According to a recent MSCI analysis of the private equity landscape, in past years value creation often relied on rising valuations and overall market optimism. During the 2020–2021 period, with interest rates near zero, much of the profit simply came from companies being sold at higher prices. That era, however, is now over.
Today, investors are focusing less on theoretical returns and more on real cash generation. It is no coincidence that the phrase “DPI is the new IRR” is frequently cited—emphasizing that what matters are distributions, not promises. The challenge is that investment exits have become more limited, and cash is returning slowly.
To address this, secondary transactions have increased, particularly through so-called continuation vehicles. In simple terms, these structures allow managers to hold an investment longer while providing some liquidity to earlier investors. For some, this is a practical solution; for others, it merely postpones the problem. Whether these vehicles deliver meaningful results remains to be seen.
Meanwhile, the mechanics of value creation in buyouts have shifted. Valuation growth no longer drives performance. Instead, outcomes increasingly depend on whether portfolio companies increase revenues and improve operational efficiency. Simply put, investments generate returns only if the underlying businesses actually perform better.
In the private credit space, the picture is different but equally complex. High interest rates over recent years have supported returns, yet signs of pressure are emerging. One notable trend is the rapid growth of semi-liquid funds, which promise investors greater flexibility.
These funds mainly attract new entrants to private markets by giving the impression that capital can flow in and out relatively easily. In practice, however, liquidity is limited and relies on valuations set by the managers themselves. This means that during periods of stress, withdrawals may be delayed or restricted.
At the same time, loan impairments are rising, particularly among companies struggling to service debt after two years of high interest rates. So far, interest income has offset these losses, but early signs suggest that pressures are far from over.
Overall, private markets enter 2026 more mature but also more demanding. The easy era of soaring valuations is behind us, and value creation now depends on real, measurable results.
The key question for the coming years is straightforward: will these markets be able to provide liquidity when everyone needs it at the same time? The answer will determine whether the current model is sustainable or merely buying time.