McKinsey Sees Private Equity on Comeback Trail for 2025

The last few years have been challenging for private equity, but the asset class has started to emerge from the fog, according to a new report from consultancy McKinsey & Co.

In 2024, private equity returns declined to 3.8%, the third consecutive year in which the public markets outperformed the asset class. Buyouts returned 8.5%, while private growth equity returned 2.7% between the fourth quarter of 2023 and the third quarter of 2024. During the same period, the S&P 500 returned 36.3%.

The private equity asset class has been a strong performer in the long term: Buyouts returned annualized gains of 14.1% and 13.4% over the past 10 and 25 years, respectively. Growth equity and venture capital returned 14.5% and 10.7%, respectively, during those periods, and the S&P 500 returned 13.5% and 8.2%, respectively. Stronger long-term returns, despite a few weak years, likely explain limited partners’ continued support for the asset class, which is also considered a diversifying asset, according to McKinsey.

The IPO market remains tough: In 2024, only 5% of PE-backed exits were made through initial public offerings, compared with sales to corporates, which comprised of 50% of exits, and sponsor-to-sponsor transactions, which made up 45% of exits.

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McKinsey also observed a rebound in dealmaking and the return of distributions to LPs. Private equity dry powder also decreased, fundraising continues to be challenging, and LPs are increasingly interested in general partner stakes.

Distributions Up, Dry Powder Down

For the first time in nearly 10 years, distributions from private equity managers to their LPs outpaced capital contributions from LPs to managers. The first half of 2024 saw net distributions to LPs for the first time since 2015.

“After a rough 2022 and 23, we saw distributions pick up in the first half, putting 2024 on the track to the best year since 2015, where distributions to LPs outpaced capital contributions,” says Alexander Edlich, a senior partner in McKinsey’s private equity and principal investors practice. “You saw a lot of resilience shining through.”

The ratio of distributions to capital calls was 1.2 in the first half of 2024, while in 2015, the last year in which distributions were greater than capital contributions, the ratio was 1.3.

Dry powder is also decreasing, falling 11% year over year. Dry powder inventory—the amount of capital available to GPs as a multiple of annual deployment—fell to 1.89 years from 2.02 years in the first half of 2023.

“The dry powder we estimate in the first half of the year was about $2.1 trillion,” Edlich says. “This was down from $2.3 trillion in the first half of 2023. It’s still a lot of dry powder, but that reflects the interest in private equity and the conviction that LPs have in it.”

Fundraising Environment

For private equity firms, fundraising was down for a third year in a row, according to McKinsey: a drop of 24% year over year to $589 billion for traditional commingled vehicles. Fundraising hit a high in 2021, when private equity firms raised $952 billion from LPs.

Fundraising is also taking longer: Funds that closed in 2024 were open for an average of 21.9 months, a record high. By comparison, the average was 19.6 months in 2023 and 13.1 months in 2018. The number of private equity funds closing also fell to the lowest level in a decade.

“For a long time, you had the financing environment be quite stuck.” Edlich says. “You had an LP strike, where they weren’t ready to commit until they received their money back.”

While distributions are up, they remain lumpy, the McKinsey report stated, and LPs are choosing to wait for distributions before committing to new funds. But there is good news ahead, especially as distributions return.

“We do hear a lot more excitement from LPs to recommit to the market now that exits, in particular, have been unstuck,” Edlich says.

In a survey of LPs, McKinsey found that 30% of respondents plan to increase their private equity allocations over the next 12 months, “even as public markets outpace [private equity],” Edlich says.

Fundraising does appear more resilient, particularly in the middle market. Funds that range in size from $1 billion to $5 billion in assets under management were the only funds that had a net gain in fundraising, increasing 0.5%. In the first half of 2024, for reference, private equity firms with at least $10 billion in assets saw fundraising fall 42.8%. For firms with less than $250 million in assets, fundraising fell 35.9%.

GP Stakes

GP stakes—LPs directly investing in a general partner—are also growing in popularity. According to McKinsey, 43% of surveyed LPs currently invest in GP stakes. Of the 43%, about 56% said they also are considering buying direct GP stakes.

“That is also largely led by sovereign wealth funds,” Edlich says. “It is not a surprise to us that there is a renewed or expanded interest in GP stakes. Private capital is a massive, $14 trillion industry that has significant tailwinds behind it, very good long-term performance and strong demand from LPs, so it’s unsurprising that there’s major interest from LPs to also participate in asset management economics.”