Goldman Sachs Sees Private Markets' Distribution Engine Restarting Within Three Years

What's New

Pete Lyon, global co-head of the Capital Solutions Group, and Michael Brandmeyer, global head and CIO of the External Investing Group, both at Goldman Sachs, argue private markets sit at a structural inflection point in a podcast on Goldman Sachs Exchanges. After unprecedented growth from 2010 to 2022, the distribution engine of private equity has been gummed up since the Fed raised rates 500 basis points, leaving annual distributions stuck at 8% to 10% of NAV against a historical norm of 20%. Lyon and Brandmeyer project distributions normalizing to 15% to 20% and deal activity potentially exceeding the 2021 peak within two to three years.

Why It Matters

The diagnosis cuts against the louder market narrative that private credit cracks and private equity's underperformance versus public markets signal something structurally broken. Lyon and Brandmeyer argue the opposite: the indigestion is mechanical and largely behind the industry. The implication for LPs is that withholding commitments until DPI improves may now coincide with the moment GPs begin clearing inventory. For allocators rotating away from private markets after two years of public market dominance, the timing question is whether to reduce exposure into a normalizing distribution cycle rather than out of one.

Big Picture Drivers

• Structural market evolution: Lyon compares the current moment in alternatives to the decimalization of public equities, with secondaries, NAV lending, and hybrid capital structurally expanding the liquidity spectrum available to sponsors.

• The math behind the freeze: When the Fed raised rates 500 basis points, private equity portfolios were worth less because the levered asset class was suddenly financed at much higher debt costs, but marks were slow to follow, stalling M&A and IPO activity.

• Operating earnings cushion: Three to four years of economic growth have allowed underlying company earnings to grow into valuations even as debt costs stayed elevated, narrowing the bid-ask spread that froze deal flow.

• LP pressure forcing GP action: LPs are explicitly conditioning new fund commitments on prior-fund distributions, creating intense pressure on GPs to monetize positions and reopening the exit pipeline.

• Secondaries as a parallel exit channel: The private equity secondaries market reached roughly $250 billion last year and could double to $500 billion within three to five years, providing a durable escape valve outside traditional IPO and M&A paths.

By The Numbers

• 6x: Growth in private markets between 2010 and 2022

• 500 basis points: Fed rate hikes that froze the distribution engine

• 14 years: Average time from venture funding to IPO today

• Almost 7 years: Average buyout holding period, up from 5.5 years a decade ago

• 8% to 10%: Annual distributions as a percentage of NAV over the past three years, versus a 20% historical norm

• 2%: Current private credit default rate, versus historical peaks above 10%

Key Trends to Watch

• DPI as the fundraising gate: With LPs explicitly conditioning new commitments on returned capital, GPs that clear distribution backlogs first will dominate the next fundraising cycle and accelerate industry consolidation.

• Industry barbell sharpens: The large multi-line public asset managers and discrete alpha-generating specialists are pulling away, leaving mid-sized firms vulnerable to absorption or strategic narrowing.

• Retail liquidity redesign: With retail now representing roughly 20% of private credit, recent liquidity mismatches will likely push sponsors toward longer-duration vehicles and clearer gate disclosures rather than reduced retail access.

• Private credit trading market emerges: A nascent secondary trading market for private credit positions could blur the distinction between public and private credit pricing as the cycle progresses.

Memorable Quotes

• "The circulatory system is not working." Brandmeyer on why the distribution slowdown is the central problem facing private equity, not credit deterioration or public market dispersion.

• "We don't think there's going to be a tsunami of distributions. We think it's going to be more consistent as the market continues to perform." Lyon framing the recovery as steady normalization rather than a single-quarter release.

• "Alpha is cyclical in the private markets." Brandmeyer explaining why three-year rolling private equity returns have turned negative against public markets, and why he expects the relationship to mean-revert.

The Wrap

The case Lyon and Brandmeyer make is narrower than it first appears. They are not calling a bottom in private equity returns or claiming the illiquidity premium has been reliably present over the last three years. The thesis is mechanical: distributions get unstuck because the underlying math works again once earnings, marks, and rates converge, and the secondary market provides an exit channel that did not exist at this scale in prior cycles. That logic only holds if the macro backdrop stays roughly intact through 2027, with capital markets open and no recession deep enough to rewiden the bid-ask spread. The next four quarters of IPO completions and sponsor exits will tell whether normalization is genuinely underway or simply deferred again.