Why US Private Equity Is Lagging Behind Public Markets: What LPs Want Now

The private equity (PE) industry, historically prized for generating alpha over public equities via leverage, operational improvements, and long-term illiquidity, is now under intense pressure. Rising interest rates since 2022 have made debt financing costlier, dampening deal-making and making leveraged buyouts less accretive. As valuations dropped in much public, exit markets tightened—especially for IPOs—and many GPs are unwilling to exit at prices that crystallize losses. In consequence, investor patience has been tested by record-high backlogs of portfolio companies.

Limited Partners (LPs) are raising red flags. The annualized return of 5.8% (net) for U.S. PE from 2022 through Sept 2025 fails to compensate for illiquidity, high fees, and long holding periods, especially vs an 11.6% S&P 500 return over the same span. Distributions (cash returned) remain depressed; many assets are marked to model rather than realized via exits. Some LPs are ‘firing’ underperforming PE managers; others are selling stakes in secondary markets—often at discounts—to free up liquidity. Fundraising has dropped precipitously: the ~$320B raised so far in 2025 (through end-Q3) indicates one of PE’s weakest years in a decade.

Strategic implications are substantial. First, GP models must adjust: fewer exuberant LBOs, more disciplined investing, more operational value creation, and more realistic exit timing expectations. Second, fundraising strategies must appeal to LPs via fee mitigation, performance transparency, or evergreen structures. Third, consolidations are probable: weaker mid-market firms may be acquired, merged, or disappear. Fourth, regulatory and market scrutiny is increasing: LPs demand real returns, less mark-ups, more frequent reporting; and competition from public and private credit is changing the risk/return profile of PE.

Open questions remain. Will macro conditions—interest rates, inflation, economic growth—permit a strong exit rebound in 2026? Can GPs close valuation gaps without sacrificing returns? How many primarily buyout-oriented firms will be forced to pivot to infrastructure, private credit or sector specialization? What structural changes (e.g. fund terms, transparency, GP-LP alignment) will become standard as discipline and skepticism grow?