What's the read on venture and growth-equity markups, DPI, and distributions?

Limited Partners are confronting a severe liquidity crisis in venture capital, driven by a widespread lack of distributions and portfolio overallocation [17, 24, 25, 28]. The industry has experienced approximately **$200 billion in net negative cash flow** since 2022, stalling the capital recycling engine that LPs rely on to fund new commitments [12, 18]. This "DPI problem" has become the primary complaint from institutional investors, forcing a fundamental shift in focus from paper gains (MOIC) to realized cash returns (DPI) [23, 24]. The issue is compounded by the "denominator effect" and significant appreciation in a few large private companies, which has pushed some LPs' venture allocations from a target of 20% to as high as 25% of NAV, with at least one outlier reporting an allocation of 52% [8, 14, 16, 27]. This liquidity squeeze is altering fundraising dynamics, as LPs become more selective and re-evaluate their commitment pacing, contributing to fundraising levels not seen since 2017 in the US and 2016 in Europe [4, 7, 18].

The current distress is largely a hangover from the 2020-2021 vintage years, which are widely expected to be "tough vintages" due to capital deployment at peak valuations [2, 3, 29]. A significant portion of companies from that era, including an estimated **40% of US unicorns**, have not raised capital since and remain overvalued on LP books, creating a performance and valuation overhang . Beyond cyclical market timing, structural issues within the asset class contribute to the problem, particularly in large, multi-billion dollar funds . The mathematics for these mega-funds to generate historical top-quartile returns are daunting, requiring an unrealistic number of massive exits over $50 billion [1, 21]. Furthermore, the traditional 2/20 fee structure in these large funds can create a misalignment, as management fees alone generate immense, risk-free wealth for General Partners, potentially dampening the incentive to pursue the difficult exits required for LPs to see distributions [1, 19].

In response to the liquidity drought, LPs are intensifying their scrutiny of fund managers, using the downturn as an opportunity to differentiate between skill and luck [12, 20]. Diligence is now heavily focused on a GP's valuation discipline, capital deployment speed during the frothy 2020-2021 period, and portfolio management through down rounds [20, 30]. This has led to a "flight to quality" towards managers who demonstrated discipline by resisting fund size scaling and maintaining a clear protocol for realizing gains [3, 11]. Some firms are noted for proactively marking down portfolios by 20% to 30% , while others have established dedicated liquidity committees to address the DPI challenge directly . This pressure is also extending to fee structures, with a growing argument that large growth-stage funds should adopt models closer to public equity, such as a **1% management fee and 10% carry**, to better reflect their risk profile [5, 13].

Despite the current challenges, a significant liquidity wave is anticipated around **2026**, which could alleviate the distribution pressure [1, 9]. This forecast is based on a confluence of factors, including a large backlog of mature private companies needing to exit, a potential reopening of the IPO market, and substantial cash reserves at large tech companies that could fuel a wave of M&A . However, this forward-looking optimism is tempered by the historical reality of venture returns. Data shows that only top-decile managers consistently outperform public markets, and the top quartile DPI for mature, 15-year funds is **1.8x**—a high benchmark for recent vintages to meet [6, 10]. The consensus remains that most LPs are not adequately compensated for the risk and illiquidity of the asset class, underscoring that disciplined manager selection is paramount [1, 10].