Cracks in PE/VC mean openings for impact investors

Is the PE/VC downturn an opportunity for impact investors?

Over the past 25 years, private equity and venture capital have become prominent asset classes with ~$11 trillion in net asset value and dry powder. They’ve driven innovation, wealth creation, and economic growth, while simultaneously fostering extraction and an investment ecosystem largely at odds with the needs of society.

But the foundational assumptions of PE and VC around exit horizons, and power law returns are being tested like never before. The tide is turning with PE fundraising declining for three consecutive years and a -5.5% CAGR since 2019. Many are speculating that this isn't just another cyclical downturn, but a structural reckoning.

A System Under Strain

From where we sit—at the intersection of capital innovation, impact investing, and company building—it's clear that conventional PE and VC models are increasingly out of touch with entrepreneurs wanting to grow sustainable businesses, employees wanting to share in value creation, and companies that need patient capital to prioritize impact over short-term profits.

Consider the following:

• PE firms are stuck. Firms can't sell their companies: A record 29,000 portfolio companies are being held across the industry because return expectations are mismatched with market appetite and changes in technological advancements. Liquidity is drying up. LPs are pulling back new investment with a 23% drop from 2023 to 2024. Fundraising is slowing with the number of funds able to close falling to 2017 levels.

• A scramble for liquidity. Continuation funds, secondary sales, strip sales, and even crypto staking are being used to return cash to LPs​. Yale is considering selling $6 billion in PE holdings through secondary sales, as returns are not sustaining expected spending from its endowment. Such financial engineering shows signs of a system fraying at the edges, and an investment model that has lost the plot.
  

• GPs are re-evaluating what drives returns. According to Charles Hudson of Precursor Ventures, “75% to 80% of the dollars that LPs get back in the next five years will come from secondary sales,” not IPOs or acquisitions​. That’s a significant sign that the VC model is not working as well as advertised.

The cause of this isn’t just tariffs, interest rates, or a tough fundraising cycle. The truth is that the two-and-twenty, closed-end fund model—with a 10-year clock, an over-reliance on explosive exits, and short-term alignment between capital and company—is inadequate for creating long-term impact, and may no longer be ideal for generating sustainable economic returns.

The Market Is Demanding Something Different

This is not cause for despair, but It’s a call to reimagine. If PE and VC are cracking under the weight of their own expectations, the opportunity is to design something more pragmatic, equitable, and structurally sound. Here’s what we advise the broader impact investing ecosystem to consider moving forward:

1. Adjust Risk/Return Expectations

While it's normal for investors to slow down their decision-making in a volatile market, benchmarking to traditional and alternative asset classes is evidence of status quo bias: a preference for maintaining the way things are when better options may exist. Traditional asset classes do not prioritize and include social impact in their equation, and therefore impact investors must change the frame of reference from which they operate. As such, thinking about duration, risk, and returns of an investment will shift towards including an ‘environment and social return' that has clear intentionality, measurement, and management with a clear differentiation for who benefits from it. Doing so could in the long-run deliver alpha through impact materiality.

2. Invest in Permanent Capital

The closed-end 10- to 12-year fund structure imposes multiple constraints. GPs put downward exit pressure on companies on a predetermined timeline, LPs face long lock-ups with limited liquidity, and entrepreneurs are incentivized to optimize for short-term valuations over long-term durability. Permanent capital vehicles, whether in the form of evergreen funds, holding companies, or exchange traded entities, can offer patient capital, long-term flexibility, and adaptable liquidity. This model is well-suited for impact investing, where social and environmental returns require time to manifest. PCVs allow asset owners and managers to achieve outcomes over decades, not just fund cycles.

3. Embrace Structured and Hybrid Capital

Companies are often forced to choose between selling ownership or taking on rigid debt that does not accommodate the ebb and flow of growing a business. Instead, they need capital that shares risk, respects cash flow, and aligns with their mission. Structured and hybrid capital—including revenue-based financing, redeemable equity, preferred shares, and income share agreements—offer a third way. These models can align incentives for investors and entrepreneurs and unlock sustainable growth without compromising mission.

As VC liquidity pathways dry up, continuation funds and secondaries have emerged not just as exit options, but as signs that we should plan for other types of exits from the start. Median TVPI for 2021–2023 vintage funds lags behind even modest expectations—between 0.92x and 0.99x. If funds aren't even returning the original amount of capital their LPs have invested, perhaps more creative exit strategies are needed.

Instead of engineering liquidity at the back end, what if it's built in from the beginning?

The Future of Investing

None of this means that PE and VC are going away, but what we’re experiencing is an opportunity for recalibration. The financial machinations that defined the last two decades of PE and VC—juiced valuations, blitz-scaling, and debt fueled buyouts—feel increasingly disconnected from the real economy, and the lives of everyday people.

We need a fairer, more grounded investment ecosystem—one that rewards stewardship over speculation, dignity over disruption, and ownership over extraction.

The future of investing won’t be defined by how quickly capital is returned, but by how meaningfully it’s deployed to address persistent problems. It won’t be defined by the number of unicorns minted, but by how many stakeholders prosper.

That’s what comes next.