Private equity is inherently an illiquid asset class, with money locked in closed-end structures for extended periods, from the time of investment until eventual sale of the portfolio holdings. To address this liquidity challenge, investors often employ diversification as a strategy. By consistently committing to a portfolio of funds over time, they can anticipate a continuous flow of distributions that can be used to cover capital calls. This approach helps mitigate the impact of underperforming funds, as stronger-performing ones can offset shortfalls. Furthermore, the timing and magnitude of capital calls and distributions tend to balance out, minimizing idiosyncratic risks—similar to how diversification works in the public stock market.

However, the analogy with the public market also extends to the systematic aspects of the portfolio that resist diversification efforts. When the tide goes out, ships sink in unison. Despite limited available data, there are indications that this phenomenon is currently playing out in the private equity landscape.

For instance, Burgiss, a reputable collector of limited partner (LP) data, has suggested that 2023 might witness the most significant cash-flow deficits in the industry's history. Similarly, when examining our own funds of funds ("FoFs") holdings, which represent diversified portfolios of private equity funds, it is evident that distributions have significantly dwindled in 2023 compared to previous years.

As can be seen from the chart, the median distributions relative to commitments across the 10 FoFs in our sample have shrunk from 27% in 2021 to 14% in 2022, and were a mere 7% in 2023. This substantial decline has caught many investors off guard. As a result, investors find themselves in the position of needing to respond to these changing circumstances. Since they cannot compel their fund managers to sell the underlying investments, their only alternative is to initiate the sale of their fund holdings themselves.

In mcp's annual investor survey, more than a quarter of investors expressed that they are considering selling some of their private equity positions for liquidity reasons, marking a 160% increase compared to 2021.

This quest for liquidity has reignited interest in the LP segment of the secondaries market. Over the past decade, LP transactions steadily declined in favor of general partner ("GP")-led transactions, where the underlying fund managers initiated liquidity options in various forms. However, this trend began to reverse from 2021 onward. In 2020 and 2021, GP-led transactions dominated the market, but by 2022 and 2023, LP-led transactions regained prominence, as evidenced in the following chart.