As top startups delay IPOs indefinitely, institutional portfolios are seeing their venture allocations morph into significant, illiquid growth equity holdings. These "private forever" companies are great businesses but create a portfolio construction problem, tying up capital that would otherwise be recycled into new venture funds.
An effective manager evaluation technique is to recognize that everyone presents their polished "best self" initially. An allocator's primary job during due diligence is to actively investigate beyond this facade to uncover the manager's "true self"—how they operate under pressure and handle failure—before committing capital.
When polled, virtually no Limited Partners (LPs) admit to having a median or below-median private equity portfolio. This collective overconfidence is a powerful behavioral bias that sustains demand for the asset class, as everyone believes they can outperform the average even if market returns compress.
The primary growth drivers for private equity—sovereign wealth and private wealth channels—prefer concentrating capital in large, brand-name firms. This capital shift starves middle-market players of new funds, leading to a likely industry contraction where many may have unknowingly raised their last fund.
GPs are holding assets longer not just due to market conditions, but out of fear for their own business. They believe extending the hold period will allow underlying business growth to eventually hit their crucial Multiple on Invested Capital (MOIC) targets, which is critical for successfully raising their next fund.
Unlike illiquid private equity, private credit funds provide a steady stream of cash flow through coupon payments. This self-liquidating feature perfectly solves the liquidity needs of the private wealth channel, making it a far more suitable and popular alternative asset for that investor base.
The private equity market has abundant capital and willing companies, yet transactions are stalled. This is because General Partners (GPs) fear selling at low returns and Limited Partners (LPs) fear over-commitment due to liquidity concerns, creating a gridlock where no one wants to act.
Institutional allocators are currently over-allocated to illiquid private assets due to the denominator effect. When distributions from these funds finally resume, the initial wave of capital will be used to rebalance portfolios back toward public markets, not immediately recycled into new private equity commitments, a trend private GPs may not see coming.
Contrary to common belief, the Total Portfolio Approach (TPA) isn't about nimble trading. It's a framework that uses data to understand the risk of any investment relative to a simple reference portfolio (e.g., 70/30). This allows allocators to fund compelling opportunities flexibly, freed from rigid, pre-defined asset class silos.