Private markets across Europe have experienced what analysts describe as a significant 'reality check' as fundraising activity plummeted to its lowest level in a decade during 2025. This dramatic decline follows a marked slowdown in dealmaking and persistent performance challenges that have made it increasingly difficult for major buyout firms to return capital to their investors.
A Sharp Decline in Fundraising Activity
According to fresh analysis of the sector, fundraising for alternative fund managers fell by approximately 40 percent year-on-year across Europe. This substantial drop was driven by a notable absence of new mega-fund raises and what analysts term 'persistent liquidity constraints' throughout the industry.
The total capital raised by private markets funds dipped below €100 billion (equivalent to £86.5 billion) for the first time since 2018. This milestone signals that the era of substantial inflows that characterised the industry throughout the previous decade appears to be drawing to a close.
While the downturn was particularly pronounced in Europe, fundraising in the United States also experienced a slowdown during 2025, with figures dropping by 17 percent compared to previous years.
Understanding the Private Markets Landscape
Private markets represent a collective term for the rapidly expanding private equity, venture capital, and private credit industries. These sectors have witnessed remarkable growth in recent years, attracting unprecedented levels of investment capital and delivering strong returns for participants.
Funds operating within this space typically function on five to eight-year cycles. They initially raise capital from investors, then deploy these funds into various unlisted companies. Upon completion of the investment cycle, funds are designed to sell their holdings and return the proceeds, plus any profits, to their investors.
The Challenge of Returning Investor Capital
The extended period of ultra-low interest rates that persisted from 2010 to 2022 fuelled a frenzy of dealmaking activity. This environment allowed the private markets industry to showcase exceptional gains and attract record levels of investment from limited partners (LPs).
However, the subsequent tightening of monetary policy, primarily through central banks raising interest rates, combined with a series of macroeconomic shocks, has created significant challenges. Many flagship funds now find themselves struggling to exit their investments and return capital to their backers.
A notable example of this difficulty emerged recently when buyout giant TDR was compelled to sell its stake in the David Lloyd gym chain to itself via a 'continuation vehicle' structure, having failed to attract an external buyer for the business.
The Knock-On Effect for New Fundraising
Morningstar's analysis indicates that with investor capital remaining tied up in older funds, there has been a direct knock-on effect on fundraising efforts for new vehicles. In 2025, the largest fund closed was valued at less than €5 billion. This stands in stark contrast to 2024, when approximately half of all capital raised came from funds exceeding €5 billion in size.
Johann Scholtz, a senior equity analyst at Morningstar, commented on the situation, stating: '2025 was a reality check for private markets. Returns on European private capital funds are tracking at half of their longer-term averages, largely due to persistent liquidity constraints that limited exits and cash distributions.'
He added: 'That pressure has closed the valuation gap with traditional asset managers and reset expectations. While challenges remain in the near term, we see valuations for private managers becoming more compelling into 2026.'
Performance Metrics Show a Slowdown
The analysis further revealed that the exceptional performance achieved by much of the industry is beginning to moderate. Across European private markets, annualised returns stood at six percent in the third quarter of 2025. This represents a notable decline from the highs of 12 percent that the sector enjoyed on average over the preceding five-year period.
This combination of reduced fundraising, constrained liquidity, and moderating returns paints a picture of an industry undergoing a significant period of adjustment and recalibration after years of rapid expansion.
