Private equity retains its crown as the AIC sector with the highest 10-year performance, at 595%. Yet its recent history has been chequered, with widening discounts and nerves over valuation. The sector appeared to be stabilising at the start of 2025, and in the second half of the year, has seen some green shoots. Investors may be edging back.

The immediate catalyst for the sector’s weakness was the sharp rise in interest rates in 2022, which hurt all long-dated, high growth assets. But even as interest rates have fallen, investors have continued to weigh up whether private equity’s stellar returns were a moment in time – a response to cheap borrowing and booming stock markets – or whether the structural growth story still holds.

In the second half of 2025, they appear to have concluded that there is still a growth opportunity in the sector. Discounts have come in significantly for many trusts. HarbourVest Global Private Equity (HVPE) has been typical of the wider sector, with the discount moving from 46% in April, to 28% today. Pantheon International (PIN) was 47% in April and is 27% today. Only 3i (III) has moved in the opposite direction, where its substantial premium has narrowed. However, discounts remain significantly wider than their pre-Covid levels and unusual for a higher growth sector.

Underlying NAVs haven’t shown nearly the same volatility. Neither Pantheon nor HVPE has seen a negative discrete year of NAV since February 2021. The problem has been that returns have not been sufficiently compelling to tempt investors away from public markets. Barring some outliers, trusts have delivered a share price return of 1.3% to 9.8% over the past 12 months. The MSCI World rose 20.1% over the same period, while the MSCI Emerging Market index is up 43.67%. Investors have gone elsewhere in search of growth.

Groups have worked hard to support their share prices over the past few years. Trusts have restructured, launched buyback programmes, and undertaken significant marketing and promotion activities to ensure that the trusts are better understood and to bust some of the myths surrounding private equity. On the whole, this has worked, but to take the next leap forward, the sector needs to re-establish its credentials as a high growth option.

Momentum building

This is happening, slowly. Alan Gauld, lead fund manager on the Patria Private Equity Trust (PPET), says the second half of the year saw the strongest performance since interest rates rose in 2022. He says: “It’s dangerous to extrapolate from six months performance, but we had NAV total return of 7.9%. That’s what you’d expect from private equity. It could be the start of a bounce back.” He says the underlying performance of their portfolio looks strong, with average revenue growth at 12-13%.

Richard Hickman, managing director at HVPE agrees there are tangible signs of progress: “Q4 distributions were notably better than the prior year. They are not back to where we think they should be, but there has definitely been progress. In Q1 to date, there has been more exit activity. There’s an IPO pipeline building up in the US and Europe. We’re seeing a lot more activity in the venture and growth portfolio. Overall, it’s looking good.”

The macroeconomic environment is also becoming more favourable. The tariff uncertainty stalled M&A, says Gauld, which tends to turn the wheel of private equity: “When there is more activity and confidence, the more transactions and exits happen.” While only a handful of portfolio companies had a direct impact from tariffs, it affected sentiment across the market. A more stable and predictable environment should be helpful. Equally, a more benign interest rate environment is useful. In continental Europe, interest rates are 2% and rates should fall in the UK and US as well. Hickman says it is notable that Europe has performed better than the US this year.

Activity spreading

Hickman says that exit activity has tended to be concentrated at the larger end of companies. The Permira and Warburg Pincus £2.7bn sale of Evelyn Partners to NatWest Group has been a high profile example. He believes this should start to trickle down into smaller and mid market companies this year. Equally, amid venture capital companies, activity has been concentrated on payments companies. The Stripe and Revolut IPOs are imminent, for example. This should also broaden out in 2026.

Gauld says as this exit activity spreads, it could deliver significant uplifts to NAV. He says: “They should help NAV growth: cash comes back and that allows us to invest with more momentum. It’s probably not a big V-shaped recovery, but there should be a bit more momentum in terms of cash back and new investments. This will get that wheel moving a bit more quickly.”

The SaaS problem

The fly in the ointment has been the software-as-a-service (SaaS) area. This had been a popular hunting ground for many private equity companies with its asset light, high margin business models making it a profitable option. However, there are now fears it will be taken out by artificial intelligence. This has prompted a sell-off in listed SaaS businesses in public markets, which has accelerated since the launch of a series of plug-ins for Anthropic’s Claude AI tool.

This could spread to the private equity sector, and software-heavy trusts such as HG Capital have already seen weakness in their share prices, even if there has been no tangible impact on the companies they hold so far. Hickman points out that many software businesses are vertically integrated with their clients. They deliver “mission critical reporting, filings, regulatory and compliance. Those boring but complicated and delicate processes.” Most clients won’t be in a hurry to go through the upheaval of replacing their existing provider, he says.

However, it is a reminder of how quickly certain sectors can be disrupted and is an argument for diversification in private equity. Hickman points out that SaaS businesses represent “low to mid” single digits of the HVPE portfolio, and they also have exposure to AI within the venture and growth parts of the portfolio, which should help hedge some of the risks.

With that caveat, it could be a better year for the private equity sector. Exit activity – through M&A and IPOs – is increasing, which should get the flywheel moving. There is still scope for discounts to come in further, even if they have moved a long way in 2025. Private equity may finally start looking like a growth sector again.