Today’s private markets are undergoing a fundamental market structure change, much like public equities did with decimalization and ETFs. This suggests the current illiquidity and complexity are features of a maturing market, not just a temporary downturn.
The industry is polarizing into two camps: massive, multi-strategy public asset managers and highly specialized, alpha-driven boutiques. Mid-sized, less differentiated firms are being squeezed out as the industry matures and funding models shift.
Cash distributions to LPs, the lifeblood of private equity, have slowed as holding periods lengthen significantly (e.g., VC to 14 years, buyouts to 7). This 'gummed up' system is impeding new fundraising and forcing industry consolidation.
PE's outperformance is not constant. It appears flat when public markets surge over 10% but is most pronounced when public markets are flat or negative. This cyclicality explains the recent negative alpha against soaring public indices.
With billions in private capital available, companies no longer need to IPO for growth financing, staying private for over a decade. This fundamentally shifts value creation and innovation away from public markets, unlike in the 1990s when firms like Amazon went public to raise small sums.
Despite negative press, private credit isn't in systemic trouble, with default rates (around 2%) far below historical averages (>10%). The real issue is a liquidity mismatch in retail funds, where gates surprise investors, rather than a widespread problem with credit quality.