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Can private equity bounce back?

Goldman SachsAlex Blostein, Allison Nathan, Mike Nickols, Gina Lytle
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  • Private equity returns over the next two to three years are projected to be more subdued than historical averages, with the 15% to 20% net IRR range observed in the 2020–2022 vintages expected to be difficult to replicate due to a higher interest rate environment.
  • A global $2.5 trillion of dry powder, representing approximately $5 trillion of leveraged purchasing power, must be deployed over the next several years, creating a dynamic of excess capital chasing limited opportunities that will drag on returns.
  • The pace of capital deployment is forecast to accelerate in the coming couple of years as financing availability improves and credit spreads tighten, though the return of capital to limited partners remains a prolonged process expected to last through the next 12 months.
  • Industry growth is anticipated to shift from the 30% acceleration seen in 2021 and 2022 to a slower but positive rate over the next five years, with primary growth drivers emerging from non-US markets (specifically the Middle East and Asia) and wealth management channels.
  • Structural shifts are expected where private credit continues to capture market share from private equity by offering double-digit returns with lower risk, while semi-liquid products launch to provide low single-digit liquidity options for retail investors.
  • Market consolidation through both organic and inorganic means will likely continue as firms diversify into credit and infrastructure, with larger firms gaining share via multi-asset allocations and smaller firms facing pressure unless they demonstrate diversification, global exposure, and strong wealth channels.
  • Fundraising success over the next three to four years will determine which managers can successfully raise subsequent vintage funds for 2026, 2027, and 2028, while the industry enters a mature phase requiring clients to be more discerning regarding expertise and value creation.
  • Deal-making activity and the secondary market (currently over $100 billion annually) are expected to expand as valuations converge and the IPO market picks up for larger assets, contingent on decreased uncertainty regarding interest rate paths and the emergence of rate cuts.
  • The private equity sector remains a significant component of long-term allocations expected to persist through the next decade, with overall optimism for the second half of the current year and into 2025 dependent on the realization of lower rates and more well-functioning markets.