Private Equity's Uneven Recovery Shows Buyout Dominance Amid Broader Private Markets Challenges, MSCI Reports

What's New

MSCI's Q4 2024 Private Capital Benchmarks Summary reveals a private markets landscape struggling to maintain momentum, with most strategies posting positive but underwhelming returns compared to public markets. Buyout funds maintained dominance with cumulative returns "comfortably eclipsing all other private-asset strategies" despite showing signs of slowing growth.

Why It Matters

This mixed performance comes at a pivotal moment as private markets navigate higher costs of capital, prolonged exit timelines, and fundraising challenges. With distribution rates hovering at decade lows and new tariff-related risks emerging, investors need precise benchmarking to guide portfolio decisions in an increasingly complex environment.

Big Picture Drivers

• Credit supremacy: Private credit outperformed private equity for the third consecutive year, driven by continued pass-through of elevated interest rates to lenders.

• Equity fluctuation: Equity fund returns showed greater variability while underperforming credit strategies, with buyout posting 5.5% calendar-year returns versus 9.7% in 2023.

• Dispersion narrowing: The performance gap between top and bottom asset classes tightened to just 10 percentage points, the smallest observed in the past decade.

• Real estate pressure: Real estate portfolios remained under stress with negative returns in Q4 2024, continuing a trend of soft performance since mid-2022.

• Deal thawing: Declining dry powder as a percentage of capitalization (20.7%, a decade low) may signal a modest pickup in deployment activity despite subdued fundraising.

By The Numbers

• 5.5%: Calendar-year 2024 returns for buyout strategies, down from 9.7% in 2023

• 2.3%: Q4 2024 return for venture capital funds, outpacing buyout in a quarterly rarity since 2022

• -3.0%: 2024 return for real estate funds, facing continued downward pressure

• 7%: Mezzanine debt funds' 2024 return, the top performer among private capital strategies

• 1.0: The distribution-to-contribution ratio in Q4 2024, approaching breakeven after six years of slow distributions

Key Trends to Watch

• Exit markets remain largely frozen, with distribution activity still muted even as venture capital shows modest recovery in late-stage valuations.

• Revenue and EBITDA growth for buyout-backed companies have returned to long-run averages, suggesting a more uniform market following post-COVID volatility.

• Healthcare, consumer staples, financial services, and energy investments appear most exposed to tariff risks, while real estate shows relatively lower exposure.

• Private-market strategies struggled to keep pace with public markets in 2024, with private equity underperforming the MSCI ACWI IMI by roughly 11 percentage points.

• Fundraising has slowed across all strategies, with distribution rates at decade lows, suggesting a potential liquidity crunch for limited partners seeking portfolio rebalancing.

• Venture capital returns have plateaued over the past two years despite Q4's promising uptick, indicating persistent challenges in monetizing older positions.

• Investment intensity data shows infrastructure and natural resources becoming more strategically important despite their mixed performance, particularly as investors seek assets with inflation protection.

The Wrap

Private markets are adjusting to a new normal characterized by compressed returns, tighter liquidity, and narrower performance dispersion. While buyout maintains its long-term dominance, investors must adapt to a marketplace where exits remain challenging, fundraising has slowed, and new geopolitical risks add complexity to portfolio construction decisions.