WTT: Can Private Markets Normalize?

In this What Ted's Thinking, Can Private Markets Normalize? I posed the question of whether private equity will ever be able to recycle capital fast enough to support successive fundraises without strain. The answer, I'm afraid, is no. In a world dominated by short termism, does it seem odd that private equity holding periods are getting longer? Public market investors trade faster than ever, and social media dopamine hits are relentless. Yet private equity portfolio companies are now held for more than six years on average. Private equity professionals don't have different genes than other investors. They face a structural problem. Too many portfolio companies cannot find a buyer. A year ago, I asked the question, when will private markets normalize? At the time, I argued that expectations for a surge of capital returning from private equity exits were premature. That assessment proved correct. While exit activity increased, it remains far below what would be required for private markets to recycle capital fast enough to support successive fundraises without strain. I've continued to think about whether normalization is possible this year. Once again, the answer is no, not yet. I'm starting to wonder if the answer is no, not ever. Viewing private equity through a supply and demand lens helps explain why. On the purchase side, growth remains robust. On the exit side, supply overwhelms demand. Supply and demand for purchases. Over the past decade, the total unrealized value held by global private equity funds has tripled, rising from approximately 1,100,000,000,000.0 to 3,200,000,000,000.0. For this to happen, private equity markets had to expand on both the capital and opportunity fronts. Demand for private equity has surged as institutional allocations rose motivated by a long history of strong returns. In addition to tripling deployed capital, private equity firms now sit on another $1,200,000,000,000 in dry powder. Looking ahead, further growth in demand seems likely. Pools of capital that are under allocated to private markets, most notably private wealth, insurance companies, and sovereign wealth funds, are continuing to increase exposure, supporting ongoing purchase activity. The supply of companies willing to sell to private equity is also substantial. In The US alone, roughly 87% of businesses with more than a $100,000,000 in revenue are privately owned, representing more than 19,000 companies. This universe of potential targets provides abundant raw material for private equity firms to own many more businesses. Both demand for private equity exposure and the supply of acquisition opportunities are well positioned for growth. Supply and demand for exits. Exit activity tells a different story. While investors have a strong desire to exit portfolio companies, buyer demand has not kept pace. The private equity business model relies on finite life funds with successively larger vintages. LPs have limits on the capital they can deploy. When capital is tied up in existing funds, it constrains commitments to future ones. This dynamic explains the industry's push towards new pools of capital, private wealth in particular. The math of capital recycling can be complex, …