Private equity could be set for a powerful catch-up move. That view rests on a simple idea: how these funds get priced each day often masks their true value. I call it the 40% rule. It explains why private equity can look sleepy in a roaring stock market, then jump when deals start to hit. Right now, the conditions for that jump are lining up.
My name is Taylor Sohns. I’m the CEO of LifeGoal Wealth Advisors and hold the CIMA and CFP designations. I spend my days analyzing how markets move and why. In this piece, I’ll break down how private equity marks are set, why they lag in strong equity markets, and what could unlock value as the deal window opens.
“Private equity is setting up for a massive catch up trade.”
The 40% Rule: Why Daily Prices Can Mislead
Public stocks print a price every second. Private companies do not. Yet many private equity funds publish a daily net asset value. That creates a gap between what a portfolio is worth and what gets reported along the way.
Here’s the practical workaround many funds use when there is no new sale or IPO for a holding:
“If the S&P 500 is up 1% that day, the private equity fund will mark up 0.4%.”
That is the 40% rule. It applies a fraction of the public market’s move to the fund’s reported value. It is not a perfect method. But it helps keep daily values from swinging wildly in the absence of real transactions.
Think about a fund that owns fast-growing software firms and healthcare platforms. On a day with no deals, there is no direct price for those holdings. So the fund nudges its value in the same direction as public markets, but only partway. That softens the day-to-day noise. It also creates a lag when stocks race higher.
I’ll make it concrete with a short example. Suppose the S&P 500 rises 10% in a quarter. A private equity fund using this approach might show only a 4% move over that period. Meanwhile, the underlying businesses could be improving more than those marks reflect. The true catch-up comes later, when a stake is sold or a company is listed. That’s when you see the real price.
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Why Lagging Marks Matter In A Risk-On Market
Private equity funds often target businesses with faster growth or more operating leverage. In an environment where investors take more risk, those kinds of companies should shine. But daily marks do not capture that right away.
The result is a disconnect:
- Public stocks surge and grab headlines.
- Private equity NAVs look slow because of partial marks.
- The performance gap narrows when actual deals set real prices.
That gap can frustrate investors. It can also set the stage for a strong run. When conditions favor growth, the delayed recognition in private equity can create stored energy. The trigger is liquidity—an IPO, a sale to a strategic buyer, or a sponsor-to-sponsor deal.
“That’s when the fund pops, when the real market price is set.”
What Could Unlock The Catch-Up
The biggest swing factor is the deal window. For the last couple of years, higher interest rates and uncertain earnings have made IPOs and large takeovers tougher. Valuation gaps were wide. Debt was more expensive. Many owners chose to wait.
Now that picture is changing. Rate expectations have eased from their peak. Equity markets have improved. Buyers are back at the table. Confidence helps both sides find a clear price. When that happens, the backlog breaks, and NAVs can jump with each exit.
There’s also the marquee effect. A large, high-profile offering can set the tone for others. It shows appetite. It sets comps for adjacent businesses. It tells boards and sponsors that public markets are willing to fund growth again.
“With SpaceX just blowing the IPO window way open, we’re gonna see more private companies come open.”
High-profile listings or liquidity events—real or rumored—can ripple across sectors. They send a signal to banks, acquirers, and founders. That message is simple: the window is not shut. As those signals build, activity tends to follow.
How The Catch-Up Typically Plays Out
When the window opens, several paths can reset private equity pricing:
First, you get IPOs. A portfolio company lists on a public exchange, and overnight, you have a live market price. Funds that own shares can revalue their stakes using that price. That can lift net asset values and sometimes trigger partial distributions when lockups end.
Second, you see strategic acquisitions. A larger corporate buyer might pay a premium to add a product, a customer base, or a technology. Those transactions often deliver cash proceeds to the fund and set clear marks for peers in the same niche.
Third, sponsor-to-sponsor deals return. One private equity firm sells to another. This can happen when a buyer sees a value creation plan that fits its playbook. The sale price becomes the new reference point for the asset and similar holdings.
Finally, continuation vehicles and secondaries provide added liquidity. Older funds can move an asset into a new vehicle backed by fresh investors. That process results in a negotiated price and an opportunity for existing investors to take cash or roll forward.
Each of these events takes an estimate and turns it into a real number. Do that across a portfolio, and the cumulative effect can be large. That is the essence of the catch-up trade.
What Investors Should Watch
Three signals can help gauge whether the setup is strengthening:
- Deal announcements pick up across several sectors, not just one or two.
- New issues priced within or above guidance and trade well in early sessions.
- Financing terms improve, with lenders providing steadier support and lower spreads.
These signs mark a healthier market for exits. They also hint at a tighter bid-ask spread between buyers and sellers. When that spread narrows, transactions close. And each closing resets marks closer to economic reality.
Risks, Friction, and What Could Go Wrong
The path is not risk-free. If inflation flares and rates jump again, financing may tighten. That could slow deals and extend holding periods. Weak earnings from public peers could also hurt valuations and chill demand for new listings.
Selection matters too. Private equity is not one thing. Sector focus, deal size, and manager skill create very different results. Two funds raised in the same year can finish far apart. The dispersion can be wide, and fees can magnify it.
Illiquidity is another headwind. Many vehicles are locked for years. Interim redemptions may be limited or unavailable. Interval and tender-offer funds ease this, but they can gate outflows or cut repurchase amounts during stress. That reality means sizing and pacing matter a lot.
Lastly, headline events can disappoint. A big-ticket IPO might stumble. A buyer could walk away. Supply can outstrip demand if too many deals rush out at once. Be ready for noise along the way.
Accessing Private Equity Thoughtfully
You do not need to be an institution to gain exposure. There are several entry points, each with trade-offs.
Some investors use publicly traded firms that manage private assets. Owning shares in large managers can deliver indirect exposure to deal fees, performance carry, and assets under management.
Others consider listed vehicles that invest in private deals and publish periodic NAVs. These can trade at discounts or premiums to their reported values. That adds another layer of opportunity and risk.
There are also interval and tender-offer funds that target private equity or private credit. These funds offer periodic liquidity windows but still require patience. They can be a fit for investors who want access but cannot lock capital for a decade.
At higher wealth levels, feeder funds and platform access may open doors to flagship buyout, growth, or secondary funds. Those options often come with capital calls, K-1s, and complex tax reporting. They also require careful diligence on the managers and terms.
Building A Smart Allocation
Private equity can serve as a growth sleeve within a diversified plan. The key is matching the vehicle to your time horizon and liquidity needs. Avoid funding long-term positions with money you might need soon.
Consider pacing commitments over time. Vintage-year diversification helps reduce timing risk. By spreading exposure across different fundraising years, you reduce the risk of hitting a single valuation peak or a single exit trough.
Be mindful of fees. Management fees and carried interest vary by structure. Read the documents and model net returns after fees. Also, note the tax treatment. Distributions can include different character types with different rates.
Keep expectations grounded. The 40% rule can mask momentum on the way up and the way down. In a soft market, partial marks can delay bad news. Realism helps prevent surprises in both directions.
A Simple Checklist To Use Now
- Clarify your time horizon and cash needs before committing.
- Decide on your access path: public managers, listed vehicles, intervals, or direct funds.
- Diversify by sector, strategy, and vintage year if possible.
- Track IPO calendars, M&A headlines, and deal spreads for signs of momentum.
- Revisit sizing as liquidity events occur and distributions arrive.
Putting It All Together
The daily marks you see in private equity tell only part of the story. When markets favor growth and risk, underlying values can climb faster than reported NAVs. That creates a visible lag. The catch-up shows up at the moment of truth—when companies list or get sold.
Today’s setup points to more of those moments. Deal activity is stirring. Confidence is improving. High-profile events are signaling that the window is opening. As more transactions clear, I expect private equity marks to move closer to the true economics inside these portfolios.
“In a true risk-on market, they should actually outperform.”
If you plan to participate, be thoughtful about structure, sizing, and time horizon. The return path may not be smooth, but the mechanics are straightforward. When real prices arrive, the lag narrows—and that is where the catch-up lives.
Frequently Asked Questions
Q: What exactly is the 40% rule, and why do funds use it?
The 40% rule is a shorthand many private equity funds use to update daily values when no holdings trade. If the S&P 500 moves 1%, the fund may adjust about 0.4% in the same direction. It reduces noise in reported values during quiet periods, but it also creates a lag that resolves when a company is sold or goes public.
Q: How can I tell if the private equity “catch-up” is starting?
Watch for more IPOs pricing near the top of their ranges, stronger first-day trading, and a steady climb in announced mergers. Also, look for better credit terms on deal financing and fewer pulled offerings. Those are signs that buyers and sellers are finding agreement, which leads to real price discovery.
Q: What are practical ways individual investors can gain exposure?
Common paths include buying shares of public alternative asset managers, using listed vehicles that hold private assets, or considering interval and tender-offer funds with periodic liquidity. Higher-net-worth investors may access feeder funds into flagship private equity or secondary strategies. Each approach has trade-offs in fees, liquidity, and tax reporting, so match the choice to your goals and horizon.
