In the fourth quarter, the persistently low distribution environment continues to dominate our Narrative Maps for both GPs and LPs. The continued backlog of private equity “inventory” contributed to the lowest year for fundraising since 2020.
Of note, Q4 was particularly weak for fundraising, with only $133B raised, or about half the average amount raised in fourth quarters over the last five years. The sustained weakness in the fundraising environment continues to drive the other major themes highlighted in our Narrative Maps – from the “retailization” of private equity, to the rise in continuation vehicles, and even the push for firms to differentiate using AI.
For the first time in years, we are more constructive on exits and distribution yields in 2026. As the record levels of dry powder raised during 2021 are maturing in older funds, GPs who have been slow to deploy face a “use it or lose it” decision, which we believe contributed to a rebound in deal activity in 2025 that will continue. While full year data is not yet available, monthly average sponsor backed announced deployment was up ~47% over 2024 and ~80% over 2023 through October.
NAV growth for North American and European Buyout, barring a surprise to the upside in Q4, will have underperformed the S&P 500 for three straight years. In the language of our models, this means the ratio of intrinsic value of private equity assets (IV) has converged with NAVs, and now those models are closer to parity. Conditioned on parity or better as our new status quo, this is a positive for the exit environment. As a result, our Nowcast models project that distribution yields will increase steadily over the year, improving steadily over the course of 2026. There is substantial uncertainty on either side of this forecast; we interpret these moves as suggestive of less cyclical pressure gumming up the works of the private markets machine, but continued secular headwinds need to be countenanced.
As outlined in our market update last quarter, we believe there are four ingredients required for a healthy exit environment, (i) a supportive macro backdrop, (ii) healthy IV/NAV spread, (iii) a positive carry trade (attractive ROA/ROE) and (iv) aligned incentives. As we move into 2026, many of the early signs of recovery that we highlighted in our September tariff update remain in place, especially for distributions, though there remain reasons for caution as well:
Macro (Positive): Relatively strong macro fundamentals, supported by strong domestic demand and a surging positive trade impulse—machine-driven forecasts for Q4 point to >5% real growth after >4% in Q3.
IV/NAV (Positive): Current indicator sits at 97% (vs. two-quarter trailing NAV) and 95% (vs. contemporaneous NAV) and has remained above ~95% for five consecutive months for the first time since the 2022 downturn.
ROE (Negative): Implicit, levered returns of new buyout deals remain challenged, despite Fed / base rate easing and tight credit spreads.
We are more positive on distributions, but we are not universally positive industry-wide. First, the basic mechanics of fund age are playing a part. Funds raised during the boom are facing dry powder pressure to deploy, which will raise the likelihood of more sponsor-to-sponsor activity, and funds raised after the boom, who did not uniformly buy at all-time-high prices, are likely to begin crystalizing early wins (and do not face the same IV/NAV headaches). Software managers with inventory facing perceived existential risks from AI, but valued at growth multiples, are unlikely to trade. Zombie funds represent an omnipresent and growing tax on the liquidation potential of industry-wide NAV. Hence, distributions may improve but we are far from calling for new records to be reached in 2026. Lastly, we maintain that the New Exit Game remains in force, as we plan to detail further in our upcoming contribution to Evercore’s State of the Market report: some of the pressure on exits is a function of a change in the repeated game between GPs and LPs that is more secular and longer-lasting, and which we believe will favor GPs with demonstrable alpha-generating capabilities.
Just as important, our Nowcasts do not point to evidence of easing pressure from the Twin Scarcities. Absent a historic melt-up in market-wide asset prices, we expect private equity returns to remain challenged by high entry and holding multiples. What affects the exit market is the relative value of private equity holding values vs. their intrinsic value. But the absolute level of prices remains high—comparable public assets (proxying for IV) have just caught up. And an iron law of finance is that high prices = low expected returns.
You can find the full market update here or view at our private markets research platform, Katmai Labs (subscribe here).
Sources: Private Equity International Fundraising Report Full Year 2025, Goldman Sachs, Dealogic, Atlanta Fed GDPNow