An optimistic but measured outlook for private equity

Expert insight

February 17, 2026 Successful stakes entail discipline, diversification, flexibility with liquidity and rigorous manager selection.

Private equity investments face several near-term challenges, but over the coming decade, we expect that high-quality managers with reasonable fees will deliver high-single-digit annualized returns, outperforming public equities. Investors should prioritize rigorous manager selection and diversification because of the high level of manager risk, partnering with firms that secure lower costs. Investors should also commit to a consistent private equity investment strategy and maintain flexibility with liquidity. Private equity managers are navigating a challenging backdrop, with elevated borrowing costs and constrained exit opportunities. Secondary market volume—that is, the trading of fund interests—has risen. At the same time, discounts to net asset value have held steady, while fundraising has slowed amid the exit backlog. Despite this environment, our long-term outlook for high-quality private equity funds remains positive.

Public equity returns have been strong, and private equity assets have grown significantly, but private equity funds in the top two quartiles of long-term performance have continued to deliver excess returns (Brown et al., 2024). While the asset-weighted return of buyout funds has underperformed a public index over the past few years, short-term stretches like this are not new (Rabinovich and Schweitzer, 2025). Despite the private equity industry’s maturation, the dispersion of excess returns remains significantly wider than for public equity funds and is at an absolute level close to historical norms, underscoring the continued importance of high-quality manager selection.

Notes: Analysis of public equity funds is based on their annual net-of-fee excess return over each fund’s benchmark, using 10 years of global active fund performance data as of Dec. 31, 2024. Calculations use net-of-fee data for private equity funds from vintage year 1998 to 2024. Excess returns are annualized and represented by “Direct Alpha.” Direct Alpha is an annualized measure of excess return that compares the performance of a private investment with the hypothetical return of a public market index, assuming an identical cash-flow pattern. Direct Alpha for buyout is computed against the Russell 3000 Index, and venture capital is computed against the Russell Microcap Index. For details on the methodology used to calculate Direct Alpha, see Gredil, Griffiths, and Stucke (2023). Past performance is not a guarantee of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. Sources: Vanguard calculations, using data from Morningstar Inc. and MSCI.

Valuations remain elevated across private and public markets, but the spread continues to support the case for a private equity liquidity risk premium. In addition, secondary market volume for investors who demand liquidity continues to provide attractive opportunities for skilled managers to find high-quality assets at attractive prices.

Fees directly affect investment returns, yet despite the tendency in other markets for fee percentages to decline as assets grow, private equity fund fees have remained relatively stable (Callan, 2024). Firms that negotiate lower management fees can boost net performance for investors.1

Notes: The global buyout EV/EBITDA multiple is computed as the equal-weighted average of the median global buyout multiples of enterprise value to earnings before interest, taxes, depreciation, and amortization, as reported by Preqin and PitchBook. While these databases cover distinct sets of deals, some overlap may exist. Averaging across both sources provides a more representative estimate of prevailing valuation levels. Global and U.S. public equity valuations are based on the MSCI ACWI Investable Market Index and the Standard & Poor’s 500 Index, respectively. Sources: Preqin, PitchBook, and FactSet data, as of September 30, 2025.

Given stretched absolute valuations, future returns hinge on earnings growth rather than multiple expansion. With leverage less attractive in a higher-interest-rate environment, private equity managers are prioritizing organic growth, operational improvements, and strategic acquisitions for their portfolio companies. We expect reasonable corporate earnings growth of approximately 5% annually in the U.S. and about 4% globally over the next decade.2

Vanguard’s public equity return outlook for the next decade, particularly in the U.S., is cautious, with a wide range of possible outcomes. In comparison, the net-of-fee forecast for higher-quality private equity funds remains appealing, although the range of possible outcomes is wider given the inherent illiquidity and active risk. If investors gauge the risk of private equity investing by the average volatility of quarterly private equity fund net asset values, they might believe that private equity is safer than the public markets. However, we believe that this measure is artificially low and understates true risk. Our estimates in the chart below suggest the volatility is broadly comparable to that of public equity markets, aligning with theoretical expectations.

Notes: These return assumptions depend on current market conditions and may change over time. The PE return expectations are net of fund fees and assume zero manager alpha and a typical risk profile when a diversified program of funds is held. If an investor were able to identify and access high-quality managers with reasonable fees, a task that is challenging and carries significant uncertainty, that would shift the distribution to the right accordingly. Sources: Vanguard calculations, using data from the MSCI-Burgiss Private Capital Universe sample and asset-return projections from the Vanguard Capital Markets Model (VCMM). IMPORTANT: The projections and other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modeled asset class. Simulations are as of October 31, 2025. Results from the model may vary with each use and over time. For more information, please see the related notes at the end of this article.

Despite elevated levels of economic uncertainty, we remain positive on the long-term outlook for high-quality private equity funds. Our view is supported by historical performance, fair relative valuations and reasonable earnings growth expectations. Given the manager and liquidity risks inherent to private equity investing, discipline, diversification, flexibility with liquidity and rigorous manager selection remain critical. Considering there is no guarantee of outperformance, the expected return premium must be high enough to compensate for these risks (Aliaga-Díaz et al., 2022). These factors make private equity unsuitable for some investors. For those who choose to pursue private equity, diversifying across managers, strategies, vintages and regions, sticking to a consistent private equity commitment strategy and partnering with a firm that can negotiate attractive fees can help improve the likelihood of achieving investment success.3,4 1 For more on the topic of fee variation within private equity funds, see Begenau and Siriwardane (2024). 2 For more information on our general corporate earnings growth outlook, see the Vanguard economic and market outlook for 2026, available at: https://corporate.vanguard.com/content/dam/corp/research/pdf/isg_vemo_2026.pdf. 3 For more on the topic of diversification within private equity, see Benefits of a Fund-of-Funds Strategy in Private Equity (Vanguard, 2024), available at https://corporate.vanguard.com/content/dam/corp/research/pdf/benefits_of_a_fund_of_funds_strategy_in_private_equity.pdf. 4 For more on the topic of consistent private equity commitment over the temptations of timing, see Power in Persistence: Staying the Course With Private Equity Commitments (Rabinovich, 2024), available at https://corporate.vanguard.com/content/dam/corp/research/pdf/power_in_persistence_staying_the_course_with_private_equity_commitments.pdf. Related Links Article 6 min read Do private assets belong in 401(k) plans? Sep 23, 2025 Article 6 min read Sep 23, 2025 Article Wellington, Vanguard, and Blackstone to collaborate on investment solutions combining public and private assets Apr 15, 2025 Article Apr 15, 2025 PDF The diversification benefits of private equity Jan 25, 2024 PDF Jan 25, 2024 Notes: All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. This communication is for informational purposes only and does not constitute an offer or solicitation to purchase any investment solutions or a recommendation to buy or sell a security, nor is it to be construed as legal, tax or investment advice. Private investments involve a high degree of risk and therefore should be undertaken only by prospective investors capable of evaluating and bearing the risks such an investment represents. Investors in private equity generally must meet certain minimum financial qualifications that may make it unsuitable for specific market participants. CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute. More about the Direct Alpha methodology Direct Alpha refers to the Gredil, Griffiths, Stucke Direct Alpha method. It is a measure of annualized excess return and compares the relative performance of the private market investment with the stated index as of the measurement date; the calculation is an internal rate of return, based on the series of fund cash flows and the residual value, discounted to a single point in time using the respective index returns; the cash flows are discounted to the same point in time to effectively eliminate the impact of any changes in the stated public equity index from the private market cash flows. For example, a direct alpha of 3.5% indicates that the private investment has generated an annualized excess return of 3.5% over the stated index. About the Vanguard Capital Markets Model The asset-return distributions shown here are in nominal terms—meaning th