The movies from my teenage years foreshadowed the topsy-turvy world of today’s private equity industry. Back then, we heard about strange things afoot at the Circle K (Bill & Ted’s Excellent Adventure) and dogs and cats living together (Ghostbusters). Today, the lack of distributions and secondary sales from longstanding leaders are strange things in the industry, and the convergence of public and private assets might feel like dogs and cats living together.

I’ve been thinking about what commitments from LPs will look like on the other side of this logjam. Spoiler alert: expect a meaningful haircut in institutional commitments, with inflows from private wealth offering the possibility of filling the gap.

None of this should come as a surprise. Five years ago, in The Day of Reckoning for Private Equity, I suggested we had already hit peak returns – but that it would take a while to show up in the numbers. At the beginning of this year, before Liberation Day, I discussed why distributions are unlikely to catch up with new money in the ground for several more years (When Will Private Markets Normalize).

Institutional Commitment Models

As Hugh MacArthur at Bain & Co. noted on a recent Capital Allocators podcast, distributions as a percentage of invested capital held steady at 20%-30% for years until 2021. Since then, those figures have fallen – first to 15% and potentially around 10% this year. In other words, the average holding period for a private equity investment has more than doubled, from four years to ten.

If this doubling of holding periods is permanent, allocators will cut commitments by half going forward. More likely, the duration extension will be temporary but may not fully revert to the prior 4 to 5-year hold for some time. The drought in distributions also compels allocators to question their confidence in their commitment models.

Allocators will decrease commitment sizes going forward because of longer holding periods and model uncertainty. For example, Meredith Jenkins of Trinity Wall Street mentioned on our Friends Reunion podcast that they have cut annual commitments by 20% to account for longer-duration holds.

But there’s more…

Liquidity Management

In the 1990s, Yale’s public equity portfolio consisted of a small group of active managers. To rebalance, Yale called a manager in its portfolio, withdrew some capital, waited a week or two for sales to settle, reallocated funds, and waited again for a different manager to buy underperforming assets. That was standard.

Then ETFs came along. Today, many institutions hold ETF positions to streamline rebalancing. Importantly, they expect the ETF to underperform their active managers and accept lower returns on that portion of the portfolio in exchange for liquidity.

Private markets will follow a similar playbook. Interval funds and other semi-liquid structures are emerging as tools for better liquidity management. Institutions in the future will allocate a small portion of their private equity portfolios to these vehicles to provide flexibility in managing cash flows, even if the expected returns are lower.

The Private Equity Portfolio of the Future

Put these factors together, and the implications are clear: normalized private equity commitments from institutions will fall. That old $150 commitment made to achieve $100 of exposure might soon look like $55-80.

Here’s the math:

• Past Commitment: $150 to maintain $100 to privates.
• Duration adjustment: Decrease by 25-50%: $75-115
• Model uncertainty adjustment: Reduce by 20%: $60-90
• Liquidity buffer: Reduce by 10% ($54 – 81)

How Will Private Equity Grow?

Even as institutional pacing slows, private equity can still grow if the wealth channel adopts scalable structures that balance access with liquidity. As explored in our Private Wealth mini-series, the mega alts platforms are sprinting to replicate their private credit success in equity.

Private credit works beautifully in an interval fund, as income offers a regular stream of liquidity. Private equity is more challenging in a semi-liquid box. As described on past episodes of Capital Allocators with Steve Nesbitt and Kipp deVeer, highly diversified portfolios of secondaries and co-investments may provide a vehicle that allows private wealth to access private equity. But it’s hard to imagine achieving scale without primary deal activity.

If the private equity industry can crack the code for private wealth, private equity will see growth for many years to come.  If not, we’ll have a long, slow decline until the dust settles.

What started with the Wizard of Oz echoed in The Terminator: “We’re not in Kansas anymore.”