‘It's forcing private equity investors to be a lot more judicious on the way in for new investments,’ says KPMG’s John Cho
Each month at BPM, we offer a slate of articles and content pieces that go deep on a particular topic. This month, we're exploring private markets and the utility in institutional portfolios.
Private equity allocations have climbed across all institutional investors over the past two decades. As a result, the asset class has built its reputation on 25 to 30 years of strong returns that consistently outpaced public markets, which naturally drew more capital in.
While that track record is what fuelled the rush, John Cho believes the rush itself became the problem, notably as private equity had what Cho describes as "an explosive period of growth," driven by simple economics.
"There was a dramatic increase in the demand for private companies or for private equity investments, and therefore, it raised prices of companies that were looking for private equity money," said Cho, national private capital leader of KPMG Canada, adding valuation multiples climbed for five to seven years straight, and the correction that followed was inevitable.
That’s why he believes Canadian pension plans’ underperformance are making headlines for all the wrong reasons. After years of loading up on private equity, the asset class that was supposed to deliver outsized returns has gone soft.
Still, Cho doesn’t call it outright underperformance.
“Let’s say softer performance," he said, underscoring the issue is ultimately timing. After all, pension plans need to mark their holdings to market, and when multiples contract, paper values drop, even if the underlying businesses haven't been sold. "It's only when you exit is when you really put a real mark on there," he said.
Cho underscored how weaker private equity performance should be viewed in the context of a normal market cycle, rather than evidence that the asset class has fundamentally broken.
Like any market, private equity goes through periods of expansion and correction. After several years of intense demand for private companies, too much capital chased too few deals, pushing up valuations and purchase multiples. Now that cycle has turned, new investment activity has slowed, and existing holdings are being marked at lower values, which is dragging on reported performance.
He also argues that the operating backdrop has become tougher. Economic conditions are less supportive, and many portfolio companies are not growing quickly enough to offset the higher prices paid for them. That weaker underlying business performance is feeding into lower valuations across private equity portfolios.
He also points to the timing of when many investments were made. Notably, deals struck in the hottest years of the market, especially around 2021 and 2022, were often done at elevated prices in a seller’s market. As a result, investors had little choice but to pay up if they wanted access to attractive assets, and in many cases those valuations were based on future growth expectations rather than fully realized performance. Some of those vintage years are now weighing on returns, with investors still waiting for company performance to catch up to the prices paid.
Still, Cho sees some value in the correction.
"It's forcing private equity investors to be a lot more judicious on the way in for new investments, and it's forcing them to lean in with their management teams into existing portfolio companies to accelerate financial performance even more," Cho said.
Cho believes pension plans’ recent private equity weakness needs to be judged in relative as well as absolute terms. One reason the asset class looks soft, he suggests, is that public markets, especially those lifted by big technology names and enthusiasm around AI, have delivered unusually strong returns over the past few years. Against that backdrop, private market portfolios appear to be lagging.
Cho suggests the recent stretch has reinforced a strategic shift already underway. Rather than trying to compete directly with the biggest private equity buyout firms, many pensions have leaned harder into partnership models.
The logic is that pensions have clear strengths, including scale, global reach, patience, and diversification, but may be at a disadvantage when going head-to-head with large buyout firms that have longer track records, deeper operating resources, and more specialized sector expertise. Partnering through fund commitments, co-investments, and similar structures allows pensions to tap into that infrastructure instead of trying to replicate it.
In that sense, the current downturn is forcing pension investors to reassess where they genuinely have an edge and how they should pursue returns in private equity. While Cho emphasized this isn’t a retreat from the asset class, he frames it more as a rethink of execution. After all, pension plans remain committed to private equity but are also becoming more deliberate about the model they use.
He also stresses that much of the recent weakness reflects unrealized marks rather than final outcomes. These assets are still being held, and their values are being adjusted to current market conditions. For Cho, the true scorecard comes later, when investments are actually sold.
Outside of traditional PE, infrastructure is gaining traction, noted Cho, as inflation-adjusted infrastructure investments offer better match returns on the asset side with obligations on the liability side.
Still, the central question for pension investors right now is whether they are being adequately compensated for the risks they are taking, Cho emphasized.
"There has been more focus on developed markets than developing markets, just because the question of, ‘Can you get paid for risk on an already a higher risk asset class relative to other classes?" he said.
That’s pushed capital toward the US, continental Europe, and increasingly toward Canadian-based investments, where pension plans can draw on deep relationship networks and long-standing familiarity with local companies.
On the sector side, AI's impact on technology businesses is drawing significant attention while people-based businesses like professional services, engineering, and architecture are attracting interest, though as Cho suggests, aren’t really forming a dominant theme.
"Beyond that, I wouldn't say there's any particular sector that they're more focused on," he said.
