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Limited partnership model: GP and LP roles

At the core of a private equity fund is the limited partnership agreement (LPA), which formalizes the relationship between the GP and LPs. Private-equity funds are typically limited partnerships. GPs commit 2–5% of capital, source and manage deals, and earn fees plus carried interest. The rest is provided by LPs, pension plans, endowments, sovereign funds, and affluent individuals, who receive long-term returns in exchange for limited liability.

Fund hierarchy

Effective private equity fund structuring aligns tax, regulatory, and investor-type considerations by layering feeder, parallel, and co-investment vehicles around a master fund.

A tiered setup lets managers match structures to investor needs. An umbrella (master) fund holds the assets. Feeder funds pool money from specific groups—say, U.S. tax-paying investors or EU institutions—and invest in the master. Co-investment vehicles sit alongside the main fund, so LPs can back single deals, usually at reduced or zero fees.

Parallel funds and offshore entities for tax efficiency

To serve cross-border investors, managers often run parallel funds in low-tax hubs like Cayman or Luxembourg. These vehicles invest in lockstep with the on-shore fund, so every LP gets identical exposure and performance.

Fund lifecycle overview

A private equity fund progresses through clearly defined phases. Understanding where a fund sits in its lifecycle helps LPs gauge liquidity expectations, risk exposure, and near-term cash-flow demands.

Fundraising and commitments

Over roughly 6–18 months, the GP markets the fund and collects binding commitments. A first close occurs when the target is soft-circled; later closes hit the hard cap. Capital stays with LPs until called, preserving their liquidity.

Investment period vs. harvest period

Years 1–5 – Investment: The GP draws capital to buy and build companies. Annual call limits and recycling rules in the LPA smooth cash flows.
Years 5–10 – Harvest: Focus shifts to exits and distributions. New deals slow, and management fees often drop to a percentage of invested rather than committed capital.

Extension and wind-down phase

Most funds last 10 years, with two optional one-year extensions. These extra years give the GP time to exit tough assets. The final phase sees residual holdings sold, audits wrapped up, clawbacks settled, and a last distribution made.

Grasping where a fund sits in this timeline helps LPs match expected calls and payouts to their liquidity plans and risk appetite.

Capital commitments and capital calls

Private equity funds use a pledge-and-draw model—LPs commit capital up front but only wire funds when the GP issues a capital call. This keeps LP cash productive until needed and ensures a disciplined funding process.

Capital commitments and capital calls

How LPs commit and how GPs draw capital

At closing, each investor signs a subscription agreement—say for €25 million—to be drawn over about five years. The GP issues capital calls only when cash is needed, with every draw taken pro rata from unfunded commitments. LPAs back this with default penalties such as interest charges, dilution, or forced sale of the commitment.

Notice the structure and timing of capital calls

Calls usually arrive by secure email 10–15 business days before funds are due and outline the amount, purpose, and remaining commitment. Many managers provide rolling cash-flow forecasts or cap annual drawdowns to help investors plan liquidity.

Recycling provisions and reinvestment mechanics

Early exit proceeds can be “recycled” during the first few years—often up to 100% of paid-in capital—so the GP can reinvest without raising new money. Recycled amounts are tracked separately, charged fees only once, and after the investment period, any further reinvestment needs LP consent.

Management fees and expenses

Typical 2-and-20 fee structure

Most funds charge an average of 1.74% of committed capital during the investment period. Performance fees remain the classic 20% carry above an 8% preferred return, though first-time or niche managers may discount headline rates to win anchor investors.

Fee offsets, expense reimbursements, and fund-level costs

Deal fees earned from portfolio companies usually offset 100% of the management fee. Organizational costs are capped (often 1% of commitments), while broken-deal expenses, subscription-line interest, and compliance outlays are also borne by the fund but within budget limits. The true cost to LPs is the net figure after these offsets and caps—not the headline “2 and 20.”

Carried interest and distribution waterfalls

Carried interest is the GP’s share of profits, typically earned after LPs receive a minimum return. The distribution waterfall outlines how proceeds flow from investments to LPs and the GP.

Preferred return, catch-up, and carry

First, LPs get their preferred return. Next comes a short “catch-up” stage where proceeds flow to the GP until its share of profits equals the agreed carry rate. After that, any remaining gains are split 80% to LPs and 20% to the GP.

Deal-by-deal vs. whole-of-fund waterfalls

A deal-by-deal waterfall pays carry on each successful exit, letting the GP collect early but creating higher clawback risk if later deals underperform. A whole-of-fund waterfall waits until the entire portfolio clears the hurdle, delaying GP payouts but giving LPs stronger downside protection.

Clawbacks and escrow arrangements

If early distributions give the GP more carry than it ultimately deserves, a clawback clause forces repayment, usually within 90 days of final liquidation. To avoid messy give-backs, LPAs often escrow some percentage of each carry payment until the last asset is sold, and the results are final.

Understanding these mechanics helps investors gauge when they will see cash returns and how well their interests stay aligned with the GP throughout the fund’s life.

Co-investment and sidecar structures

Why GPs offer co-investments

Co‑investments let managers tackle deals too big for the main fund alone, spread risk, and give select LPs a closer look at underwriting. They’re in demand: a 2025 Adams Street survey shows 88% of LPs plan to boost co‑invest budgets.

How co-investments are structured and allocated

Most follow‑on money flows through a Special-Purpose Vehicle (SPV) that buys the same shares on the same terms as the flagship fund; investors wire cash within about ten days of notice. Some firms also raise small “sidecar” pools for future deals. Offers go out pro rata to interested LPs, with any leftover capacity filled first‑come, first‑served.

Governance and fee differences

Because LPs assume single‑asset risk, economics are lighter—often no base fee and only 1% management, 10–12% carry versus the standard 2% and 20%. Control stays with the GP, but co‑investors receive richer reporting, and any potential conflict with the main fund must clear the LP advisory committee review.

Continuation funds and secondary structures

The rise of GP-led secondaries

Secondary deal volume hit $162 billion in 2024, a record, with GP‑led transactions accounting for nearly half. Activity continues in 2025: Neuberger Berman closed a $4 billion GP‑led fund in June, quadrupling the size of its 2020 predecessor.

Structuring continuation vehicles

Continuation funds follow a four‑step process: GPs select strong‑performing assets, obtain an independent valuation and Limited-partner advisory committee (LPAC) approval, run a competitive bidding process, and offer LPs the choice to cash out or roll into the new vehicle. The structure includes capped leverage and a reset waterfall.

Impacts on fund performance and LP alignment

Properly executed, a continuation fund can boost near‑term distributions in the selling vehicle, give the GP more time to grow value, and let rolling investors avoid an untimely sale. Mismanaged, it can double‑charge fees or skew track‑record optics.

The key is transparent pricing, recycled carry that reflects genuine performance, and clear disclosure so every party can judge whether staying in—or stepping out—makes economic sense.

Legal and compliance considerations

Subscription agreements and LPA terms

Investing in a private equity fund starts with a subscription agreement, where LPs commit capital and confirm eligibility. The Limited Partnership Agreement (LPA) is the core contract outlining the fund’s rules, covering fees, investment limits, governance rights, and removal provisions. Understanding both documents is essential before committing.

Key-man provisions and fiduciary obligations

Key‑man clauses protect LPs by suspending new investments if certain senior managers leave the fund. This ensures continuity in leadership. Private equity managers also have fiduciary duties—they must act in the best interest of LPs. In the U.S., the SEC enforces these duties. In the EU and UK, regulations like AIFMD and FCA rules ensure similar oversight and transparency.

Regulatory oversight and disclosures (SEC, AIFMD, etc.)

Private equity funds must comply with regional regulations:

U.S. (SEC): Focuses on disclosures, audits, and marketing rules.
EU (AIFMD): Requires transparency on risks, fees, and leverage.
UK (FCA): Enforces valuation and reporting standards.

Regulations evolve, so GPs must update LPs and adapt fund operations accordingly.

Final thoughts: What to know before committing to a fund

Questions LPs should ask about fund structure

Navigating private equity challenges—from opaque fee structures to evolving regulations—requires careful review before committing. LPs typically ask the GP how often capital will be called, whether fees fall after the investment period, and when carry is paid. Clarify what happens if key managers leave, how conflicts with co‑investments or continuation funds are handled, and how the firm stays ahead of shifting rules such as AIFMD II or new SEC guidance.

What makes a well-structured fund transparent and aligned

A robust fund pairs plain‑language documents with economics that reward true, portfolio‑wide performance. Fees taper as assets are sold, carry triggers only after LPs recoup capital plus the hurdle, and any recycling or secondary deals are fully disclosed and LPAC‑reviewed. Consistent, data‑rich reporting and a proactive compliance culture keep interests aligned from first close to final liquidation.

Looking to navigate private equity with confidence? Explore our private equity fund solutions to plan for predictable cash flows, fair economics, and long-term alignment.

Private equity investing is a long game: capital is typically locked for ten years or more, and returns arrive in irregular bursts. The distribution waterfall is the gearbox that converts those episodic realizations into cash flows for Limited Partners (LPs) and General Partners (GPs), spelling out who gets paid, when, and how much.

Draft it well, and incentives line up beautifully. LPs recoup their outlay plus a minimum return before the GP earns its carried interest. Draft it poorly and the partnership risks clawback disputes, over‑distribution, and reputational damage. Yet despite its importance, waterfall mechanics often remain opaque to new investors and even junior professionals.

This guide demystifies the subject from first principles, walking through the core components, contrasting European and American structures, and analyzing real‑world variations such as tiered carry and hybrid designs.

Understanding the Role of Distribution Waterfalls

Why waterfall structures matter to LPs and GPs

Distribution waterfalls are the contractual roadmap that converts book gains into cash in investors’ pockets. Written into the Limited Partnership Agreement (LPA), they dictate the order, timing, and magnitude of every dollar that flows out of the fund.

For LPs, a clearly drafted private equity waterfall model guarantees that their contributed capital and a minimum return are paid first, lowering downside risk and making funds comparable. For GPs, the same provisions establish a transparent “scorecard”: only by clearing the hurdle do they share in profits.

Where waterfalls fit within the fund lifecycle

Private equity waterfalls remain dormant during the commitment and investment phase when capital is called and deployed. They become operational once realizations begin in the harvest phase.

In a European (whole‑of‑fund) waterfall, GP carry cannot crystallize until aggregate distributions have returned all contributed capital plus the preferred return.

In an American (deal‑by‑deal) waterfall, the test applies to each realized investment, so carry can start flowing as early as the first exit. Consequently, waterfalls shape cash‑flow timing throughout the later years of the fund and materially affect Distributions to Paid‑In (DPI) metrics reported to LPs.

Core Components of a Waterfall

Preferred return (hurdle rate)

A preferred return—most commonly an 8 % compound IRR—acts like a risk‑free floor for LPs. Only once cumulative distributions exceed the hurdle does any carried interest accrue. Some emerging managers layer tiered hurdles (e.g., 8% then 10 %) to attract commitments or to reward top‑quartile performance.

Return of capital to LPs

Before performance payments are considered, LPs receive a dollar‑for‑dollar return of their contributed capital, including fees and expenses that were drawn down. This step ensures GPs focus on absolute value creation rather than maintaining NAV, and aligns with the principle that investors should recover their money before sharing profits.

GP catch-up provisions

Once the LPs have received their capital back and the preferred return, most waterfalls include a catch‑up tranche. Here, the GP receives all or a majority of incremental proceeds until its share of total profits equals the agreed carry percentage (typically 20 %). The catch‑up accelerates the GP’s economics without disturbing the final 80 / 20 split.

Carried interest allocations

After the catch‑up, any remaining profits are split according to the carried‑interest ratio—classically 80% to LPs and 20% to the GP. Some LPAs introduce tiered carry that escalates to 25% if performance exceeds, say, a 3× multiple.

Comparing Common Waterfall Structures

European-style (whole-of-fund) distributions

Under a European or whole‑of‑fund waterfall, all cash first repays LP capital and the portfolio‑level preferred return before any carry can flow to the GP. The structure is now standard for large buyouts, infrastructure, and secondary funds because early winners subsidize later laggards, ensuring the GP never earns carry while the overall fund is underwater. The trade‑off is slower GP liquidity, which firms often balance with fee step‑downs, co‑invest commitments, or faster drawdown schedules.

American-style (deal-by-deal) distributions

An American, or deal‑by‑deal, private equity waterfall model allows the GP to collect and carry on each exit once that single investment clears its hurdle. While this accelerates GP economics—vital for emerging managers—it introduces three pain‑points for LPs: (1) clawback exposure if later exits underperform, (2) escrow locks on 20–30% of interim carry, and (3) tax‑timing complexity for the GP. Because of these risks, most large institutions demand a European or hybrid waterfall.

incentive alignment and risk considerations

Timing of carry: Deal‑by‑deal waterfalls pay the GP early, potentially skewing incentives—winners may coast, laggards may gamble.
Over‑distribution risk: Clawbacks exist but are challenging to enforce once cash is distributed; ILPA stresses no carry should flow from a continuation fund still below its fund‑level hurdle.
Capital efficiency: Because European waterfalls recycle early proceeds back to LPs before paying the GP, they are often paired with recycling provisions that allow the GP to reinvest a portion of early distributions. This can smooth DPI profiles while keeping incentives intact.

Applying a Waterfall to a Hypothetical Exit

How Proceeds flow through the waterfall

To understand how private equity distributions work in practice, consider a hypothetical exit scenario. A portfolio company is sold, and the fund receives $100 million in proceeds. This example walks through how those funds are distributed under a standard private equity waterfall structure, highlighting how different mechanics impact outcomes for both LP and GP.

Part 1: Illustrative Example – Fund Economics

Assumptions:

Total exit proceeds: $100 million
LP capital contributed: $80 million
Preferred return (hurdle): 8% annual (simplified to 1 year)
Carried interest: 20% to GP
Catch-up: 100% after preferred return

Distribution Breakdown (European-Style Waterfall)

Step	Amount	Description
Return of capital to LPs	$80 million	LPs recover their contributed capital first
Preferred return to LPs	$6.4 million	LPs receive an 8% preferred return on capital (simplified)
GP catch-up (100%)	GP catch-up (100%) $1.6 million	GP receives 100% of proceeds until 20% of total profits is caught up
Remaining profit split (80/20)	$12 million	Split: $9.6M to LPs, $2.4M to GP

Total Distributions:

Recipient	Total Received
LPs	$96 million
GP	$4 million

Part 2: Comparing Structural Variations and their Impacts

Structure	Description	LP Outcome	GP Outcome
European Waterfall	Carry only paid after full capital + preferred return	Lower risk, predictable returns	Delayed but aligned with fund success
American Waterfall	Carry paid deal-by-deal after each profitable exit	Higher risk, clawback exposure	Faster liquidity, but clawback risk
With Preferred Return + Catch-up	LPs receive fixed return first; GP catches up to 20% of profits	Protects LP downside	Potential for large lump-sum carry
No Preferred Return	Profits shared immediately without a hurdle	Lower downside protection	Quicker upside participation

Key Insights

Timing of GP Carry: Deal-by-deal structures benefit GPs early but may create clawback obligations later.
Alignment: Whole-of-fund structures delay GP payouts but ensure the fund is profitable overall before carry is distributed.
Preferred Return & Catch-up: These features enhance fairness and protect LP capital, while still rewarding GP performance.
Risk Allocation: Waterfall mechanics are a powerful tool to balance liquidity timing, performance incentives, and downside protection

Clawbacks and Safeguards for LPs

How over-distribution is handled

If the GP receives more carry than final returns justify, the LPA activates a clawback: the GP (often jointly with its partners) must repay the excess—net of taxes—after liquidation or at pre‑agreed checkpoints.

Escrow accounts and clawback mechanics

Escrow practice is all over the map: 42% of funds escrow nothing, 25% escrow the full 100%, and, where used, escrow levels range from 10% to 100%, according to Proskauer Europe Market Report.

Typical terms found in LPAs

Testing cadence: clawback assessed at each recycling period and finally on the latter of fund termination or the last portfolio realization.
Cap/collar: repayments limited to the lesser of excess carry or 100% of cumulative carry received.
Tax gross‑up: GP repays on an after‑tax basis to avoid double taxation.
Security: minimum 25% escrow or an unfunded letter of credit from a GP affiliate.
Auditor certification: independent sign‑off on the clawback calculation before any further GP distributions.

Evolving Waterfall Practices in Modern PE

Tiered carry structures and performance hurdles

Some LPAs move beyond a flat 20% carry by implementing performance-based tiers. For instance, carry may increase to 25% or even 30% once certain return thresholds are crossed, such as a 2.5× or 3× multiple. These tiers reward GPs for outsized performance while keeping base expectations in line with market norms.

Hybrid or deferred waterfall designs

Hybrid waterfalls release deal-by-deal basis only after 75% of capital is back, and the fund is in the black. Or park interim carry in a priority account released once several exits clear the hurdle, balancing early GP liquidity with LP protection.

Waterfall in continuation funds and secondaries

When assets roll into a continuation vehicle, the original equity waterfall freezes, and any prior carry is offset against the new one. Secondary buyers typically insist on a fund‑level waterfall—even for single‑asset deals—to keep incentives aligned over the extended hold.

What LPs should look for in fund agreements

Questions to ask about waterfall mechanics

Key questions for LPs: How is the hurdle compounded? What share of interim carry is escrowed, and for how long? Are deal fees included in clawback? Does the catch‑up run at 50% or 100%? Is recycled capital treated as fresh for hurdle purposes?

Red flags and vague language in LPAs

Beware definitions that exclude broken‑deal costs, missing clawback deadlines, an “annual” hurdle with no compounding method, a catch‑up set at the GP’s discretion, or blank escrow terms.

Ensuring long-term alignment and transparency

LPs can lock in alignment by securing quarterly private equity waterfall model reports, audit rights, key‑person carry stops, successor‑fund offsets for over‑distributions, and full disclosure of parallel vehicles. Now that you understand how private equity distribution waterfalls work, take the next step with confidence. Explore Alter Domus’ integrated private equity fund solutions—from waterfall modelling and carry tracking to full-service fund administration and reporting.

Disclaimer: THIS MATERIAL IS PROVIDED FOR GENERAL INFORMATION ONLY, DOES NOT CONSTITUTE INVESTMENT ADVICE, AND PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.

Why fund administration is evolving

Investor expectations and expanding regulations are pushing outdated operating models to their limits. Limited partners (LPs) now demand timely portfolio updates, transparent ESG metrics, and seamless reporting. Meanwhile, frameworks like the EU’s Sustainable Finance Disclosure Regulation (SFDR) continue to expand.

Legacy systems—spreadsheet-heavy and manually stitched together—can’t scale to meet these demands. With growing deal volumes and complex data types (e.g., capital-call tracking, ESG metrics), scalable, cloud-based solutions are critical. These tools deliver audit-ready data at higher frequencies and unlock new operational efficiencies.

Technology is the enabler, but strategy is the differentiator. A Gartner survey shows 77% of respondents plan to boost spending in the technology category in 2025, but half still lack a clear roadmap.¹ Digitization is a multi-year operating model shift. To exemplify, our primer on fund administration demonstrates the extensive impact of seemingly minor process modifications—such as automating capital-call notices—on the entire lifecycle.

With the pressure points and strategic context defined, let’s explore the fund administration trends reshaping the industry.

1. Digitization and automation

Automation has evolved from experimentation to core infrastructure and now has become a defining fund administration industry trend. Robotic-process-automation (RPA) bots now handle daily—even intraday—NAV calculations and reconciliations, surfacing only genuine anomalies for review.

Early adopters are already reclaiming days from quarter-end close cycles and redeploying staff to higher-value analysis. A public UiPath case study illustrates the scale: after layering RPA on top of its data lake, about 80% of each fund’s NAV workflow is complete before accountants start work, freeing them to focus on validating the most critical 20% and driving higher accuracy.

Such success stories have nudged even smaller venture funds to follow suit. Our guide to venture capital fund administration details how emerging managers can adopt the same playbook.

2. Real-time reporting and data transparency

Today’s LPs expect answers on demand, not quarterly. Dashboards showing committed capital, distributions, and ESG KPIs are now standard. Some ask, “Can you show fund metrics before dessert?”

Self-service portals are becoming the norm, offering fund-level IRRs, portfolio-company KPIs, and mobile optimization. Firms that provide real-time transparency attract more committed capital and close funds faster.

Leading administrators integrate portfolio ERP data into central warehouses, automatically populating dashboards. When GPs, LPs, and auditors all access a single source of truth, capital-call approvals speed up, and disputes drop.

3. ESG and compliance integration

Compliance has moved into the data stack. LPs and regulators now want verified, metric-driven ESG reporting beyond high-level narratives. SFDR Level 2 mandates specific Principal Adverse Impact (PAI) indicators, making ESG one of the most data-intensive areas.

Leading fund administrators embed rulesets directly in their platforms. For instance, if a company exceeds carbon thresholds, the system flags it and pre-populates disclosure templates. Automation helps firms stay ahead of evolving requirements.

Forward-thinking firms are also adopting voluntary standards such as TCFD and ISSB, integrating ESG data into performance dashboards. This lets LPs evaluate both financial and sustainability outcomes side by side.

4. Strategic outsourcing models

Outsourcing is no longer just about cost. It’s part of a broader fund administration outsourcing trend focused on scale, capability, and strategic partnership. Managers are forming long-term partnerships with administrators offering deep domain expertise and innovation roadmaps.

Co-sourcing is gaining traction, allowing firms to retain control over key functions—like waterfall modeling—while outsourcing heavy-lift tasks like investor reporting.

Choosing the right model is complex. In-house teams keep intellectual property but often struggle with regulatory tech demands. External specialists offer scale but require oversight. Build flexibility into any model you adopt. Our in-house vs. third-party guide explores these trade-offs in detail.

Modern APIs and standardized schemas have made migrations smoother. With phased transitions and parallel testing, switching providers is no longer a major disruption. Our checklist for migrating fund admin shows how a phased cut-over with parallel runs, followed by incremental go-live, can minimize disruption.

Key Takeaways for Fund Managers

Automate early and often: RPA and AI-driven reconciliations reduce errors, speed closes, and free staff for higher-value tasks.
Make real-time transparency the default: On-demand data is now table stakes. Falling short may result in capital flight and prolonged fundraising.
Embed ESG at the data layer: Automating capture today prevents compliance headaches tomorrow and signals commitment to responsible investing.
Choose the right partner model: Reassess your approach regularly to stay aligned with the latest fund administration outsourcing trends.

Alter Domus partners with investment managers worldwide to deliver scalable, tech-enabled fund administration solutions. Whether you’re navigating complex compliance, seeking real-time reporting, or planning a strategic migration, our global teams and purpose-built platforms are here to help.

Why more fund managers outsourcing

Regulatory bodies like the SEC and ESMA now move in months, not years. Compliance demands are accelerating and so are investor expectations for transparency. Limited partners (LPs) simultaneously expect near real-time transparency across fees, ESG metrics, and portfolio KPIs.

Building an internal function capable of meeting those demands requires constant investment and scarce talent. By choosing to outsource fund administration, general partners (GPs) transform fixed overheads into variable costs, tap institutional-grade technology, and free senior staff to focus on fundraising and value creation.

Here are five key advantages of outsourcing fund administration:

1. Operational efficiency and scale

Specialist providers launch dozens of vehicles every quarter, so they bring proven playbooks for legal entity set-up, capital-call workflows, and investor onboarding. That scale translates into speed. Reporting initiatives shows that private-markets managers can now compress the traditional 45-day NAV cycle to just 20 business days by using automated data ingestion and daily reconciliations.

Faster books mean faster returns calculations, quicker distribution notices, and shorter audit windows. Emerging managers, meanwhile, gain access to enterprise-grade portals and data lakes without the multi-million-dollar capital expenditure required to build their stack.

Top administrators invest continually in investor portals, data lakes, and middle-office platforms that smaller firms could not replicate. Through private equity fund administration outsourcing, emerging managers tap enterprise-level tools without carrying the CAPEX or upgrade burden.

2. Improved accuracy and risk

Manual spreadsheets are still the leading cause of operational errors. According to Gartner data cited by BizTech Magazine, human error accounts for 52% of incidents in financial organizations.

Outsourcing replaces manual processes with straight-through processing, robotic automation, and built-in validation rules that flag breaks instantly—reducing the risk of costly restatements across fee calculations, waterfall models, and investor allocations.

This shift toward automation is also reshaping accountability. Deloitte’s 2024 Global Outsourcing Survey shows that 67% of companies now use outcome-based contracts, directly aligning provider incentives with accuracy and timeliness.

3. Focus on core investment activities

Every hour the CFO spends reconciling bank statements is an hour not spent negotiating debt terms or refining value-creation plans. Handing recurring tasks to an outsourced fund administrator releases internal bandwidth for fundraising, deal sourcing, and portfolio oversight. That shift also resonates with LPs, who increasingly want to see that GPs devote their headcount to activities that directly drive returns rather than processing work.

With administration off their plate, CFOs can allocate scarce headcount to strategic roles such as data science, debt origination, or co-investment structuring—functions that directly influence returns and differentiate the firm.

4. Access to expertise and evolving tech

The pace of innovation in fund administration technology now rivals that of front-office fintech. Cloud-native general ledgers, API-integrated data pipelines, and AI-driven reconciliation engines are updated on a near-quarterly basis. By outsourcing fund administration, managers gain immediate access to these advancements, without bearing the cost or complexity of in-house vs. third party implementation and maintenance.

Beyond technology, top-tier administrators bring deep regulatory and jurisdictional expertise. Whether it’s structuring a Luxembourg RAIF (Reserved Alternative Investment Fund), navigating Cayman CRS (Common Reporting Standard) compliance reporting, or complying with the latest U.S. “private fund adviser” rules, these partners offer specialized knowledge that reduces the risk of compliance errors and accelerates cross-border fund launches. Their support ensures that managers stay ahead of regulatory developments, without having to build or retain large internal teams.

5. Strategic co-sourcing and custom models

Outsourcing is not an all-or-nothing choice. Companies can maintain their proprietary functions, such as treasury or portfolio analytics, while utilizing third-party scale for core accounting and investor services through co-sourcing.

Venture funds with weekly safes have different needs from infrastructure vehicles with waterfall-heavy cash flows. Modern providers offer tiered service levels, dedicated pods or “follow-the-sun” coverage, so each strategy pays only for what it uses. When strategies evolve, the administrator can scale, avoiding disruptive and costly migration of fund admin projects down the line.

Final thought: Outsourcing as a competitive advantage

In a market where LP diligence digs ever deeper into operational resilience, the benefits of outsourcing fund administration reach far beyond cost containment. The right partner delivers speed, accuracy, and transparent governance that translates into stronger investor trust and faster fundraising cycles.

As investor expectations rise, outsourcing becomes a strategic lever, not just for efficiency but for growth. Learn how Alter Domus is the ideal venture capital fund administration partner and can help your firm scale smarter, meet regulatory demands, and strengthen investor trust.

Talk to Alter Domus today to see how our fund administration services can reduce your operational burden and accelerate time-to-NAV.

Private Equity:
H1 Review and H2 Outlook

What to Watch out for in H2 2025

After a promising start to 2025, exit activity has fallen back into limbo amidst trade uncertainty, put private equity programs under increasing pressure to deliver liquidity
LPs to become increasingly proactive in unlocking liquidity through LP-led secondaries deals
Managers who have sat tight are coming to a point where they have to find exits for portfolio companies – even if it means selling at discounts to NAV
Liquidity pressures and global uncertainty are prompting a rethink of LP strategy, with the mid-market firmly back in the investor radar

Tim Toska

Global Sector Head, Private Equity

The private equity industry has found itself stuck in a holding pattern through the first half of 2025, with an anticipated increase in exits and distributions yet to materialize.

Private equity managers entered 2025 with cautious optimism and hopeful that with inflation peaking and interest rates coming down, jammed up M&A and IPO markets would reopen and enable firms to secure exits and return cash to investors, which in turn would help to reenergize becalmed fundraising markets.

For the first quarter of 2025, the market looked set to deliver on this promise, with global private equity exit value coming in at $175.59 billion – almost triple the $65.4 billion of exit value recorded in Q1 2024 and strongest quarter for exit value since Q2 2022, according to law firm White & Case and Dealogic.

A significant overhaul of US tariff and trade policy announced early in Q2 2025, however, slowed early momentum with prospective exits and IPOs of private equity portfolio companies put on hold as vendors and buyers paused to assess the impact of a changing tariff backdrop on portfolio company earnings and asset valuations.

Final exit figures for Q2 2025 are still pending, but with Bain & Co analysis showing buyout deal value for April 2025 almost a quarter (24 percent) below the monthly average posted through Q1 20 2 5, a drop off in deal flow following a promising start to the year is expected, with exit activity directly impacted. Bain & Co models forecasting declines in exit value and volume in Q2 2025.

Pressure builds to lock liquidity

A choppy first half of 2025 has left managers under increasing pressure to up distributions to LPs, who are waiting on cash to flow back from their private equity programs before making allocations to the next vintage of funds.

This has left private equity managers stuck in a fundraising limbo, with PEI figures for Q1 2025 showing fundraising posting the weakest first quarter since 2020 and some $21.7 billion down on Q1 2024 numbers.

Bain & Co analysis indicates there will be little respite for managers facing the fundraising market, with around $3 of manager demand for capital for every $1 dollar of LP allocation supply.

Through the M&A and IPO drought of the last 18-24 months, managers had been able to ease the pressure to make distributions somewhat by unlocking liquidity through alternative structures, with Bain & Co noting that the industry had secured some $410 billion through minority stake sales, dividend recapitalizations, secondaries continuation vehicles and net asset value (NAV) financings.

The stalled exit rally of 2025 suggests that GPs will have to continue leaning into these alternative exit channels to extract some liquidity from ageing portfolios (Pitchbook analysis shows the private equity hold periods are a decade highs), but there is intensifying demand from LPs that GPs start to realize cash proceeds through conventional means and stop relying on highly-structured solutions to improve distributed-to-paid-in ratios.

In a webinar poll of Institutional Limited Partners Association (ILPA) members, for example, more than 60 percent indicated a preference for mainstream exits over other options – even if this meant trading at discount to current portfolio valuations.

Shifting market dynamics

Looking ahead to the second half of 2025, the prolonged liquidity bottleneck that has hovered over the market through the first half of year will drive shifts investor tactics and strategies.

LPs, who have waited patiently for exit windows to reopen, could start taking a more proactive approach to expediting liquidity by trading directly in the secondaries markets in great volumes. In 2024 LP-led secondaries deal value climbed to US$87 billion, the highest total since 2016, according to Adams Street Partners’ 2025 Global Investor Survey.

This momentum has carried into 2025, with US university endowments, a cornerstone of the private equity investor base, deciding to sell portfolios in the secondaries market for the first time. According to Adams Street, 40 percent of LPs see selling portfolios in the secondaries market as a priority for 2025 – the highest level since the COVID period in 2020.

This trend could prompt a changed in GP behavior, with acute demand for liquidity pushing managers to bite the bullet and trade out of portfolio companies – even if they have to do so at a discount to NAV – in order to clear out older vintages and move on.

The distributions squeeze is also prompting a rethink of geographic and market segment exposure among investors.

From a geographic perspective, tariff disruption in the US has sparked a shift in LP sentiment when it comes to making allocations by geography, with a survey by fund adviser Capstone Partners finding that around a third of LPs anticipate reducing allocations to certain geographies on account of geopolitical and macro-economic uncertainty, with North America emerging as the region most affected.

The return of the mid-market

There are also signs of a rethink among LPs when it comes to the prevailing strategy of the last decade to consolidate GP relationships, write bigger cheques to fewer managers and skew portfolios to large private markets franchises running multi-asset investment strategies.

Slowing distributions and the challenging exit market for large assets, however, has put the mid-market firmly back on the investor radar, with LPs pivoting back to this segment of the private equity ecosystem. The New York State Teachers’ Retirement System, for example, is considering upping its target for small and medium buyout funds from 45 percent to 55 percent, while the California Public Employees’ Retirement System has upped its exposure to mid-market private equity from 28 percent of its budget allocation to 62 percent during the last 24 months, PEI reports.

Investors have acknowledged the mid-market’s ability to generate alpha across cycles, with Pinebridge research showing that mid-market buyout funds show less correlation to public equities than large cap funds, and are less volatile and more resilient in periods of macro-economic uncertainty.

Returns dispersion in the mid-market between top performers and the rest is wider than at the top end of the market, which heightens risk of adverse selection, but at point in the cycle where large cap managers are still working through a backlog of ageing portfolio company exits, the mid-market’s track record and distinctive attributes are shining through and expected to continue catching LP attention through the rest of 2025.

Infrastructure:
H1 Review and H2 Outlook

What to Watch out for in H2 2025

Infrastructure fundraising is rallying, with fundraising for the first half of 2025 already ahead of the full year total for 2024.
In volatile capital markets, investors are turning to infrastructure to deliver uncorrelated returns.
The asset class is supported by favorable underlying drivers, supporting a long pipeline of deal flow for managers.
Managers will expand infrastructure investment strategies into areas like private debt and secondaries to expand access to infrastructure deals.

Anita Lyse

Global Sector Head, Real Assets

Private infrastructure has emerged as a safe haven of choice for investors through a volatile first half of 2025.

After a flat year in 2024, fundraising for the asset class has thrived in through the first half of 2025, with managers securing $134.3 billion in commitments – already more than the full-year total of $111.3 billion raised last year, according to Infrastructure Investor figures. Takings through the first half of the year represent the second strongest H1 fundraising during the last five years, putting the infrastructure in position to land one of the ever years for fundraising on record.

Uncorrelated returns in a choppy market

Through a six-month period of trade and geopolitical uncertainty, infrastructure has offered investors the promise of stability and attractive, uncorrelated returns.

Infrastructure has been one of the best performing private markets asset classes – outperforming public market equivalents for the last 12 years, according to Hamilton Lane figures, and for the last 10 vintage years has posted pooled one-year IRRs of 12.5 percent.

The asset class, however, hasn’t attracted increasing investor backing because of short-term volatility. The sector also benefits from attractive long-term commercial and operational drivers point to long-term earnings growth and returns.

Maintaining and upgrading existing infrastructure, meeting increasing demand to develop more core infrastructure to support expanding populations, and the emergence of new pockets of infrastructure, such as digitalization and renewable, present infrastructure managers with a large pipeline of potential deals offering a wide range of risk-return dynamics.

United Nations models forecast that the global population will reach a record high of 9.7 billion by 2050, which will drive huge demand for increased investment in core water, sanitation, transportation and power infrastructure.

The G20 Global Infrastructure Hub estimates that at current levels, investment is not sufficient to meet anticipated, with an infrastructure funding gap of $15 trillion opening up by 2040 unless levels of investment accelerate.

With public finances stretched following pandemic stimulus measure and increases in borrowing costs, governments will increasingly have to turn to private infrastructure managers to fill the funding gap.

Private infrastructure managers are also playing a key role in funding the roll out of renewable energy and data center infrastructure.

Investment in renewable energy is now outpacing hydrocarbon investment at a ratio of 10-to-1 – five times higher than a decade ago, while the data center market is growing at a 22 percent compound annual growth rate, reflecting the emergence of AI and the digitalization of the world economy[4].

These drivers point to a private infrastructure that has a long runway of growth still ahead of it. According to Preqin infrastructure assets under management have been growing at a compound annual growth rate (CAGR) of 16 percent since 2010 and are on track to exceed $1.8 trillion by 2026. Even if this forecast is meet, total private markets infrastructure AUM will only be a fraction of the US$15 trillion infrastructure funding gap.

Opening up new routes to market

In the months ahead private markets managers will leverage the strong investor appetite for mainstream, flagship infrastructure funds to launch new strategies in areas like secondaries infrastructure and infrastructure debt.

Managers early to the infrastructure secondaries space have made consistent distributions to investors at buyout-like returns with net IRRs in the 20 percent range.

According to asset manager Blackrock the infrastructure secondaries market is still a relatively under-capitalized market that presents buyers with scope to acquire infrastructure portfolios at attractive entry multiples and is on the cusp of a surge in transaction volumes as the private infrastructure market matures and more buyers and sellers in infrastructure space take advantage of the liquidity and j-curve mitigation secondaries plays can deliver.

Infrastructure debt presents a similar growth trajectory, as infrastructure developers look to expand the range of financing options available to them.

In the US, for example, a jurisdiction where infrastructure projects have been financed in municipal bond markets, more issuers are turning to private debt finance, where lenders typically aim to hold debt for the long-term rather than selling down in times of volatility. Private markets manager Apollo estimates that growth in private infrastructure lending could see the overall private debt market grows as large as $40 billion.

A positive outlook

The infrastructure space is not without its challenges. Shifts in US policy and subsidies for renewables, for example, will present headwinds for decarbonization and green energy investors to navigate. Infrastructure assets, particularly in the transport, logistics and ports spaces, are also on the frontline of geopolitical conflict and trade disruption, and can be exposed to falling traffic volumes and terrorism risk. Infrastructure operators are also under increasing scrutiny with respect to the resilience and contingency plans in place for the crucial infrastructure they manage.

Even when factoring in these risks, however, the underlying drivers of infrastructure demand globally, and the huge ask when it comes to finance projects to meet this demand, present private infrastructure investors and managers with attractive opportunities to lock in attractive, risk-adjusted returns is the face of ongoing macro-economic uncertainty.

Real Estate:
H1 Review and H2 Outlook

What to Watch out for in H2 2025

Real estate fundraising shows double digit increase in H1 2025, as mega fund closes boost takings.
Fundraising for opportunistic real estate accounts for 30 percent of overall takings – more than any other strategy.
Data center deals consolidate position as key driver of real estate investment across the cycle.
Managers will expand infrastructure investment strategies into areas like private debt and secondaries to expand access to infrastructure deals.
Private real estate managers are becoming increasingly influential in industry consolidation and M&A,

Anita Lyse

Global Sector Head, Real Assets

After facing a perfect storm of headwinds during the last three years there are encouraging signs that private real estate may be turning a corner.

The real estate sector has faced disruption on multiple fronts, with the increase in home working post-pandemic impacting the office segment, while bricks and mortar retail sites have continued to struggle in face of the long-term secular shift to online shopping.

Add in a prolonged period of high interest rates, which has seen a surge a financing costs for new projects and put the capital structures of some portfolios underwater, as well as a liquidity crunch in the huge Chinese real estate market, and there hasn’t been much for private real estate managers to cheer about.

Turning the corner: fundraising and investment improves

The first half of 2025, however, has signaled that better days may lay ahead of the industry. After three years of decline, first half fundraising for private real estate rallied promisingly in H1 2025 to secure commitments of US$110.54 billion for the first half and lock in a 16 percent year-on-year increase on the US$95.19 billion raised in the same period in 2024, according to PERE figures.

Fundraising for H1 2025 boosted was by two mega-fund closes by Blackstone, which raised just under $20 billion across the two vehicles, but with blue chip franchises Brookfield, Starwood and Carlyle still on the road with new real estate vehicles, the pipeline for fundraising through the second half of the year is positive.

Improving fundraising numbers have been complemented by uptick in investment activity. According to JLL, direct investment in global real estate transactions came in at US$185 billion in the first quarter of 2025, up 34 percent year-on-year.

The uptick in deals comes despite a choppy macro-economic backdrop, with liquid debt capital markets, an increase in larger ticket deals and a rise in the number of cross-border transactions providing sufficient momentum to counter-balance short term volatility.

Navigating complexity

Even as fundraising and investment figures show real estate on an upward trajectory, the sector continues to present challenges and complexity for private real estate managers to navigate.

Opportunistic real estate strategies, for example, which are focused on the acquisition of distressed and underperforming real estate assets, for example, accounted for 30 percent of overall real estate fundraising in H1 2025, according to PERE, reflecting a real estate market that is still trying to recover from the myriad disruptions of recent years.

And even though headline real estate fundraising figures are on an upward trajectory again, it is still taking managers longer than at any point in the last five years to close funds, with more than half of funds closing below target, PERE figures show.

On the investment side, managers are also having to parse through the mixed performance of different real estate assets.

The office market has sustained a recovery, with lease renewals and extensions holding up and overall vacancy rates expected to decline, according to JLL. New project development has been muted, however, and there is a bifurcation in demand between a select pool of office buildings in high-quality locations and older buildings in less popular centers.

In the logistics space stakeholders have been assessing what shifts in trade policy mean for production and warehouse space, which has impacted leasing activity, while retail real estate has continued to grapple with rising store closures.

Data center boost

One real estate vertical that has hardly skipped a beat through recent market tumult is the data center space, which has remained a red-hot area for real estate investment.

Rising demand for data capacity from the rise of AI technology, as well as from non-AI computing power requirements, has provided solid underlying fundamentals and growth forecasts for real estate managers to investment behind. According to McKinsey estimates, $7 trillion of investment will be required by 2030 to meet data projected center demand.

The bullish outlook for data center investment is reshaping fundraising markets, with data center focused vehicles emerging as the most popular sector specialist strategy in H1 2025. Data center specialist funds accounted for US$15.4 billion of total real estate fundraising in the first half (four of the ten largest fund closes in H1 2025 were for data center funds), to put strategy ahead of core residential and industrial specialist funds for the first time, according to PERE.

Back stronger

Looking ahead to the rest of 2025 and into 2026, private real estate will continue to encounter obstacles and headwinds, but after a very difficult 36-month period, the sector is in a more stable position than it has been in recent years.

Indeed, private real estate looks set to emerge from this cycle of market dislocation in a stronger and more influential position.

Private real estate managers have led wider industry consolidation and M&A through the downcycle, and gradually expanded market share, frequently via take privates of publicly listed real estate investment trusts.

Private real estate is now established as one of the most important and consistent sources of capital for aspiring real estate companies and management teams.

Managers who have been able to steer through the flat fundraising and deal markets of the last three years will find themselves in a prime position as the real estate cycle turns.

Private Debt:
H1 Review and H2 Outlook

What to Watch out for in H2 2025

Private credit has delivered steady and highly attractive risk-adjusted returns for investors through the recent cycle of inflation and interest rate dislocation
Strong performance has supported steady private debt fundraising
Elevated interest rates and lower leverage multiples put private debt managers in a position to underwrite deals on attractive terms
Default risk, however, is on the radar as financing costs put pressure on company balance sheets

Greg Myers

Global Sector Head, Private Debt

The private debt industry consolidated its status as one of the best performing private markets asset classes in the first half of 2025, supporting steady fundraising and solid returns.

In the face of trade and macro-economic uncertainty, private debt has delivered attractive risk-adjusted for investors. According to MSCI figures private credit returns outpaced private equity and real assets in Q1 2025, while Hamilton Lane analysis shows private credit outperforming public market benchmarks for 23 years in a row.

The resilient performance of private debt through the recent cycle of rising inflation and interest rates has made the sector a go-to option for private markets LPs. Private debt fundraising reached US$74.1 billion in Q1 2025 – the highest first quarter takings on record, according to Private Debt Investor.

A supportive underwriting backdrop

Looking ahead to second half of 2025, private debt managers remain well-positioned to continue deploying capital on attractive terms and pricing.

Interest rates have been cut in Europe and the UK, but remain relatively high when compared to the start of the rising interest rate cycle, while in the US the Federal Reserve has held back from bringing rates down through the first half of the year. The floating rate structures for private loans benefit from higher base rates, enabling private credit lenders to underwrite deals at attractive prices. In addition, private credit lenders are in a position to lock in these attractively priced opportunities at lower risk, with leverage multiples coming down as debt servicing costs have climbed. According to an Investec GP survey, more than 40 percent of the GPs polled said leverage multiples for new deals had come down when compared to the previous 12 months.

Deepening distribution channels

Through the second half of 2025 and into 2026 private debt funds are also set to see a steady flow of financing opportunities.

The asset class proved its ability to underwrite jumbo loans that would normally be the preserve of public syndicated markets through the period of rising interest rates, with borrowers often choosing private credit packages over syndicated loans when public debt markets all but shuttered through the initial phase of interest rate rises.

Syndicated loan issuance did rebound in 2024, with issuance across North America and Europe more than doubling year-on-year as borrowers pivoted back to cheaper public debt options amid optimism that interest rates had peaked.

Private credit, however, has been able to sustain deployment by focusing on its core mid-market deal base, but has now established its credibility as a deliverable option for bigger ticket underwrites. According to Deloitte analysis the averaged private debt deal size has increased by more than 50 percent between 2020 and 2024, which illustrates how private debt managers have been able to successfully expand the addressable market for private debt capital.

With tariff and geopolitical uncertainty weighing on public market debt market, where there is more sensitivity to macro-economic shifts, and issuance windows are more liable to open and shut intermittently, private debt players are well-placed to win larger credits through the second half of the year by offering big ticket borrowers with more certainty around deal execution.

Private credit players have also widened their distribution channels by partnering with banks to service issuers who like to include banks and private debt financing tranches in their capital structures. The market has also seen more and more tie-ups between insurers and private credit players, who are originating investment grade private credit deals for the annuities of insurers, while also partnering with insurer asset management teams to issue private loans.

In addition to accelerating deployment by taking on bigger deals and partnering with financial institutions, private credit players are also expanding their platforms into adjacent areas, including private credit secondaries, NAV financing, and infrastructure debt, opening up further growth opportunities for the asset class.

Default risk: the one cloud on the horizon

But while private debt is well set to benefit from a number of tailwinds, there are also potential challenges the manager may have to navigate in the coming months.

The most prominent is default risk. Private credit managers have on the whole been able to manage default risk in their portfolios by offering amend and extend deals and direct portfolio management.

There are signs, however, that pressure is building on the companies in private credit portfolios, with high financing costs stretching balance sheets and making it more difficult to for borrowers to repay loans and interest.

Currently, defaults in the private credit space have been low, with analysis from Proskauer putting the default rate for US private credit unitranche loans at less than 2.5 percent for Q1 2025.

The Lincoln Senior Debt Index, however, shows an increase in direct lending covenant breaches and the use of payment-in-kind (PIK) facilities, which allow borrowers to defer interest rate payments.

In addition to chasing down new deals and launching new products, private debt managers will also be playing some defence to protect value in existing portfolios.

Venture capital firms are facing the most challenging deal and fundraising backdrop in more than a decade. Investment in operational infrastructure is helping managers to navigate it.

In the first half of 2025 global venture fundraising came in at just US$41.6 billion, according to Venture Capital Journal (VCJ), down from US$60 billion over the same period in 2025 and the lowest first half total in eight years. Venture capital investment volume, meanwhile, fell to a record quarterly low of 7,551 deals in Q1 2025, according to KPMG, with the second quarter not much better as a challenging investment backdrop persisted.

A scarcity of LP allocations and transaction flow has thrown venture capital deployment and fundraising schedules out of kilter and intensified competition between managers for capital and deal flow. In the face of these headwinds, operational excellence is becoming point of difference for managers in a competitive market.

A factor in fundraising

For venture firm CFOs and COOs, the growing importance of the back-office as a differentiator when competing for LP capital is a game changer.

Historically the primary predictor of fundraising success was front office excellence and track record, and the ability of managers to identify and execute on the best deal targets and maximize investor returns. The back office was a necessary but primarily administrative function.

There is a general consensus across the industry, however, that CFOs have taken a more strategic role within venture capital firms, with the CFO role expanding beyond fund reporting to include involvement and time spent supporting investor relations, marketing and portfolio management and reporting.

This has been a catalyst for the traditional siloes between the back office and front office breaking down. Operational infrastructure is now a key enabler of front office success, with the CFO and COO setting this interface and participating in the implementation of technology and service provider support to build out of centralized operational processes and data infrastructure that underpin core front office functions.

Indeed, due to the increasing sophistication of the LP base, LPs are paying closer attention to back-office capability when deciding which managers to allocate limited capital resources to. According to Private Funds CFOs 2025 Insights Survey, 36 percent of respondents said LPs were paying closer attention to operational and infrastructure capabilities – up from 22 percent a year earlier.

A robust operating model is seen as a risk mitigator for LPs when selecting managers, as LPs require the managers they back to have the right people, processes and technologies in place to support strong governance and protect firms against downside risk. Alter Domus has noted a steady increase in due diligence requests from investors and prospective investors. These have involved calls, questionnaires and onsite visits to fund administrators.

A sound operational model is also a key enabler for managers to scale as they stay on top of ever-changing fund structures, co-investment, SPVs, continuation vehicles and special account fund structures.

The venture ecosystem hasn’t been isolated from trends reshaping the wider private markets space, where a wider mix of investors, with varying returns objectives and tax and regulatory obligations, comprise a manager’s core LP base. This includes servicing a potentially growing base of non-institutional investors allocating to venture strategies through semi-liquid and interval structures, which require the management of liquidity sleeves and the more regular publication of net asset value (NAV) marks. Venture managers have been pioneers in development of evergreen and permanent fund structures. Blue chip venture managers, including Sequoia and Thrive Capital, are among the venture firms to have launched permanent capital funds with indefinite fund lives. Some of these funds can hold public stocks, a natural fit for early venture investors in what are now some of the world’s largest companies.

In a market where liquidity is at a premium (distributions as proportion of private markets NAV well to 11 percent in 2024, the lowest percentage in a decade, according to Bain & Co analysis, LPs are also placing premium on managers with the back-office capability to manage capital calls and distributions with maximum efficiency.

Cash-constrained LPs will not want to face capital calls too early or have cash locked up unnecessarily because of a premature call. LPs will also note which managers can expedite timelines for distributions. With distributed-to-paid-in (DPI) now almost as important as IRR for LPs when backing managers, the way firms handle cash management processes, capital calls and distributions, has been elevated from relatively low value, administrative work to a key differentiator for LPs.

The speed of capital calls can also present a venture firm as more attractive in competitive deal auctions and funding rounds. In a deal environment that is low volume and more competitive, having an efficient cash management model (opening accounts, issuing capital calls, funding deals) that doesn’t create a bottleneck or pose as a risk area can make the difference in winning or losing a deal.

Venture regulatory and reporting demands are also intensifying. In addition to meeting LP expectations for more frequent and granular reporting on fund and portfolio company performance, venture firms are also having to steer through regulatory change, with the next iteration of the EU’s Alternative Investment Fund Managers Directive – AIFMD II – applying from April 2026, and the US Securities and Exchange Commission (SEC) issuing record levels of financial penalties in the 2024 fiscal year. With data privacy regulation and environmental, social and governance (ESG) compliance also on the venture manager to do list, the regulatory and reporting ask of venture firms has never been more demanding.

The challenge of scaling the back-office

For the venture CFO and COO, who are responsible for laying the foundations and strategic direction of their franchises, an innovative approach to overhauling old expectations of how a firm’s venture back office looks and operates has become necessary to put firms on the right trajectory.

Keeping up with the expanding expectations of the venture capital back-office presents significant cost challenges and complexity for managers, and it is the responsibility of the CFOs and COOs to lead the organizational transformation required to keep their firms in tune with changing market dynamics.

Venture firms have long-operated as nimble, efficient partner-led organizations focused predominantly on deal execution and fundraising. Back-office requirements were relatively light touch and could be handled by small, inhouse teams.

In the current market, CFOs and COOs are under the pressure to determine the best course of action; continue with the in-house model and invest in hiring and growing the team, along with implementing technology to manage increasing operational workload; or partner with service providers.

Exploring the options: insourcing vs outsourcing

Historically venture managers have been slower to adopt an outsourced model than other asset classes. Venture structures have been relatively straightforward to administer, especially for emerging managers where structures may be simple and the volume of investors per fund small enough to manage effectively inhouse. For many of the smaller VCs, cost sensitivity has been another factor for insourcing.

There is also a sensitivity around confidentiality. Several venture deals will be confidential, which has led to some nervousness about sharing too much information with third-party service providers.

The insourcing model, however, does present challenges that venture CFOs and COOs have to consider.

To keep up with increasing complexity, investor expectations and regulatory demands, back-office teams are leaning more and more on technology, software, process automation and AI tools. Advances in technology will also be led by many of the companies that venture managers have invested in and are familiar with. As a result, venture managers will be more familiar and comfortable with automation, AI and new technology, and will find technology more valuable and easier to implement.

The private markets industry has already embarked on this technology trajectory, with an industry survey led by Alter Domus and Deloitte recording that well over half of managers are already utilizing digitization and automation in daily operations, and that almost 63 percent anticipate that AI and GenAI will have a significant impact on the alternative investment industry. The survey found that respondents saw streamlining operational processes, enhancing decision-making capabilities, and increasing portfolio performance areas where digitization and tech-adoption should focus.

Keeping pace with tech adoption, upgrading and transitioning legacy technology platforms, and training and recruiting back-office teams that are fit for purpose, however, requires significant upfront capital expenditure that can prove overwhelming for venture managers – especially if this investment would otherwise have been directed into core front office dealmaking resources and recruitment.

According to VCJ, the average venture fund in H1 2025 closed at US$124.5 million, the lowest average recorded in six years. With smaller funds and fee income than other private markets strategies, such as buyouts or private credit, venture firms will often lack the budgets to add to inhouse teams, invest in new technology platforms and retain back-office staff who are being stretched as reporting and regulatory workflows increase.

Outsourcing presents a solution to these capital expenditure and tech-adoption bottlenecks.

Outsourcing fund administration specialists service thousands of managers and funds, across multiple asset classes and geographies, and are thus able to achieve economies scale that enable them to deliver high-value fund accounting, fund administration and investor services as significantly lower costs than an individual venture manager in isolation.

Fund administrators will also be engaging with regulatory and technology developments, on behalf of clients, on a daily basis and have the scale to deploy dedicated teams with deep expertise in these areas to support venture clients.

Outsourcing providers can also advise venture managers on the software and technology platforms best matched to a manager’s deal strategy and investor base, and leverage relationships with technology vendors to roll-out bespoke solutions at competitive price points that can be benchmarked by LPs.

Fund administrators can also provide venture clients with access to proprietary and automation tools that are fit for purpose, allowing managers to reinvest in other aspects of their business. Alter Domus, for example, has invested significant capital in data analytics and workflow automation, which clients can use to drive efficiencies across the back-office. Clients using these tools have reported efficiency gains of between 10 percent and 20 percent.

The evolution outsourcing

The fund administration industry, however, has recognized some of the challenges presented by “old-fashioned” outsourcing arrangements and has tailored services that allow venture managers to retain the ready access to data and institutional knowledge that an insourced model provides, at the same time as unlocking the cost-efficiencies and scale that an outsourced model can offer.

Fund administrators can now provide co-sourcing operating models where data is held in a cloud environment, rather than behind an administrator firewall, and can be accessed by both manager and fund administrator as required.

For CFOs and COOs this removes the friction points of going back and forth to an administrator when fielding LP information requests, but still gives the manager the back-office scalability and cost advantages of an outsourced model.

In addition, co-sourcing makes it easier to switch administrators if a manager chooses to, as the manager retains control of the platform and software its back-office data is running on.

Lastly, another outsourcing model that growing managers have found compelling is the “lift out”. This involves a number of the manager’s incumbent team leaving and becoming employees of the fund administrator, while continuing to support the same funds they covered in-house. Institutional knowledge isn’t lost, and the manager retains continuity of the team servicing the funds, while putting in place a more scalable and cost-effective operational model for the future.

Building partnerships

As the venture capital ecosystem faces an operational inflection point, where operational infrastructure evolving from a back-office matter to strategic differentiator, working with a tech-enabled fund administration provider can help venture managers to level up their back-office capability without drawing resources and senior partner attention from the core business of raising and deploying capital and delivering returns to LPs.

Relationships between managers and outsourcers, however, are deepening and becoming more sophisticated, to best meet manager requirements.

A fund administrator is no longer just providing arms-length services and basic support, but serving as long-term partner to managers as their operational requirements develop and change.

Managers will now turn to their fund administrators for advice on the optimum operational model for their organization and support on how to execute business transformation, manage data migration and implement new systems. Fund administrators will also advise on the technology and software that best dovetails with a manager’s operational model and keep managers up to date on regulatory and compliance requirements.

A fund administrator like Alter Domus can provide genuine strategic value to venture capital CFOs and COOs as they navigate the shifting industry backdrop, serving not just as provider of basic support functions, but as an important partner and counsel.

Exchange-traded funds (ETFs) composed of collateralized loan obligations (CLOs) have grown significantly in recent years. The underlying CLOs consist primarily of senior secured broadly syndicated loans (BSLs). Although retail investors have had access to BSL funds for over 30 years through open-ended leverage loan mutual funds and for over a dozen years through ETFs, the first publicly traded CLO ETF was launched only in 2020. Prior to this development, CLO investments were predominantly made by institutional investors. This is particularly noteworthy given that historically anywhere from a half to up to two-thirds or more of the US BSL market are held by CLOs[1].

This paper examines the performance of a sample of publicly traded CLO ETFs based on historical returns. The sample encompasses various CLO ETFs that target a range of tranche seniorities, reflecting different levels of credit risk as indicated by their ratings. Additionally, the performance of BSL ETFs, from which we selected a sample, is considered to provide a reference point, given that a CLO tranche is fundamentally a derivative of its underlying BSL portfolio.

Our analysis of the historical daily returns and correlations of the ETFs indicates that over a longer period (such as two years), the risk/return characteristics amongst the ETFs are generally consistent with the underlying risk profile of the relevant ETF – i.e. similar performance levels for similar risks – and moderate correlations. However, an examination of daily CLO ETF returns and correlations over a short volatile period can exhibit a noticeable divergence in absolute and relative performance. These findings indicate that the ‘intuitive’ view that CLOs and BSLs are highly correlated may not be evident until there is significant market volatility. And even in that case, differences in performance indicate that other factors may be at play.

Our analysis found that CLO correlations may be further explained at times by vintage and underlying asset manager exposure rather than just broader BSL market dynamics. We offer additional insights and key factors that can impact the performance between CLO portfolios.

Historical Returns – Data

Our sample of CLO ETFs spans the range of tranche seniorities and the credit ratings scale – from CLO ETFs that focus primarily on senior tranches (rated primarily Aaa) to those that focus on investment grade mezzanine tranches (rated from Aa to Baa). And even to those that include some speculative grade tranches (Ba). Our study also considers BSL ETFs to acknowledge that CLOs are derivatives of the BSL market.

In this context, the relationship between CLOs and the underlying BSL market could provide additional insight into the performance of CLOs. We also included some other market related ETFs to gain additional insight as to the performance of the BSL and CLO markets relative to the broader capital markets. Thus, the selected ETFs can be grouped into three categories: BSL, CLO and other broader markets.

BSL Category

We selected four BSL ETFs that are managed by well-established asset managers and have benchmarks to broad BSL indices.

Table 1: List of BSL ETFs

CLO Category (BSL-Derived)

We selected a variety of CLO ETFs that invest in CLO tranches across the CLO capital structure, and with investments in CLOs across a range of vintage periods and asset managers.

Table 2: List of CLO ETFs

Understanding the underlying ratings distributions gives further insight into the level of exposures a CLO ETF has within a typical CLO capital structure. The CLO portfolios within our sample cover a range of credit risk exposures – from a fund with essentially 100% Aaa to other funds with a broader representation of investment-grade ratings as well as funds with concentrations of Baa/Ba credit risk[2].

Other Broader Markets Category

We also included ETFs that can provide additional perspective on the relative performance of the BSL and CLO markets to the broader capital markets.

In this context, we selected a small cap equity ETF (IWM) since many BSL borrowers would fall in the small cap category; a high yield bond ETF (HYG) since these issuers have a similar credit risk profile (though with different recovery rate and interest rate risks) as compared to BSLs; and a short-term Treasury fund ETF (VGSH) to provide some benchmark of shorter-term risk-free interest rates.

Looking at Financial Performance

We focused on the risk-return and correlation characteristics across the ETFs. We looked for insights into how the ETFs performance behaved with one another within the same category (‘intra-category’), and across categories (‘inter-category’) over different time periods. We observed that both intra-category and inter-category performance and correlation metrics depended heavily on which period we selected. We found that during the most recent market volatility (April 2025), patterns emerged that were not so evident during calmer periods.

In some cases, the correlations we observed between the BSL and CLO ETFs were not as consistent as expected. Understanding that CLOs are derivatives of the BSL market, we initially expected to see a relatively higher degree of correlation across all market environments, but the correlations across all market environments varied. This observation suggests that not all CLOs track the same broad ‘BSL market’.

We also found that CLO performance could be influenced by unique factors related to range of vintage periods of when the underlying CLOs were issued and the overall exposures to common CLO asset managers.

These findings show that these variations across CLO portfolios can offer an opportunity for CLO investors to diversify their BSL and BSL-derivative portfolios to better optimize their specific risk-return objectives. In other words, not all BSL and CLO ETFs are alike.

Historical Performance – ‘Normal Times’

We chose two distinct historical return periods to begin our comparative analysis. One that we could classify as a ‘normal’ period and the other as a ‘volatile’ one. We chose the month of April 2025 as the volatile period. This period reflected significant market volatility due to the rapidly changing global trade outlook and economic uncertainties associated with the related US tariff announcements.

We selected the two-year period from April 2023 through March 2025 as a proxy of ‘normal market conditions’ and can be considered somewhat as a benchmark. Exhibits 1 and 2 show the historical return statistics and correlations of daily returns for each of the ETFs, respectively. Note that two of the ETFs in our sample were not in existence for the full two year-period analyzed. Thus, summary stats are not available, and correlation stats apply only for the respective period that each of these two ETFs was in existence.

We note that the return and risk characteristics across the ETFs are generally as expected within each investment category and subcategory. For example, among the BSL ETFs we note that there is no material distinction among the standard deviations and coefficients of variation. Among the CLO ETFs, the riskier CLO ETFs with lower rated tranches show higher volatility and coefficients of variation as compared to those CLO ETFs with higher rated tranches. The high yield bond ETF was the most volatile among the credit-sensitive ETFs. As expected, the small cap stock ETF was the most volatile while the short-term Treasury ETF was the least.

Exhibit 3 summarizes the cross-category correlations of historical daily returns. These are based on simple averages of correlations amongst the ETFs within their respective categories. The text box on the right provides guidelines for assessing the correlation results presented in this paper.

During ‘normal times’ NONE of the observed correlations were assessed to be Strong or Very Strong. All the correlations were assessed to be in the Moderate and Weak/Very Weak categories. Only 4 of the 22 observed correlations were assessed as Moderate while the remaining 18 were Weak / Very Weak. Three of the four that were Moderate, were related to the BSL category – BSLs to: BSLs, HY Bonds, and small cap stocks, respectively.

These observations suggest that during normal times, the correlations were not particularly significant for the CLO ETFs. Furthermore, CLO performance did not appear to be materially correlated to other credit risk assets, including the BSL market. Even within the CLO category, correlations were relatively marginal across the CLO capital structure, which suggests that movements in CLO tranche risk premiums seem to be more idiosyncratic during stable markets. These results are not surprising given that the CLO tranches are supported with credit enhancement – unlike CLO equity tranches, which we would expect to be more sensitive.

Exhibit 1: ETFs historical return statistics (April 2023 – March 2025)

Exhibit 2: ETFs Historical Daily Return Correlation Matrix (April 2023 – March 2025)

Exhibit 3: ETF Categories Historical Daily Return Correlation Matrix (April 2023 – March 2025)

Historical Performance – ‘Volatile Markets’

As previously explained, we defined the ‘volatile’ period to be the month of April 2025, a period of significant market volatility. Exhibits 4 through 6 show the various historical return statistics for the ETFs during this period.

One can immediately notice the significant jolt in the related risk statistics for all ETFs and the correlations among them. Below are some noteworthy observations based on the comparison of risk statistics between the two periods.

CLO ETFs experienced the largest increase in risk measures, measured both by volatility (4x to 11x increase) and the range of daily returns (1.5x to 4x higher).
BSL ETFs experienced roughly a 4x increase in volatility and about a doubling of the range of daily returns.
Traditional ‘risk’ asset categories of high yield corporate bonds and small cap stocks did not show as much of a relative increase as the BSLs and CLOs – a relatively modest 2x increase in volatility and a 50% increase in range of daily returns. These asset classes, albeit riskier as they are typically subordinated relative to BSL, are more liquid and established markets. For the short-term Treasury ETF, the risk performance in April 2025 was relatively indistinguishable than during the ‘normal’ period.

With respect to correlations, our observations show a sharp increase. Whereas during ‘normal’ times, correlations are not meaningfully significant, this changed during ‘stressed’ markets – half of the observed correlations are now assessed to be Strong and Very Strong (11 of the 22 observations) whereas 3 of the 22 are now Weak/Very Weak.

While correlations increased substantially, there were still some areas of divergence in performance that are worth noting. For example, the CLO ETFs such as the higher rated investment grade CLO ETFs show moderate correlations to all other asset classes. This implies that CLO ETFs may offer some diversification benefits (especially as you move up the capital structure associated with greater credit enhancement) even in stressed markets. However, the CLO ETFs with lower-rated tranches did show very strong correlations to the ’risk’ assets, but that is to be expected given their tranches’ higher degree of credit risk exposure associated with lower levels of credit enhancement.

Exhibit 4: ETFs historical return statistics (April 2025)

Exhibit 5: Historical Daily Return Correlation Matrix (April 2025)

Exhibit 6: ETF Categories Historical Daily Return Correlation Matrix (April 2025)

Other Observations

A detailed attribution analysis of the underlying CLO ETF performances is outside the scope of this paper. However, we performed some high-level reviews of the CLO portfolios to look for potential factors that could affect the performance of the CLO ETFs and help explain some of the correlation behavior CLOs experienced, especially during the ‘volatile’ period as CLOs appeared to exhibit lower intra and inter correlations than the other asset classes.

Additional factors beyond market considerations appear to emerge when we look closer at the CLO portfolios. In addition to diverse capital structure exposures, we observed that the CLO ETFs had relatively diverse CLO vintage exposures. While exposures to common asset managers across the CLO ETFs could be significant, we noticed that the exposures were often across various CLO vintages of common managers.

Investing across CLOs with unique asset managers can provide diversification benefits despite targeting the BSL market. Different managers may have varying investment styles, strategies, size (or AUM), as well as industry/sector and credit expertise.

Notwithstanding the fact that a CLO portfolio may consist of several CLOs managed by the same entity, there can be advantages from diversifying across vintages. CLOs can be executed under different market conditions and potentially with variations in reinvestment criteria, even given identical CLO portfolio managers. Furthermore, CLOs from different vintages may be at various stages in their lifecycle, such as the reinvestment or amortization period, which also affects the level of a CLO’s reinvestment activity, as well as being past their non-call period, which can indicate the degree of potential refinancing activities.

Conclusion

ETFs composed of CLOs, with underlying BSLs, have experienced significant growth in recent years. While retail investors had access to funds of BSLs for over 30 years, the first publicly traded CLO ETF was introduced in 2020. This is noteworthy since a large part of the BSL market is held by CLOs and thus offers a broader group of investors to participate in the BSL-derived market across various risk/return profiles.

This paper analyzed the performance of CLO ETFs based on a sample of historical returns. The sample included different ETFs that target a range of CLO tranche seniorities, representing varying levels of credit risk. The performance of some BSL ETFs was also reviewed since the performance of a CLO tranche is essentially derived from its underlying BSL portfolio.

Our analysis of the historical daily returns and correlations of the ETFs show that over a longer ‘normal’ period, co-movements in performance are moderate and the risk/return characteristics across the ETFs are generally consistent with their underlying risk profile. However, CLO ETF returns and correlations can exhibit a noticeable divergence in performance and increase in volatility over a shorter period of extreme uncertainty. An example of which was during the recent period of market fluctuations caused by the US tariff announcements.

We also found that CLO correlations can be explained further by key factors such as the distribution of exposures to: (1) seniorities of the CLO tranches, (2) the vintage periods of when the CLOs were issued, and (3) asset manager overlap within a CLO ETF portfolio.

The bottom line is that CLO ETFs appear to offer investment diversification benefits and that not all CLO ETFs are the same, even given similar credit risk. While performance may appear to converge during stressful times, key differences in performance is also evident.

[1] Guggenheim Investments research dated December 7, 2023 – ‘Understanding Collateralized Loan Obligations’ (https://www.guggenheiminvestments.com/perspectives/portfolio-strategy/understanding-collateralized-loan-obligations-clo) and FT Opinion On Wall Street dated June 7, 2025 – ‘The trend strengthening the hand of big credit houses’ (https://www.ft.com/content/b5693e95-3a89-4df0-a1f8-ad3e70338458).

[2] Although some of the CLO ETFs may report CLO tranches that are “not-rated”, this is not technically correct in all cases since some ETFs generally report ratings only from the two largest and widely recognized NRSROs. Nonetheless, “non-rated” tranches may still be less liquid and more volatile given the absence of a rating from one of the two largest NRSROs, but likely to offer higher yields.

technology brightly colored data on screen

In the face of volatile stock markets, tariff uncertainty and sustained elevated interest rates venture capital investment has proven remarkably resilient. In the first three months of 2025 global venture investment reached a 10 quarter high of US$126.3 billion and up 53 percent year-on-year from US$82.3 billion in Q1 2024, according to KPMG figures.

Investment in AI and machine learning technology funding rounds has been the single biggest driver of venture capital investment resilience, accounting for close to 60 percent of combined venture deal value in Q1 2025, according to Pitchbook.

But while the importance of AI to the health for the venture deal ecosystem in the current market is undeniable, but behind the AI-driven headlines, other sectors are also generating and interest and deal flow.

Alter Domus reviews five key sectors attracting investment from venture capital managers:

1. AI and machine learning:

Without the contribution of AI funding round activity, overall venture capital funding round investment figures would have come in much weaker.

AI has been a hot ticket for investors, with the long-term growth trajectory and application of AI technologies supporting robust valuations and investor appetite for exposure to fast-growing AI start-ups with proven technologies.

The US AI space has been particularly active, with OpenAI, the developer of ChatGPT, closing the largest private tech in history with a US$40 billion funding round that valued the business at US$300 billion. In other US AI deals large-language model (LLM) competitor Anthropic raised US$4.5 billion across two closings and AI-powered augmented reality company Infinite Reality raised a US$3 billion round to lock in a US$12.5 billion valuation.

AI investment activity also corner-stoned the European venture market, although the focus was more on AI-industrial applications as opposed to the LLM deals that led the US market. Healthcare-led AI companies such as Neko Health and Cera landed funding rounds of US$260 million and US$150 million respectively.

AI also animated Asian venture capital, with the release of Chinese LLM AI company DeepSeek, which can operate with less computing power than other models, opening up AI to a wider pool of users and driving Asian technology giants Alibaba and Tencent to launch their own AI-offerings.

2. Healthtech and biotech:

The healthtech and biotech segment also showed positive investment growth, rising by 30.4 percent in Q1 2025 to reach US$3.5 billion from 185 transactions.

Investment in health and biotech has benefitted from overlaps with the red-hot AI sector, with numerous large funding rounds secured by businesses straddling both segments, such as the abovementioned deals involving preventative healthcare group Neko Health and in-home care platform CERA.

But while AI shaped investment in healthtech and biotech, other sector verticals have also managed to progress funding rounds. Windward Bio, for example, a clinical stage drug developer, landed a US$200 million Series A funding round, while FIRE1, a medical devices developer focused on heart failure care, landed a US$120 million round.

Other funding rounds – for companies spanning a range of therapeutic drug research, digital health technology and scanning and drug delivery areas – have also progressed, illustrates the sustained interest in the healthcare space from venture capital investors.

3. Cleantech

Despite policy shifts in the US on energy transition and environmental, social and governance (ESG), cleantech and climate-focused assets have continued to attract interest from investors.

Even as the policy focus on energy transition shifts, venture capital investors around the world have continued to bank on the long-term requirement for diversified energy sources, energy security and decarbonization in all modern economies.

In the US, X Energy, a developer of small, modular nuclear technology, raised US$700 million in an upsized Series C funding round, while Helion, a fusion reactor business, raised US$425 million in a Series F round.

Outside of the US, Chinese cleantech group SE Environmental secured a US$688 million round, while German real estate energy management company Reneo and Australian vertical farming group, Stacked Farm, closed rounds of US$624 million and US$150 million respectively.

4. Defencetech

Escalating conflict in Eastern Europe and the Middle East, coupled with a shift to satellite-, autonomous- and AI-powered defense system has supported a strong growth in defencetech venture investment, with CB Insights forecasting that at the current run rate defencetech investing will reach US$6 billion by end of 2025 – a 62 percent increase on 2023 levels.

In Europe funding round highlights have included sizeable funding rounds for Defence AI software company Helsing and drone manufacturer, Tekever. The US generated even bigger defensetech deals – including a $600 million raise by autonomous naval defense technology group Saronic Technologies, a $240 million raise for aerospace-focused ShieldAI, and a $250 million raise by anti-drone systems developer Epirus.

5. Fintech

The fintech sector has been focused on the exits and realizations of existing assets, but investment opportunities have continued to emerge, with CB Insights tracking an 18 percent quarter-on-quarter increase in fintech funding to US£10.3 billion for Q1 2025.

A rally in investment in crypto and blockchain assets, including large rounds such as the US$2 billion deal for Maltese crypto exchange Binance, contributed to the increase in fintech investment, with a number of crypto assets also testing out markets for exits.

Outside of the crypto and blockchain space, Mexican buy-now-pay-later (BNPL) platform Plata secured a US$160 million round to achieve unicorn status, while Israeli fintech services provider Raypd landed a US$500 million round to support its acquisition of PayU.

Other areas to watch:

In addition to the core investment themes listed above, venture managers have also kept tracking longer-term investment trends. These are other investment themes to watch:

6. Quantum computing:

Quantum computing – an advanced form of computing based on the principles of quantum mechanics – has the potential to solve calculations and complex problems that current computing systems can’t deliver.

The sector is still relatively nascent, but venture managers are moving actively to build exposure to the sector, with quantum computing groups raising more than US$1.25 billion in Q1 2025 – more than double the year-on-year comparison.

As the sector moves into the commercial domain, and is not solely used in a research and development context, more commercial applications and investment opportunities are opening up.

7. Graphene:

Graphene – a feather-light but incredibly strong substance with huge potential across the construction, manufacturing and industrials sectors – is expected to grow at a compound annual growth rate (CAGR) of 35.1 percent between 2024 and 2030 and become a US$1.61 billion market, according to Grand View Research.

Compared to other venture verticals, funding rounds are still relatively small, but with demand for the substance expected to increase across the energy storage, aerospace and car-making industries, this is an area venture firms are going to be paying ever closer attention to.

8. Synthetic biology:

Synthetic biology – a science applying engineering principles to living systems – has the potential to transform the availability of personalized medicine and food production and is forecast to grow at a compound annual growth rate (CAGR) of 23.2 percent between 2025 and 2035, according to Vantage Market Research.

Venture capital players have invested steadily in synthetic biology research, but commercial applications are still some way off and transitioning the sector from one receiving steady private sector capital flows at seed level, into a sector the presents an attractive risk-reward proposition for venture investors deploying scale-up levels of capital is still some way off.

9. Robotics:

Venture investment in robotics has cooled since 2021, when funding rounds totaled US$14.7 billion versus around US$7.5 billion last year, according to Dealmaker reports.

The sector, however, has continued to attract sizeable, albeit concentrated funding rounds, as companies combine physical robotics capability with AI tools.

Physical Intelligence, for example, a start-up that develops “brains” for robots secured a US$2 billion valuation when closing its recent US$400 million funding round.

In another notable deal Apptronik, a humanoid robotics company based in Texas, closed a Series A funding round at US$350 million. The company is building intelligent robots that can be deployed in the manufacturing, health care and social care sectors, among others.

At first glance, the global venture capital market appears to be booming.

Venture capital investment in Q1 2025 climbed to a 10-quarter high of $126.3 billion, rising from $118.7 billion in the previous three months, according to KPMG; some 35 Unicorn assets (start-ups valued at US$1 billion or more) were formed through the quarter, the second highest quarterly total since 2023, according to Pitchbook, and generative AI platform OpenAI landed a record setting US$40 billion funding round at the end of March.

These headline numbers, however, do not tell the full story. Overall venture investment may appear strong, but the asset class has not escaped the fallout from elevated inflation and interest rates, stock market volatility and global trade uncertainty.

Investment value is up, but venture capital deal volume is down. In Q1 2025 only 7,551 deals crossed the line, down from 8,801 deals in the previous quarter and a record quarterly low, according to KPMG. Meanwhile, a Bain & Co analysis shows a 23 percent year-on-year decline in venture capital fundraising, with Pitchbook recording a year-on-year decline in venture capital exit value, which totaled US$322.8 billion in 2024 versus US$331.2 billion in 2023.

A two-tier market

The gap between robust investment activity on the one hand, and falling fundraising and exit value on the other, reflects the emergence of a two-tier venture market that is bifurcating by sector and size.

Perhaps the starkest contrast to emerge is the widening disparity between the red-hot levels of deal activity involving AI-linked companies and start-ups in other sectors.

Indeed, close to a third of total funding round activity in Q1 2025 was generated by the mega OpenAI funding round, with large-language model AI start-up Anthropic another heavyweight contributor to headline numbers, landing a US$4.5 billion funding round raise. Other companies with specific AI-linked capabilities, including KoBold Metals, a developer of AI-powered mining exploration tools, and AI healthcare company Cera, were among the other high-profile performers.

The dominance of AI and machine learning has been such that it accounted for 57.9 percent of combined venture deal value – an all-time record share of the market, according to Pitchbook.

There have been a few other bright spots in the market, most notably in European defense-focused groups, with the Nato Innovation Fund and Dealroom recording a 24 percent rise in investment in European startups focused on developing defense and defense-related technology. Drone maker Tekever and defense software company Helsing have been among the big winners, as European governments and business ramp up defense spending in response to the ongoing Ukraine war.

Investors and dealmakers appear to be doubling down on select segments of the market, upping investment in these areas while putting investment in other areas on hold until macro-economic uncertainty abates. This is one of the main reasons for falling investment volume at time of rising investment value.

Fundraising falters

Macro-economic volatility has also impacted venture capital in a similar way to the buyout space, with volatility making it increasingly difficult to exit portfolio companies at attractive pricing, which then limits the distributions managers are able to make LPs, who in turn have to put the brakes on supporting new fundraising until managers start returning more cash to investors.

This dynamic has shaped what has been a tough fundraising market – which is expected to remain challenging in the near-term as a much anticipated “exit window” is pushed back yet again.

Venture dealmaker had entered 2025 with quite confidence that the year ahead would herald an improving environment for exits, with IPO markets (a crucial exit channel for venture-backed assets) set to reopen as inflation pressures eased and interest rates assumed a downward trajectory.

Escalating trade tension and tariff uncertainty, coupled ongoing conflict in Ukraine and the Middle East, and associated stock market volatility, however, have pushed back any optimism for a wave of exits back to the second half of 2025 at least, or even into 2026.

Venture-backed companies that have test the IPO waters have struggled to land successful listings at stable prices, while other venture portfolio assets that had been gearing up for big-ticket IPOs have delayed their prospective listings due to market uncertainty.

Exiting via funding rounds involving larger venture firms has also been testing, with Pitchbook noting that in the US – the world’s largest venture ecosystem – more than a quarter of funding rounds in Q1 2025 were flat or down rounds (where a start-up raises money at a lower valuation than in previous funding rounds).

There are signs that trade tariff dislocation may be abating, and stock markets have recovered losses from earlier in the year, laying a firmer foundation for potential exits through the second half of 2025. Markets, however, are still choppy, and it will take time for managers to build the necessary comfort to put companies on an exit pathway.

Opportunities ahead… but uncertainty lingers

Through this period of dislocation, opportunities to invest in high-quality, high-growth venture assets will continue to emerge. AI will more than likely continue to dominate deal activity, although defense and cybersecurity startups will also be high on dealmaker target lists.

Other sectors will also present compelling investment opportunity, although in smaller volumes, with cleantech and fintech the sectors outside of AI and defense that dealmakers are keeping an eye on.

Until there is a sense of wide macro-economic stability, however, the bifurcation theme that has shaped the venture investment during the last 12 months will continue to set the tone for market activity through the rest of 2025.

Challenge 1: Managing capital calls and distributions

Venture capital firms will routinely issue capital calls to draw down committed funds from limited partners (LPs). And when they exit portfolio companies, they will issue distributions.

However, both of these processes come with several challenges that can affect fund efficiency, investor satisfaction, and even regulatory compliance.

For example, capital calls require precise timing. Calling capital too early, i.e., before the VC firm is ready to deploy it, such as before finalizing a deal, can tie up investors’ cash unnecessarily and lead to frustration. Conversely, calling it too late can lead to missed investment opportunities or cash shortfalls.

Additionally, coordinating capital across multiple LPs can be complicated, especially when managing large or global investor bases. There is also the issue of making sure that each investor’s share of the capital call is calculated correctly. This can also be complicated, especially when the firm is managing a mix of different commitments or investment tiers. Miscalculations can cause legal issues or investor dissatisfaction.

In distribution terms, these often depend on successful exits, which are unpredictable. Timing them to meet investor expectations while preserving portfolio value can be difficult. Also, managing distributions often involves complex calculations to ensure each LP receives their correct share of returns.

Distributions also have tax implications, which can vary by investor. For example, U.S. investors may be taxed differently from foreign investors. Managing these tax complexities while ensuring compliance with local and international tax regulations can be a big challenge for VC firms.

Challenge 2. Navigating complex fund structures

As venture capital firms grow and take on more investors, some often set up different types of funds to meet various needs.

For example, they might create co-investment vehicles for large investors, special purpose entities (SPEs) for single deals, or parallel funds to handle different tax or regulatory requirements.

These structures can unlock strategic advantages for VC firms and attract a wider range of investors. However, they also introduce a host of operational, legal, and compliance challenges for venture capital management.

Having multiple entities of fund structures means more data to track, including fund performance, investor allocations, fees, and distributions. Keeping everything accurate across these entities can be difficult.

Different fund structures may also fall under various regulatory regimes. Keeping up with ongoing filings, disclosures, and audits across jurisdictions can be costly and error-prone.

In the same vein, different fund structures often come with varying tax implications, especially when dealing with cross-border investments. Managing these complexities and ensuring tax efficiency for both the firm and its investors can be a daunting task. Inaccurate tax reporting or inefficient structuring can lead to unexpected liabilities or penalties.

Furthermore, explaining the structure, rights, fees, and returns across different vehicles to LPs can be challenging. Complex structures can obscure performance and increase LP concerns about transparency and alignment of interests.

Challenge 3: Meeting an expanding regulatory environment

As the venture capital and private fund industry, in general, matures, governments and regulatory bodies across the world are ramping up their oversight, creating new compliance burdens that funds must follow.

This expanding regulatory environment poses significant challenges for VC firms.

Complex global regulations:

Many VC firms often execute deals and raise capital from LPs in multiple countries, each with its own set of regulatory frameworks. Adhering to diverse national and international regulations, such as securities laws, tax codes, and anti-money laundering measures, can be cumbersome and time-consuming.

In Europe, for example, the Alternative Investment Fund Managers Directive (AIFMD) imposes strict obligations on fund managers, particularly around reporting and investor disclosures.

Dynamic regulatory landscape:

Regulations are continually evolving. A regulatory framework that is compliant today may no longer be so tomorrow. This requires firms to be proactive in monitoring changes and adjusting their strategies accordingly.

Rising compliance and operational costs:

Meeting regulatory demands can be expensive. Firms must invest in compliance teams, legal counsel, and technology systems. These rising costs can strain smaller firms and divert capital away from growth-oriented activities.

Constraints on strategic flexibility:

Regulatory considerations, including ESG-related requirements, may limit the types of investments firms can pursue or slow down decision-making as additional due diligence becomes necessary.

Data privacy and cybersecurity pressures:

Regulations like GDPR impose strict obligations on how personal and financial data is handled. VC firms must ensure strong data protection protocols are in place or risk fines and reputational damage.

Legal liabilities:

With stricter regulatory oversight, VC firms face an increased risk of legal action for non-compliance, which could include monetary fines and penalties.

For example, the SEC reported it had filed a total of 583 enforcement actions against firms in 2024 and secured a record-breaking $8.2 billion in financial penalties, the highest total in its history. Legal action against a firm can lead to reputational damage, which in turn can affect a firm’s ability to attract future investors or raise additional funds.

Challenge 4: Delivering accurate and timely LP reporting

Modern LPs, armed with greater knowledge and a more discerning approach to their investments, are demanding a richer and more frequent flow of information from venture capital management.

However, delivering on these expectations is not without its challenges for VC firms. Here are some hurdles companies currently face.

Complexity of data collection and aggregation:

VC firms often invest in multiple startups, each with its financial systems, performance metrics, and stages of development. Aggregating data from these diverse sources, including equity positions, valuations, fund expenses, and portfolio performance, can be time-consuming and prone to errors.

Valuation challenges:

One of the most significant challenges in VC reporting is valuing early-stage investments accurately. Unlike public companies, which have easily accessible market prices, early-stage startups often lack clear market comparables, making valuations more subjective.

These valuations are typically determined through methods like discounted cash flow (DCF) or using comparable company analysis, both of which can be influenced by assumptions that may not be universally agreed upon.

This subjectivity introduces potential discrepancies between what different LPs consider the “true” value of the portfolio. Furthermore, the valuation of startups can fluctuate dramatically based on the latest funding rounds, exits, or market conditions, making it difficult to provide consistent and reliable valuation data in a timely manner.

Custom reporting requirements:

LPs often have unique reporting requirements based on their investment strategies, risk profiles, and other preferences. Meeting these customized reporting needs while maintaining accuracy and consistency can be challenging, particularly for smaller VC firms with limited resources.

Internal resource constraints:

Many VC firms, especially smaller ones, lack the resources or dedicated staff to manage the heavy workload required for accurate LP reporting. This can lead to overburdened teams, delays, and errors in reporting, which can negatively impact investor confidence.

Manual processes and lack of automation:

Many VC firms still rely on manual processes for collecting, organizing, and analyzing investment data. This increases the risk of errors and delays and makes it challenging to produce accurate and timely reports.

Challenge 5: Scaling operational infrastructure and talent

As venture capital firms grow, success brings a new set of operational demands.

Early-stage VC firms can often function effectively with lean teams, informal processes, and minimal infrastructure. But as they raise larger funds, expand their portfolios, and attract more established LPs, this becomes unsustainable. Firms must scale their operation infrastructure and talent to support this expansion and growth.

But again, many firms experience challenges in this area.

For example, as the firm grows, it needs to hire specialized professionals across various functions, including deal sourcing, legal, operations, and portfolio management. The demand for skilled individuals in these areas is high, and with many firms competing for the same talent, recruitment becomes costly and time-consuming. Finding candidates who not only have the necessary skills but also align with the firm’s culture is a big challenge.

Once the right talent is acquired, retaining it can also be an issue. Failing to build a clear career progression path, offer competitive compensation, or provide sufficient work-life balance can lead to high turnover, which disrupts operations and increases recruitment costs.

Operationally, scaling infrastructure often means higher costs. As the firm’s portfolio and the number of deals increase, so do the demands for more sophisticated systems and tools. Firms must invest in technology and support to handle portfolio management, investor relations, and reporting. These tools can require significant upfront costs for software, licensing, and implementation, and ongoing maintenance expenses.

For many VC firms, outsourcing some of these operational tasks to specialized service providers can be a good practical solution, as we’ll see in the next section.

How outsourced venture capital services address these challenges

To overcome some of the challenges outlined above and streamline their operations, many VC firms are turning to outsourced VC service providers like Alter Domus.

These firms offer the expertise, technology, and dedicated resources needed to manage critical back-office functions that would otherwise consume significant time and effort if handled internally.

For instance, these providers offer advanced fund administration platforms and experienced teams capable of managing every stage of capital calls and distributions. They can handle everything from calculating individual LP obligations to processing payments and providing detailed transaction reporting.

To address the increasing demands of regulatory compliance, these providers often have dedicated compliance teams that stay current with evolving rules. They can assist with developing and implementing compliance programs and managing regulatory filings, thus helping firms stay compliant.

Outsourced service providers can also help VC firms improve the quality, consistency, and transparency of their reporting. These providers typically bring a combination of experienced professionals and purpose-built technology platforms that streamline the reporting process and ensure greater accuracy.

For example, they offer technology and resources to centralize financial and operational data across funds, integrating information from multiple systems into a single, unified platform. This approach reduces the need for manual data entry, minimizing errors and ensuring that all financial information is accurate and up-to-date.

Many service providers offer secure, user-friendly online portals where VC firms and stakeholders can easily access real-time reports, transaction histories, and performance data. This centralized access enhances transparency, allowing firms to share information quickly and efficiently with investors, auditors, and other key parties.

Finally, outsourcing offers a flexible and cost-effective solution for scaling operational infrastructure and talent. Firms gain access to a scalable pool of specialized professionals and technology platforms without the fixed costs and management overhead of building an in-house team.

Wrapping: Venture capital operational challenges

Venture capital firms face a range of operational challenges as they grow and manage increasingly complex portfolios. These challenges as seen include managing capital calls and distributions, meeting expanding regulatory compliance requirements, delivering accurate and timely LP reporting, finally and scaling operational infrastructure and talent.

However, these operational complexities don’t have to hinder growth and success. By strategically partnering with specialized service providers, venture capital firms can access the infrastructure, technology, and expertise needed to tackle these challenges effectively.

Additionally, outsourcing frees up VC firms to focus on what really drives value, which is identifying, investing in, and nurturing high-potential, innovative companies.

Explore Alter Domus venture capital solutions to learn more about how we can help you optimize and streamline your operations.

How Private Equity Funds are Structured

Limited partnership model: GP and LP roles

Fund hierarchy

Parallel funds and offshore entities for tax efficiency

Fund lifecycle overview

Fundraising and commitments

Investment period vs. harvest period

Extension and wind-down phase

Capital commitments and capital calls

Capital commitments and capital calls

How LPs commit and how GPs draw capital

Notice the structure and timing of capital calls

Recycling provisions and reinvestment mechanics

Management fees and expenses

Typical 2-and-20 fee structure

Fee offsets, expense reimbursements, and fund-level costs

Carried interest and distribution waterfalls

Preferred return, catch-up, and carry

Deal-by-deal vs. whole-of-fund waterfalls

Clawbacks and escrow arrangements

Co-investment and sidecar structures

Why GPs offer co-investments

How co-investments are structured and allocated

Governance and fee differences

Continuation funds and secondary structures

The rise of GP-led secondaries

Structuring continuation vehicles

Impacts on fund performance and LP alignment

Legal and compliance considerations

Subscription agreements and LPA terms

Key-man provisions and fiduciary obligations

Regulatory oversight and disclosures (SEC, AIFMD, etc.)

Final thoughts: What to know before committing to a fund

Questions LPs should ask about fund structure

What makes a well-structured fund transparent and aligned

Insights

ANREV Australia Conference 2025

How Private Equity Waterfalls Work

Alter Domus appoints Isabel Gomez Vidal as Chief Commercial Officer to Accelerate Growth and Innovation

How Private Equity Waterfalls Work

Understanding the Role of Distribution Waterfalls

Why waterfall structures matter to LPs and GPs

Where waterfalls fit within the fund lifecycle

Core Components of a Waterfall

Preferred return (hurdle rate)

Return of capital to LPs

GP catch-up provisions

Carried interest allocations

Comparing Common Waterfall Structures

European-style (whole-of-fund) distributions

American-style (deal-by-deal) distributions

incentive alignment and risk considerations

Applying a Waterfall to a Hypothetical Exit

How Proceeds flow through the waterfall

Part 1: Illustrative Example – Fund Economics

Distribution Breakdown (European-Style Waterfall)

Total Distributions:

Part 2: Comparing Structural Variations and their Impacts

Key Insights

Clawbacks and Safeguards for LPs

How over-distribution is handled

Escrow accounts and clawback mechanics

Typical terms found in LPAs

Evolving Waterfall Practices in Modern PE

Tiered carry structures and performance hurdles

Hybrid or deferred waterfall designs

Waterfall in continuation funds and secondaries

What LPs should look for in fund agreements

Questions to ask about waterfall mechanics

Red flags and vague language in LPAs

Ensuring long-term alignment and transparency

Insights

ANREV Australia Conference 2025

How Private Equity Funds are Structured

Alter Domus appoints Isabel Gomez Vidal as Chief Commercial Officer to Accelerate Growth and Innovation

Top Trends in Fund Administration 2025

Why fund administration is evolving

1. Digitization and automation

2. Real-time reporting and data transparency

3. ESG and compliance integration

Private Equity:
H1 Review and H2 Outlook

Infrastructure:
H1 Review and H2 Outlook

Real Estate:
H1 Review and H2 Outlook

Private Debt:
H1 Review and H2 Outlook