Private Equity: Distributions Are Bouncing Back - Neuberger Berman

Private equity investment trusts are showing early signs of recovery after an extended period of weakness that depressed valuations across the sector. According to Neuberger Berman analysis, discount compression accelerated in the second half of 2025, with major vehicles staging notable recoveries. HarbourVest Global Private Equity narrowed its discount from 46% in April to 28% currently, while Pantheon International compressed from 47% to 27% over the same period. The exception has been 3i Group, which saw its substantial valuation premium narrow rather than widen. This discount compression signals shifting institutional investor sentiment after years of valuation erosion that prompted widespread concern about private equity's future appeal.

The sector's weakness has deep roots in monetary policy rather than fundamental business deterioration. Beginning in 2022, rapidly rising interest rates damaged long-duration, high-growth assets across all categories, creating a pronounced headwind for private equity valuations. However, the persistence of underperformance relative to public markets—even as interest rate cycles have eased since mid-2025—has forced institutional investors to reassess whether private equity's historic 10-year return of 595% (the highest among Association of Investment Companies sectors) reflects durable structural advantages or represents returns dependent on cyclical conditions of cheap leverage and booming equity markets. The sector appeared to stabilize in early 2025, and H2 2025 performance suggests investors have tentatively concluded the growth opportunity remains intact.

The performance gap between private equity and public equity markets remains a central challenge. Over the 12-month period measured, most private equity trusts delivered share price returns of 1.3% to 9.8%—a range substantially below the MSCI World Index return of 20.1% and far below emerging markets equity returns of 43.67%. This performance differential has redirected significant capital toward public market alternatives, even as underlying NAV performance for major vehicles has remained positive with neither Pantheon nor HarbourVest recording negative discrete-year NAV returns since February 2021. The disconnect between stable-to-positive underlying asset values and weak share price performance reflects the liquidity and valuation discount dynamics that have plagued the closed-end fund structure.

Importantly, current discount levels—while significantly compressed from April 2025 trough levels—remain substantially elevated relative to pre-pandemic baselines, suggesting incomplete institutional rehabilitation of private equity sentiment. The improved pricing environment represents a tactical valuation recovery rather than wholesale restoration of confidence in the sector's competitive positioning against public markets. This conditional recovery reflects skepticism that private equity can sustain historical return levels without the supportive backdrop of ultra-low interest rates and equity market momentum that characterized the 2010-2021 period.