Private Capital Returns Flatten Amid Market Uncertainty in Q2 2025, PitchBook

What's New

According to PitchBook's Q2 2025 Private Capital Indexes report, private capital delivered a near-flat return of just 0.1% in the second quarter, marking a significant deceleration from the 1.0% gain in Q1. The slowdown was driven by a notable -1.1% decline in private equity, while venture capital rebounded with a 2.7% return. Direct lending surged 8.0% for the quarter, and funds of funds jumped 6.1%, reflecting diverging fortunes across asset classes as market conditions remained uncertain.

Why It Matters

This performance snapshot reveals the uneven terrain facing institutional investors as they navigate private markets in 2025. The flattening overall returns and negative private equity performance suggest increasing valuation pressure and potential headwinds for the asset class, while the strength in direct lending and venture capital signals selective pockets of opportunity. With $4.3 trillion in net asset value across active funds, even modest quarterly swings represent billions in capital at stake for pension funds, endowments, and family offices allocating to alternatives.

Big Picture Drivers

• Valuation repricing: Private equity's -1.1% quarterly decline reflects ongoing adjustments to portfolio company valuations, with buyout funds down -1.8% as managers face pressure to mark holdings closer to public market comparables amid uncertain exit environments.

• Credit opportunities: Direct lending's exceptional 8.0% quarterly return demonstrates strong demand for private credit as banks retreat from certain lending activities and spreads remain attractive in a higher-rate environment.

• VC stabilization: Venture capital's 2.7% gain marks a turnaround after sluggish Q1 performance (0.8%), with multi- and later-stage funds leading at 2.9% as AI-driven valuations and selective IPO activity provide positive momentum.

• Real assets resilience: Infrastructure and real estate delivered modest positive returns (−1.4% and 2.0% respectively), offering relative stability compared to private equity's volatility during the quarter.

• Geographic divergence: North American funds (74.5% of index weight) showed resilience with a 191.4 five-year indexed return, significantly outperforming Asia (146.0) and Rest of World (129.8) regions.

By The Numbers

• 0.1% – Overall private capital quarterly return in Q2 2025, down from 1.0% in Q1

• −1.1% – Private equity quarterly decline, the first negative return since Q4 2024

• 8.0% – Direct lending's standout quarterly gain, leading all asset classes

• 13.2% – Private capital's five-year annualized return, maintaining strong long-term performance

• $4.3 trillion – Total net asset value of active funds included in the indexes as of Q1 2025

Key Trends to Watch

• Fund dispersion widening: The gap between top-quartile and bottom-quartile funds continues to expand dramatically, with top-quartile funds delivering a 238.2 five-year indexed return versus just 132.0 for bottom-quartile performers, underscoring the critical importance of manager selection.

• Smoothing adjustments reveal higher volatility: Desmoothed returns show private capital's adjusted annualized volatility at 14.7% versus 8.3% reported, suggesting investors may be underestimating true risk levels and overestimating diversification benefits when relying solely on reported figures.

• Private debt gaining momentum: With a 5.9% one-year return and 9.6% five-year annualized return, private debt continues attracting significant allocations as institutions seek yield and downside protection, with the asset class now representing 11.7% of the overall private capital index.

• Secondaries maintaining premium: The secondaries market delivered a 5.9% one-year return and 15.1% five-year annualized return, outperforming most other strategies and reflecting continued strong demand for liquidity solutions as limited partners rebalance overweight private market exposures.

The Wrap

The Q2 2025 results underscore the growing complexity of private markets allocation decisions, with traditional private equity facing headwinds while credit strategies and selective venture opportunities offer relative outperformance. Institutional investors should focus on manager selection quality given widening performance dispersion, consider the smoothing effects that may understate true volatility, and potentially increase allocations to private debt and secondaries strategies that have demonstrated resilience. The 13.2% five-year annualized return for private capital overall remains attractive compared to many public alternatives, but the path forward will likely require more tactical navigation across subcategories rather than broad-based exposure.