Private Markets' Indigestion Sets Up a Liquidity Wave

Private markets have been sluggish since 2022, but according to Goldman Sachs' Pete Lyon and Michael Brandmeyer, the system is adjusting itself, not breaking down. The drop in distributions is less a sign of market failure and more a delayed mark-to-market correction that is now being helped by strong earnings and GP creativity. For investors who can look past the noise, this period of indigestion is setting up a wave of liquidity and deals that could surpass 2021's peak within two to three years. The advantage goes to those who understand that the illiquidity premium is still there, that private credit defaults remain low, and that the real change is the permanent shift of innovation capital into private markets.

The Circulatory System is Clogged, But the Pressure to Release It is Building

The most immediate pain point in private markets is the collapse of distributions, the cash returned to limited partners. Historically, about 20% of net asset value would flow back to LPs each year. Over the last three years, that number has hovered around 8-10%. The cause isn't a lack of viable exits. It's a mark-to-market lag: when rates jumped 500 basis points in 2022, private portfolios didn't immediately reprice. Leveraged assets were worth less, but the marks stayed high. The system froze.

But the system's own dynamics are now creating a correction. Three years of strong economic growth have let underlying portfolio companies grow into their valuations. Debt costs have eased. And LPs are putting intense pressure on GPs to return capital before committing to new funds. Lyon explains the mechanism:

"Distributions are sort of a circulatory system of private equity. It's the way that the whole thing is where you lock up your money on average. You think that in five to six years you're going to get your money back with multiple."

-- Michael Brandmeyer

That pressure is exactly what's needed to unclog the system. Lyon and Brandmeyer both see signs of motion: a growing IPO backlog, secondary markets scaling quickly, and sponsors getting creative with structured liquidity solutions (NAV lending, GP cash flow lending, secondaries). The system is responding. Lyon frames it as a return to normal hold periods of six to seven years, rather than the compressed cycles of the earlier era.

The conventional wisdom says this stagnation is a structural problem. But looking ahead, it's a temporary rebalancing. The real question isn't whether distributions will return. It's whether your time horizon and liquidity needs align with the gradual recovery. This pays off over 12 to 18 months as deal activity climbs back toward 2021 levels.

The Private Credit Panic is Overblown, But the Real Risk is Structural

Private credit has been "much maligned in the press," as Lyon puts it. Headlines about liquidity mismatches in retail-focused funds have dominated. Yet the underlying data tells a different story. Default rates in private credit are below 2%. Historically, during stressed cycles, they've exceeded 10%. Even in a worst-case scenario where 50% of private credit underperforms, the implied loss rate is only about 5%. That compares to 50% peak-to-trough in public equity markets during the same period.

Lyon directly addresses the fear:

"It's been much maligned in the press and certain aspects of it. But if you look at any historical averages in terms of defaults and underperformance in private credit, we're really nowhere close to even those averages either in private credit or in public credit."

-- Pete Lyon

So where's the real risk? It's not credit quality. It's structural. Retail participation in private credit has compounded at 60% annually for five years and now represents about 20% of the market. Those retail investors often didn't understand that their 5% quarterly liquidity provisions exist for a reason: these assets are legitimately illiquid. When the liquidity mismatch surfaced, it produced a press storm, not a systemic crisis. But it reveals a longer-term vulnerability: if the economy weakens or rates stay high, more investors may test those gates, forcing fund managers to triage redemptions.

The systems-level insight: the liquidity mismatch between the fund's daily expectations and the asset's multi-year holding period is a design feature, but it becomes a bug when investors treat private credit like a liquid bond substitute. The solution isn't to kill the asset class. It's to ensure proper investor education and smarter fund structures. Over the next two to three years, expect the growth of a secondary trading market in private credit to partially mitigate this, though the core dynamic will persist.

The Illiquidity Premium is Alive, Just Temporarily Invisible

One of the most interesting moments in the conversation is when Brandmeyer and Lyon address the common cocktail-party question: "Why invest in private equity when public markets have ripped 40-50% in two years?" Their response, that alpha in private markets is cyclical, is easy to dismiss as sales talk. But the data supports it.

They analyzed periods based on public market returns. When public markets are up more than 10% in a year, private equity tends to be roughly flat relative to public (because of smoothed marks). In normal return environments (0-10%), private equity delivers its historical alpha. And when public markets are negative, private equity dramatically outperforms. The recent underperformance is a direct mathematical consequence of a historic public market surge, not a collapse of the asset class's underlying value.

This suggests that the illiquidity premium, historically estimated at 1-1.5% per annum, doesn't disappear. It just becomes hard to see in the noise of short-term public rallies. The premium is paid out over full cycles, not year-by-year.

Lyon connects it to opportunity:

"We think that within two to three years, you could be seeing distribution environments and deal activities that are even above what you saw in 2021."

-- Michael Brandmeyer

That's a bold claim, but it's grounded in the system's mechanics: the backlog of exits, the creativity of GPs, and the massive dry powder on both sides. The uncomfortable truth is that the best time to commit to private equity is often when it looks worst on a trailing-return basis. The payoff horizon is 3 to 5 years, and many LPs who rebalance out of private markets during this period will end up buying back in at higher entry multiples later.

Where Pain Now Creates Advantage Later

The real moat builder in today's environment is the ability to sit through the distribution drought. LPs that can hold positions or even increase commitments during this window will benefit from the normalization that Lyon and Brandmeyer are forecasting. The secondary market, currently at $250 billion and projected to reach $500 billion in 3 to 5 years, becomes a strategic tool, not a distress signal.

Equally important: the innovation economy is staying private longer. The average company now takes 14 years to go public because private capital markets can fund unlimited growth without an IPO. That means the most interesting growth opportunities are locked inside private portfolios. Over the next decade, the split between public and private innovation exposure will only widen, making private allocations more strategic, not less.

Key action items:

• Over the next 12 months, reassess your private equity portfolio's vintage exposure. Focus on funds that have been holding assets for 5+ years and showing strong earnings growth. These are the most likely to return capital soon.
• This quarter, educate your investment committee or clients on the cyclical nature of private equity alpha. The recent negative headline J-curve is a mirror of public market euphoria, not a systematic failure.
• Within 18 months, build a small allocation to secondaries as a liquidity tool. As the market scales to $500 billion, early movers get better pricing and access to high-quality assets.
• Over the next 2 to 3 years, increase dry powder commitments to private credit, but prioritize funds with institutional-grade liquidity management. Avoid retail-oriented structures with gates that could trigger forced selling.
• Immediately, confirm that your private credit fund managers have clear communication protocols for liquidity provisions. The retail-driven press narrative may pressure even institutional funds, and transparency now prevents panic later.
• Over 12 months, monitor the IPO pipeline for large tech names. If a few multi-billion IPOs succeed, it will unlock an entire cohort of private equity distributions.
• Now, for the long haul, accept that discomfort in private markets today creates competitive advantage. Patience and a willingness to ignore trailing-return comparisons against rip-roaring public markets will be rewarded over the next full cycle.