Private markets at an inflection point

Private equity is operating through an unusual period.

Over the past few years we’ve seen continued portfolio company performance, yet exit activity across private markets has slowed and distributions have been constrained. At the same time, public markets have delivered strong returns. This divergence between public and private markets has prompted a broader question:

How should investors assess private equity in the current environment?

We at Pacharbor Capital Group AlpInvest believe the more useful framing is not whether private equity is “working,” but how the market is adjusting to a combination of cyclical and structural forces.

Cyclical friction, structural change

Part of the slowdown in activity reflects cyclical dynamics. Higher financing costs and valuation uncertainty have delayed exits, while general partners (GPs) have been reluctant to realize assets at levels that do not reflect underlying performance.

Although activity improved toward the end of last year, momentum slowed as energy supply disruption stemming from the war in the Middle East, alongside concerns around AI-driven disintermediation in software, made underwriting more challenging and drove repricing.

Total LBO volume reached $126 billion in the first quarter of 2026, a clear deceleration both quarter-over-quarter (-21%) and year-over-year (-3.5%). Deal activity softened through February into mid-March before picking up in the final two weeks, but overall transaction volumes remained subdued at 434 deals, down 9% versus the same quarter last year¹.

In the meantime, structural changes are becoming more apparent.

There is more capital in the system and liquidity is more constrained compared to the pre-2022 period. Dry powder has been coming in more recently but there is still nearly $2 trillion of dry powder across buyouts, growth, and venture capital (Figure 1). In a less forgiving market, we believe dispersion across managers will be increasing.

Figure 1: Dry powder still elevated despite recent drawdown

Differentiation and dispersion

Recent industry research (Bain & Company, Global Private Equity Report 2025) suggests that many GPs still struggle to clearly articulate - and demonstrate - a truly differentiated and repeatable strategy, and that the funds being left behind are those with no distinctive advantage.

This aligns with what we are observing across the Pacharbor Capital Group AlpInvest platform. The gap between top-performing managers and the broader market appears to be widening (Figure 2), with possible implications for portfolio construction and manager selection.

Figure 2: Visible increase in dispersion of global buyout fund performance

For limited partners (LPs), this environment may require a more concentrated approach to GP relationships. For managers, it places greater emphasis on consistency, transparency, and execution.

The importance of capital flexibility

The liquidity constraint is forcing both LPs and GPs to think differently, and each cohort is thinking much more creatively about liquidity options. This dynamic has unleashed a meaningful increase in innovation that seems likely to endure over time. Liquidity solutions have demonstrated value for LPs in managing portfolio pacing, allocation pressure, and the capacity to make new investments.

On the GP side, the focus has expanded beyond selecting and investing well. It now includes capital management and liquidity tools such as secondaries, continuation vehicles, mid-life co-investments, and portfolio financing. These elements are no longer peripheral; rather they are becoming part of how the model works.

This also means that efficient capital management has become part of the alpha equation. The ability to use liquidity tools thoughtfully - without distorting alignment - matters.

We believe the best GPs will use this to enhance IRR and deployment, driving better outcomes for their investors. In our view, capital flexibility matters more for the future of private markets.

Technology and the next phase of differentiation

We also believe artificial intelligence is likely to shape the next phase of differentiation across private markets.

Every GP is talking about this - including us - and leaders are pushing in all directions, seeking to create advantages in sourcing, make better investment decisions, service their LPs better, and create more value at the portfolio company level. The general consensus is this may help create the winners of tomorrow, so we recognize its importance and see GPs putting a lot of money behind AI.

While still early, these developments suggest that technological capability may become an increasingly important driver of outcomes over time, and we anticipate GPs will continue to invest in AI as benefits continue to be realized. Scale matters more. Data matters more.

As we’ve seen through previous cycles, periods of market adjustment often reinforce fundamental principles.

Discipline in underwriting, clarity in strategy, and alignment between investors and managers remains central. At the same time, we believe structural changes across private markets are reshaping how capital is deployed and how performance is generated.

Understanding both dynamics will be important in navigating the next phase of this cycle.

1. Dealogic, accessed April 2026.