Living In Interesting Times

This article is drawn from a presentation given at Aon's 2025 investment conference in London. If you’d like to discuss this topic in more detail, please get in touch and to learn more about Aon’s 2026 Investment Insights Series, register your interest here

As the saying goes: “May you live in interesting times”. It’s often delivered as a curse, but I tend to think of it as an opportunity. When markets are flat, there’s not much leeway to create additional returns. It’s when there’s volatility that the real opportunities emerge.

A Mature Market Facing Growing Pains

Over the past 10-20 years, private equity has evolved dramatically – and with that evolution has come a noticeable decline in outperformance versus public markets. From 2007 to 2024, global private equity’s outperformance has fallen by roughly 240 basis points. That’s a significant drop, and naturally it begs the question, why? Partly, it comes down to maturity.

Private equity has grown up. It’s become more sophisticated, more crowded and, frankly, more competitive. Fundraising has skyrocketed since 2010, and with that influx of capital comes the pressure to deploy it. Managers must work harder and dig deeper to find value.

Then there’s the exit environment, which hasn’t exactly been friendly. Owners have worked hard to build their businesses, and they want to exit when valuations are strong. For the past five years, we’ve contended with a huge amount of economic uncertainty: trade wars, literal wars, inflation, higher rates. The result has been longer hold periods.

When owners hold companies for longer without generating commensurate value creation, returns decline. So yes, we do believe private equity returns will continue to moderate. But here’s the thing: we still expect them to outperform public markets, even if it's by a smaller margin.

The Private Equity Advantage

When you strip away the complexity – the structures, leverage, the market environment – at the core of private equity success is the ability to manage a private company. That remains a simple but powerful driver.

Private companies operate in an environment that allows for genuine long-term decision-making. There’s no quarterly earnings call, no constant market scrutiny, no need to manage the share price. You can take bold actions that might dent short-term results but create durable value over time.

Investors also have better information. Private equity managers buying a business can access every detail – they know the good, the bad and the ugly. In public markets, you only get what’s disclosed, as does everyone else.

Then there’s alignment of interest. Management teams in private companies often own a meaningful stake, usually several percentage points. If a management team isn’t delivering, the private equity sponsor can and will change it – and quickly.

These are structural advantages that public markets simply can’t replicate. And they’re why, even as excess returns compress, we still believe private equity will deliver a premium.

The Diversification Story

Historically, diversification wasn’t the headline reason to invest in private equity. But as public markets have become increasingly concentrated, diversification has taken centre stage.

Consider the S&P500 today: just seven companies now drive a huge amount of market performance. Meanwhile, the number of listed companies continues to decline, reducing breadth and opportunity in the public sphere.

Private markets, by contrast, open doors to industries and sub-sectors that are underrepresented in public indices. Private markets offer more exposure to areas such as commercial services, while public markets are overweight pharmaceuticals and tech. Put together, the two create a much stronger, more diversified portfolio.

Rethinking Fund Structures

The traditional approach to private equity has been through closed-end funds. You commit capital, wait for it to be called, and have no control over when your money comes back. That meant to build a diversified portfolio, investors need to be large enough – and patient enough – to manage it.

But private equity’s world order is changing. The rise of evergreen funds, coupled with regulatory developments such as the introduction of the UK’s Long-Term Asset Fund (LTAF) regime, is creating new avenues for investors – especially those in defined contribution pension plans – to access private markets.

That’s an exciting shift, but it also raises questions about due diligence.

The Three-Legged Stool Of Due Diligence

My team thinks about evergreen structures like a three-legged stool. Each leg needs to be sturdy, or the whole thing topples over.

1. Historical Performance and the Ability to Sustain It

   This has always been the primary focus, even in closed-end funds, but it matters even more for evergreen. In a closed-end structure, managers call capital when opportunities arise; in an evergreen one, money flows in regularly whether or not great investments are available. Maintaining returns under that dynamic requires discipline and expertise.

2. The Liquidity Sleeve

   Providing liquidity to investors while managing underlying illiquid assets is tricky. How managers structure and resource that liquidity sleeve will have a material impact on both returns and the investor experience.

3. Operational Strength

   Many private equity firms simply aren’t built for the operational demand of evergreen structures. They’re used to calling capital and distributing proceeds, not processing regular subscriptions and redemptions. Handling those operational and tax complexities requires a strong infrastructure and an experienced operations team.

A Call For Innovation

We’re genuinely excited about this next phase for private equity. Broader access, more flexible structures and evolving regulation all point towards a maturing ecosystem. For managers, this is an opportunity to bring fresh thinking to the table. Fee models, for instance, will need to evolve. We’re looking for fees that are fair, rewarding manager skill and performance while being aligned with achievable return expectations.

For investors, the enthusiasm is great, but discipline is essential. Don’t rush across the finish line. Take the time to conduct full, thorough due diligence. This is a new landscape, and we are being very measured as we evaluate new structures. Our role is to help you find the best possible funds out there.