US Buyout Funds Stopped Beating Public Markets in 2019. The Unsold Backlog Has Reached 33,000 Companies.

What's New

Private equity's core promise held for roughly three decades and then broke. Steven Kaplan of the University of Chicago Booth School of Business, whose analysis of US buyout funds anchors a report on Bloomberg Television, finds outperformance against public markets running from the 1990s through 2018 and reversing from 2019. Two forces did it. Big tech pushed public market returns higher, and the prices paid during the boom made positions harder to exit. The result sits in inventory. PitchBook counts more than 33,000 companies held by private equity firms, against 19,000 a decade earlier.

Why It Matters

The industry's defence is that this is a timing problem and holding longer produces a better price. Kaplan reads the same behaviour as a distribution failure. Managers who paid high prices in 2020 and 2021, then absorbed rate increases, are declining to sell, and distributed capital per invested has fallen as a result. Limited partners asking for their money back are being told to wait. That reframes the debate from valuation to cash, which is the one number a general partner cannot mark.

Big Picture Drivers

• Rates hit private equity twice: Steven Rattner, chairman of Willett Advisors, argues higher rates pull capital toward fixed income and separately raise the cost of debt-financed buyouts. Both squeeze what a sponsor can pay while still hitting target returns.

• Kaplan disputes the low-rate explanation: He does not accept that near-zero rates flattered the asset class, since buyout funds outperformed across rate environments and public markets got the same tailwind. His preferred test is the comparison against the S&P 500, which absorbs the same macro forces.

• The arithmetic of a return changed in 2022: Andrew Weinberg, founder and CEO of Brightstar Capital Partners, cites Bain research showing that growth of 5% used to deliver a given return, while roughly 12% bottom line growth is now needed to reach the same place.

• Exit congestion compounds: Deals struck at peak prices are underperforming, sponsors are holding rather than selling, and the backlog grows. Each additional year of hold pushes the required exit multiple higher.

• Fee structures are being unbundled under pressure: Jason Tyler, President of Wealth Management at Northern Trust, describes sponsors offering fee-free direct co-investment alongside fund commitments, aimed at large investors who were drifting toward direct deals.

• Liquidity is being engineered to reach smaller cheques: Sponsors are building more liquid vehicles for investors unwilling to lock capital for 8 to 10 years, which brings in smaller average investment sizes.

By The Numbers

• 33,000: Companies currently held by private equity firms per PitchBook, up from 19,000 a decade ago.

• 1990s to 2018: The span over which US buyout funds largely beat public markets per Kaplan's analysis, with the pattern reversing from 2019.

• 5% to 12%: The shift in bottom line growth required to produce the same return before and after 2022, per Bain research cited by Weinberg.

• 8 to 10 years: The lockup that newer semi-liquid structures are designed to shorten.

• 12 times EBITDA: What one founder, Dan Namerow, realized selling his electrical company after eight years, at the top of the cheap capital cycle.

Key Trends to Watch

• DPI becomes the headline metric: Marks are contested and IRR can be managed through timing. Distributions cannot. Expect LPs to press on realized cash and expect fundraising to sort accordingly.

• Manager dispersion widens visibly: Weinberg expects investors to finally separate firms built on leverage and multiple expansion from those built on operational work. He is talking his own book, and the claim is testable against realized returns over the next few vintages.

• Fee concessions spread from the largest LPs downward: Once direct co-investment without fees is offered to the biggest clients, mid-sized institutions will ask for the same terms.

• The backlog either clears or gets refinanced: Continuation vehicles, secondaries, and partial sales are the pressure valves. Watch whether the 33,000 figure falls or whether positions simply move between structures.

The Wrap

The thesis holds if the backlog clears at prices that restore distributions, and if manager returns spread wide enough that the operational claim can be checked rather than asserted. It fails if public market concentration reverses and the 2019 crossover turns out to be a comparison artifact of big tech's run rather than a deterioration in buyout economics. Kaplan's own framing leaves that door open, since he built the comparison against the S&P 500 precisely because both sides face the same conditions. If the index narrows and private equity distributions recover together, the reality check will read as a cycle rather than a break.