It’s well documented that the paucity of M&A activity over the last few years has resulted in extremely low levels of distributions to paid-in capital (DPI) for traditional private equity (PE) funds. In fact, you have to look all the way back to 2016 for the most recent PE fund vintage with a median DPI above one, i.e., when LPs have received all their capital back (Figure 1).

The fundamental problem is there continues to be a significant valuation gap between PE sellers and prospective buyers. The primary culprit for this impasse? The increase in interest rates from the ultra-low (perhaps unnaturally low) period of 2009-21. Prospective buyers face financing their purchase with a cost of capital around double that the now-seller would have faced to buy the same business. A higher financing cost effectively means less leverage is available, reducing the EBITDA multiple that a buyer could pay and still feasibly achieve their target return.

This dynamic puts the PE owner in a difficult position—it can either (a) sell the portfolio company and distribute the proceeds to its LPs while likely crystallizing a sizable write-down or (b) continue to hold the investment, avoiding the write-down but limiting distributions. Option b is becoming increasingly tricky, as DPI is firmly on the mind of LPs, with a 2025 McKinsey survey indicating that the number of LPs ranking DPI as the “most critical” performance metric has more than doubled over the last three years.¹ 

We see an emerging opportunity for sophisticated investors to provide structured equity capital solutions to these healthy PE-owned businesses. This allows the sponsor to achieve partial monetization—which is better than no return of capital—and a confirmation of its mark, while buying more time for interest rates to (hopefully) come down and purchase multiples to increase. Given the need for PE sponsors to increase their DPI, we think this could be a massive opportunity in the near-to-medium term.

ENDNOTE

¹ McKinsey proprietary survey, as of January 2025.

IMPORTANT DISCLOSURES

All investing involves risk. The value of an investment will fluctuate over time, and an investor may gain or lose money, or the entire investment. Past performance is no guarantee of future results. 

Asset-back securities are subject to greater levels of credit risk, call risk and liquidity risks, which may cause their values to decline.

Asset-backed securities are complex investments and they are not suitable for all investors.

©2025 Brookfield Corporation; ©2025 Brookfield Asset Management Ltd.; ©2025 Oaktree Capital Management, L.P.; ©2025 Brookfield Oaktree Wealth Solutions LLC; & ©2025 Brookfield Public Securities Group LLC. Brookfield Oaktree Wealth Solutions LLC and Brookfield Public Securities Group LLC are indirect majority-owned subsidiaries of Brookfield Corporation.

Statements made reflect the views and opinions of Oaktree. The information contained herein is for educational and informational purposes only and does not constitute, and should not be construed as, an offer to sell, or a solicitation of an offer to buy, any securities or related financial instruments. This commentary discusses broad market, industry or sector trends, or other general economic or market conditions, and it is being provided on a confidential basis.

FORWARD-LOOKING STATEMENTS

Information herein contains, includes or is based on forward-looking statements within the meaning of the federal securities laws, specifically Section 21E of the Securities Exchange Act of 1934, as amended, and Canadian securities laws. Forward-looking statements include all statements, other than statements of historical fact, that address future activities, events or developments, including, without limitation, business or investment strategy or measures to implement strategy, competitive strengths, goals, expansion and growth of our business, plans, prospects and references to our future success. You can identify these statements by the fact that they do not relate strictly to historical or current facts.

Words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other similar words are intended to identify these forward-looking statements. Forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many such factors will be important in determining our actual future results or outcomes. Consequently, no forward-looking statement can be guaranteed. Our actual results or outcomes may vary materially. Given these uncertainties, you should not place undue reliance on these forward-looking statements. This communication is not intended to provide an overview of the terms applicable to any products sponsored by Brookfield Corporation and its affiliates (together, “Brookfield”). Information and views are subject to change without notice. Some of the information provided herein has been prepared based on Brookfield’s internal research, and certain information is based on various assumptions made by Brookfield, any of which may prove to be incorrect. Brookfield may not have verified (and disclaims any obligation to verify) the accuracy or completeness of any information included herein, including information that has been provided by third parties, and you cannot rely on Brookfield as having verified any of the information. The information provided herein reflects Brookfield’s perspectives and beliefs as of the date of this commentary.