Examining the private equity landscape of the past 18 months, a casual observer may conclude that the impacts of the COVID-19 pandemic were short-lived, and that the environment ahead is smooth sailing. Deal activity and exits are at all-time highs. Returns rebounded strongly since the nadir of the pandemic, and in 2020 the asset class posted its highest return in 14 years.1 However, this smooth surface hides significant turbulence beneath. The dispersion between individual funds’ performance has widened compared to the experience of the past decade, reflecting broader differences in trajectories of companies, sectors and segments of the economy.
This dispersion may be a harbinger of a turbulent era ahead—with complexities different from, and in some ways greater than, those that many investors have previously experienced. Some challenges, like digitization and automation, are accelerations of pre-pandemic trends. Others, like inflation volatility, may be reemerging after a quarter-century—but a vastly changed economy and market structure compared to prior periods of volatile inflation mean that history may offer limited guidance. Still others, such as a political and social environment in which private equity may find itself in a spotlight after years of operating in opacity, are new. All these changes are taking place in the context of record-high valuations in private markets, with attendant implications for the way managers must select and manage their investments.