital groups and their portfolio companies is evolving.
These changing dynamics motivate our new study of growth/PE and VC investors’ key practices and investment drivers across global markets, which I am organising with Professor Emanuele Colonnelli of University of Chicago Booth and the International Finance Corporation, a member of the World Bank Group. The study aims to advance understanding of how groups are evaluating and engaging with portfolio companies. The survey takes less than 20 minutes and offers several practical benefits, including that participants will also receive a customised market report tailored to their investment preferences, allowing them to benchmark their practices against other private investors in similar markets. All responses are strictly confidential and used solely for non-commercial research purposes. The link to the survey is here.
Authored by Josh Lerner
Director, The Private Capital Research Institute (PCRI)
