PE deals topped $1T. So why are returns and liquidity under pressure?

Private equity dealmaking is approaching the record levels of five years ago, but the sector's liquidity crunch is raising questions about its vaunted outperformance of public assets.

A "fervor" for private equity M&A deals during their strong rebound in the second half of last year drove transactions to a total value of $1.16 trillion — the highest figure since 2021, according to the annual "breakdown" of the sector by private markets data firm PitchBook, a Morningstar company. Exit transactions showed an "encouraging" rise from low volumes in the prior three years, the study said. Other signals were less positive: Unallocated capital known as dry powder has reached a record of nearly $1.1 trillion; private equity fundraising efforts suffered their worst year since 2020, and the vehicles' investment returns continued to lag public indices.

Financial services that include wealth management represent only a small portion out of a universe of more than $3.7 trillion in assets under management across 13,143 private equity-backed companies in the U.S. So the ongoing, bullish flow of private equity deals specific to wealth management looks different from the broader investment sector. But financial advisors, wealth management firms and their clients are getting sales pitches aimed at the so-called democratization of private assets for retail investors and 401(k) retirement savers. And, despite warning signs about the risks, some of those efforts have proven successful.      

"Investors should really look beyond the standard claims of diversification and high returns," said Devon Drew, founder and CEO of AssetLink, a data-driven distribution service connecting asset management firms with advisors and wealth management companies. 

While private equity investments draw investors "who want to access growth and innovation that are no longer available in public markets," traits such as their lack of liquidity and more opaque structures often mask the extent of volatility and correlation with basic stock indices, Drew added. "All of those need to be taken into consideration when you're looking at if it's suitable and when advisors should look at private equity."

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A track record all over the map

Private equity returns have swung wildly since 2020, to the tune of quarterly rolling one-year performance that started in the single digits and topped 50% for most of 2021 before tumbling to nearly zero in 2023, then rising back to 7.8% through the first quarter of last year, according to PitchBook. The authors of the report noted that, like the figures for AUM and dry powder, those for performance metrics usually take an extra six months to be reported by the general and limited partners of the various funds. 

While the sector-wide percentage may obscure outliers that netted above or below that rate, investors "have become accustomed to consistent double-digit returns, and the industry has yet to deliver on that 'promise,'" the report said. Middle-market private equity funds' returns of 8.5% did surpass the 8.3% growth in the S&P 500 and 4.1% losses in the Russell 2000 during the 12-month span ending in March 2025, though, and it has been several quarters since that was the case.

"In the quarters ahead, we expect PE fund returns, regardless of fund size or type, to broaden and find solid footing in the double digits," the report said. "PE dealmaking has been resoundingly strong in 2025, and, more importantly, exit activity has also been robust, which should kick the PE flywheel back into gear for returns and distributions to LPs."

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A dim performance picture

Other experts are reading these types of results less optimistically. Over the past 20 years, data comparing private equity funds' returns to publicly traded vehicles using "equivalent" metrics, rather than "the flawed internal rate of return (IRR) measure preferred by industry insiders," suggests that they're basically performing the same as the S&P 500, according to a January report by Eileen Appelbaum, the co-director of the Center for Economic and Policy Research, a nonprofit organization that provides independent research and analysis. Since 2022, returns have tumbled below that of the S&P 500 for a simple reason, she wrote.

"PE funds have struggled mightily since mid-2022," Appelbaum wrote. "In 2022, the S&P 500 fell by nearly 20 percent. PE firms failed to mark the value of their portfolio companies to market. Instead, the general partner (a committee of principals of the PE firm, not an individual that manages the fund) used its own guesstimates of what the companies in its portfolio were worth. Fund managers declared that their portfolio companies had largely escaped the effects of the market downturn. As a result, PE portfolio companies are overvalued, and a persistent gap between buyers and PE sellers has made it difficult for PE funds to exit their investments, either through a sale or via a stock market IPO."

The higher interest rates of recent years have added to the problem by making debt more expensive. And those factors are leading to more so-called zombie funds that haven't liquidated their portfolios to distribute returns to investors after a decade, the use of complex financial maneuvers that send cash to shareholders without a traditional turnover of the investment and further challenges with raising capital, that study noted. However, Appelbaum predicted that private equity funds would perform better in 2026 than a year earlier — as long as the AI bubble doesn't pop and there is no larger economic slowdown in the U.S.

But last year set a low bar, especially in terms of capital formation. Just 327 funds closed their investment rounds at a combined value of $277.9 billion, compared to 668 at $381.6 billion in 2024, according to the PitchBook study. That ongoing trend, which PitchBook called "the only weak link for PE," carries bumper effects into other areas of the funds' businesses.

"Although exit activity continues to increase, it has not yet reached a sufficient pace to expand fundraising efforts, and we expect 2026 to face a similar situation due to trends in manager consolidation," the PitchBook study said. "Limited capital availability for LPs has created a fundraising environment where LPs prioritize longstanding relationships with GPs or larger managers with strong track records and multiple strategies under their umbrella, often at the expense of smaller or newer managers seeking to raise capital. Those that have been able to raise capital have done so in line with historical fundraising timelines, leading to ongoing PE dry powder accumulation."

READ MORE: The lure of private equity investing comes with these risks

Other key trends to watch moving forward

That's why experts in the sector are paying such close attention to the level of exit deals, in which private equity investors sell portfolio companies and distribute the proceeds to shareholders. Last year, the count of such deals jumped 17% to 1,619, and their value soared 90% to $728.1 billion — the highest figures for either metric since 2021 and the first time since then that exits have climbed by a double-digit percentage. But the largest exits drove much of those gains.

"Exit activity has remained muted in recent years — PE firms opted to hold the majority of assets longer amid valuation uncertainty, while only a handful of assets were able to exit at attractive prices," the PitchBook study said. "While large companies have been successful in securing impressive exit sizes, it remains to be seen how quickly the rest of the PE inventory will be able to exit."

None of these murky conditions, however, are likely to push down the flow of deals in wealth management or in other industries receiving private equity investment. Last year, the volume of deals increased 6% to 9,019, and their value surged 36% to $1.16 trillion. Megadeals valued at $1 billion or more "are back in full force," thanks to "improving market conditions that have allowed sponsors to re-open the PE playbook to all types of deals," the study said. 

"The defining theme for PE in 2025 was the resurgence in deal activity," it said. "The Fed's third rate cut in December likely served merely as confirmation to sponsors that deal activity is back in full swing, rather than causing yet another acceleration. Still, it prompted PE firms to end the year with a bang."