Unlike past downturns caused by recessions or banking failures, the current market stagnation exists despite strong fundamentals. With over a trillion in dry powder and ample credit available, the paralysis is driven by behavioral factors and valuation disputes, not a broken financial system.
The market's liquidity crisis is driven by a fundamental disagreement. Limited Partners (LPs) suspect that long-held assets are overvalued, while General Partners (GPs) refuse to sell at a discount, fearing it will damage their track record (IRR/MOIC) and future fundraising ability. This creates a deadlock.
GPs are caught between two conflicting goals. They can hold assets longer, hoping valuations rise to meet their paper marks and maximize returns. Or, they can sell now at a potential discount to satisfy LPs' urgent need for liquidity, thereby securing goodwill for future fundraises. This tension defines the current market.