The problems facing private equity funds present opportunities for astute investors

The majority of listed private equity funds are trading at steep discounts

Should a shrewd investor seize the opportunity before it narrows?

In comparison to net asset value (NAV), the majority of listed private equity funds are trading at significant discounts. These discounts suggest that investors are skeptical about the funds' ability to sell a large number of the holdings in their portfolios at the prices at which they are currently holding them. This concern stems from a number of years of few exits. Nonetheless, over the last 18 months, managers have begun to more successfully monetize assets. Is there any low-hanging fruit that a shrewd investor can take advantage of before the discounts start to fade?

Prior to evaluating whether listed private-equity funds provide value at discounts, it is important to comprehend the cyclical difficulties that private equity has been dealing with. Over the past ten years, private equity has become increasingly popular, mostly because of its solid track record. According to Pitchbook, over the past ten years, returns have consistently outperformed public market buyout funds, achieving an internal rate of return (IRR) of 15% worldwide. Since returns are usually based on managers' semi-annual valuations, the fact that they displayed little volatility made this appear even better. For instance, in 2022, valuations separated from listed markets, with private equity declining by 4.1% and global equity markets falling by 25.4%.

Initial public offerings (IPOs), "trade sales" to another business in the same sector, or sales to another private equity buyer are the usual ways that private-equity funds sell their holdings. The industry was in a goldilocks market in 2021. According to McKinsey, global exits totaled over £1.7 trillion that year, more than three times the amount in 2007. Many businesses that had profited from lockdowns or refinanced at historically low interest rates were sold off by funds. Windfalls were produced by an unprecedented number of IPOs, many of which were made at irrational valuations. The majority of these IPOsincluding Allfunds, Cazoo, Deliveroo, Dr. Martens, and Petco, to mention a fewlater saw a 50% decline.

By 2023, exits had dropped by half to £800 billion. As a result, capital callsthat is, money that investors were putting into funds to pay for new investmentsquickly surpassed the amount of money distributed to investors (often commitments that they had made years earlier). As a result, there was a significant cumulative difference between what investors were receiving and what they were expected to give back.

What is the performance of private-equity funds?

The total assets under management for the entire private equity industry now exceed £14 trillion, but the amount of capital returned to investors, with the exception of 2021, is not keeping up with the growing scale of private equity, which has tripled in size over the last ten years and doubled over the last five. According to Bain Capital, distributions as a percentage of NAV dropped to 15% in 2025 from an average of 29% prior to the pandemic.

The investment period of a typical private equity fund is five years, and the fund itself has a ten to twelve-year maturity period. This implies that the final investment will be held for a maximum of seven years, though funds typically try to sell an investment sooner (e.g., three to five years). However, due to the recent slowdown in exits and the flurry of dealmaking in 2021, private equity funds have ended up holding many companies longer than anticipated. "The average holding period for assets at exit is floating around seven years," Bain observes. "The industry is still sitting on 32,000 unsold companies worth £3.8 trillion." In the meantime, the median holding period for all investmentsnot just those being soldis at a record 6.3 years.

The industry now faces a serious issue as a result of this impasse. Only 19% of the 2021 acquisitions had been sold by 2025, compared to 30% of the funds' investments from 2011 to 2020 by year four. These businesses need to be sold quickly or at the very least go through a "dividend recapitalization," which entails taking on debt in order to pay out a sizable dividend. In order to raise money for their subsequent funds, managers must return cash to investors.

Last year, more than a third of the biggest buyout funds traveled to raise money. However, fundraising is difficult; according to McKinsey, capital raised in Europe decreased 41% year over year to £118 billion in 2025. Fundraising is said to take an average of 23 months. In the meantime, more funds than ever before are attempting to raise capital; according to Bain, there are 18,000 funds with a combined goal of raising £3.3 trillion. Perhaps only a third of this goal will be accomplished.

Blue-chip mega funds have an easier time raising capital (25% of capital is raised by funds exceeding £10 billion), but they still have to give investors their money back from existing funds. Distributions verify the accuracy of the valuations and performance in addition to giving investors money to cycle back into new funds. The eating is the proof of the pudding. Naturally, investors want their money returned as soon as possible, and this is turning into a point of contention. A survey conducted by data firm Preqin found that less than 20% of private equity investors are happy with the rate of exits.

The process by which private equity funds exit.

Thus, it is necessary to start deals. Some managers have transferred holdings from one of their own funds to another during the exit drought. Some were successful in persuading investors to support continuation funds, which are new funds created especially to purchase assets from maturing funds. Continuation vehicles can help set a floor for the price of assets that need to be sold, and they currently account for 14% of exits by value. Investors are concerned, though, that they could be used to conceal the true worth of underperforming assets, postponing the day of reckoning. In general, these remedies will never be able to replace a significant increase in IPOs and deal-making.

The good news is that, according to McKinsey, exits increased to £1.3 trillion in 2025the second-highest year ever. Although the Middle East crisis's effect on markets is still uncertain, 2026 is probably going to see a sustained uptick. In 2025 and the beginning of this year, there has undoubtedly been a lot of mergers and acquisitions (MandA) activity. Corporates are net asset buyers and have solid balance sheets. Additionally, it is anticipated that private equity buyers will make bigger purchases this year, enabling the "pass the parcel" of sales from one private equity owner to another, whereas last year they tended to concentrate on add-on acquisitions. Naturally, this means that the debt markets must continue to be encouraging.

Discounts that are justified.

What does a pick-up in exits mean for discounts and private equity funds? According to some investors, fund managers typically value their portfolios conservatively and will be surprised when they sell their holdings. Exits have recently been made at a marginally higher valuation than the current one. Skeptics will counter that only the best assets are being sold right now.

Generally speaking, private equity justifies the existence of a NAV discount. Even when the traded price of bonds or loans issued by portfolio companies clearly shows some trouble, some funds might hold investments at cost. In other situations, they might not accurately represent the state of the market. With transactions involving Birkenstock, Galderma, Douglas, Renk, Younited, and Zabka, IPOs increased in late 2023 and 2024, but the trend was brief. However, some private equity managers won't reset the marks on their holdings because they believe the IPO discounts required to secure exits are too steep.

Investors are therefore entitled to contest the NAVs that managers have reported. Discounts on the purchase and sale of shares in unlisted funds, however, have stabilized at about 15% in the secondary market and may tighten as buyers like Ardian, Coller, and Jefferies increase activity. Listed private equity funds, on the other hand, are trading at discounts of at least thirty percent and ought to be a far better option than investing in secondary funds with their numerous layers of fees.

Items to purchase in the private equity market.

The oldest private equity firm in the UK is 3i (LSE: III). In 2024, the share price was trading at a 70% premium to NAV; however, it eventually corrected and is currently below NAV. However, with two-thirds of the NAV in discount retailer Action, the portfolio is incredibly concentrated. The enterprise value to earnings before interest, tax, depreciation, and amortization (EV/Ebitda) ratio used to value this is 18.5. The investment is risky due to the extremely high portfolio concentration and the slowing growth of Action.

Rather than paying high prices for new investments, we can search for trusts that are trading at a discount to NAV and are repurchasing their shares with cash from disposals. Oakley Capital Investment (LSE: OCI), for instance, trades at a very alluring 35 percent discount to NAV. The price of HarbourVest Global Private Equity (LSE: HVPE) is thirty percent off. It recently sold NAV a £300 million portfolio of five buyout fund positions at a 6% discount, using part of the proceeds to repurchase shares.

Since December 2021, Pantheon International (LSE: PIN) has been trading at a 30 percent discount to NAV. With an average holding period of more than five years and half of the portfolio in pre-2020 vintages, the portfolio is mature. Additionally, the NAV might not keep up with some of this year's valuation increase. In order to reduce the discount, the company also announced some buybacks, but activists on its shareholder roster, such as AVI, Metage, and Saba, are putting increasing pressure on it to do more.

Eurazeo (Paris: RF) offers a strong 50% discount to NAV when looking outside of the UK. In addition to managing substantial sums of money from third parties, the portfolio is highly varied in terms of industries and approaches (buyout, growth, venture, and asset-based financing). With 31% of its assets sold since 2023, it is on track with its exit strategy.

MCI Capital (Warsaw: MCI) is a fantastic opportunity in Poland that provides exposure to the fintech and e-commerce sectors as well as the steadily expanding region of central Europe. Travel technology company eSky, which currently owns Thomas Cook, is part of the portfolio of the company, which has been listed since 2000. It trades at a 30% discount to the NAV after realizing successful exits in 2025.

Wendel (Paris: MF) is trading at a 50% discount to NAV because its strategy is unclear. Like the Wallenberg family and EQT or the Bonomi family and Investindustrial, it is managed by an established industrial family from northern France. Nonetheless, the recent acquisitions of Monroe Capital and private equity firm IK Partners are revolutionary. IK Partners' last three funds have performed well and should allow the company to keep raising money.

The 3.3 billion unlisted portfolio has no value once you account for the value of IK Partners, Monroe, cash, and a share in the listed testing and inspection company Bureau Veritas. Wendel continues to trade at a deep discount despite having drastically reduced its holdings of Bureau Veritas, the coatings company Stalh (after almost 20 years), and telecom tower operator IHS with a 20 percent premium to NAV. For the patient investor, this is an excellent opportunity.