Private equity’s evolving playbook: why discipline still matters in a crowded market

Private equity has long been promoted as a source of differentiated returns. Yet the mechanics of how those returns are generated are evolving as the market matures. New capital pools, structural innovations and shifting investor behaviour are reshaping how institutional investors access the asset class.

For David Chan, portfolio manager at MLC Asset Management, several structural shifts are redefining the private markets ecosystem. These changes influence everything from deal sourcing and governance to liquidity and portfolio construction. For financial advisers allocating to private markets, understanding those dynamics is becoming increasingly important.

Chan argues that private equity still offers strong opportunities. However, generating genuine alpha requires discipline in manager selection, portfolio construction and governance. In a market that has expanded rapidly over the past decade, the structure surrounding investments can matter as much as the assets themselves.

The blurring line between LPs and GPs

One of the most notable developments in private markets has been the changing relationship between capital allocators and investment managers. Historically, the distinction between limited partners and general partners was clear. One group provided capital, while the other sourced and managed investments. That separation has become less defined.

Many institutional investors now pursue direct investments alongside their traditional fund commitments. Chan describes this convergence as the rise of the “GLP”, where the roles of LP and GP increasingly overlap.

“It used to be pretty clear who the capital allocators were and who the operating managers were. Now it’s a lot less clear, with many LPs doing direct deals themselves. At MLC we’re very clear that our role is to provide the capital and partner with sector specialists who have deep operating expertise.”

While the shift can broaden opportunity sets, it also introduces complexity. Direct investing requires operational experience, sector expertise and strong networks. Without those capabilities, allocators risk moving into areas traditionally handled by specialist private equity firms.

MLC’s strategy therefore focuses on co-investing alongside experienced managers with proven operating capabilities. The firm believes the most effective partnerships combine deep industry knowledge with long-term institutional capital.

Liquidity innovation and its risks

Another major shift has been the growth of evergreen private equity vehicles and the expanding secondary market. Historically, private equity was dominated by closed-end funds with defined investment periods and long holding horizons.

Secondary markets have added an additional layer of liquidity. Annual transactions have exceeded US$100 billion for several years and surpassed US$200 billion most recently. This expansion has broadened access to the asset class.

Yet Chan warns that greater liquidity has also increased competition. As more capital flows into the same opportunities, pricing can become more aggressive and return potential may narrow.

“When a lot of capital moves into one part of the market, returns compress and competition increases,” Chan says. “You can also see valuations that aren’t really actionable, particularly when assets are purchased in the secondary market and then marked up internally.”

Evergreen structures introduce additional considerations. Many offer periodic redemption windows that allow investors to withdraw small portions of capital. In stable markets these mechanisms tend to work effectively.

However, Chan notes that the model may be tested during periods of market stress. If investors request liquidity simultaneously, funds may need to delay withdrawals or gate redemptions while underlying assets are revalued.

Staying focused on the middle market

Despite these structural shifts, Chan believes the fundamental drivers of private equity returns remain consistent. Over three decades of investing, MLC has focused on providing early institutional capital to mid-market businesses, often partnering with founder-led companies entering their next phase of growth.

“We like to be the first institutional capital into family-owned businesses, because that’s where we think true alpha still persists in private equity,” Chan says.

These companies often operate in specialised niches but lack access to sophisticated capital. With the right financial backing and governance structures, they can scale rapidly and generate strong value creation opportunities.

By contrast, much of the global private equity market now concentrates on larger transactions. Many of these deals involve secondary or tertiary buyouts, where one financial sponsor acquires a company from another.

Such transactions often rely more heavily on leverage and financial structuring. While they can deliver returns, Chan sees them as more closely linked to broader market cycles rather than operational improvement.

Mid-market investments typically provide greater scope for operational value creation. Improvements in leadership, governance and strategy can significantly change the trajectory of a business.

Diversification and alignment

Portfolio construction plays an important role in managing private equity exposures. Rather than relying on a single manager or geography, MLC spreads capital across multiple partners and regions.

Within its co-investment programs the firm typically targets 20 to 30 deals across different vintages and geographies. Its open-ended vehicles provide exposure to hundreds of underlying companies. This diversification helps reduce exposure to individual sectors or economic cycles. Weakness in one part of the portfolio can be offset by stronger performance elsewhere.

Alignment between investors and managers is equally important. Private equity structures can contain multiple layers of fees and incentive arrangements that are not always immediately visible.

“If you want great fund managers, great CEOs or great entrepreneurs, they will be paid accordingly,” Chan says. “The key is ensuring the system is transparent, so investors understand exactly what they are paying for.”

Transparency and governance become particularly important in an asset class where investments are often held for long periods and performance can be difficult to observe in real time.

For Chan, the lesson is straightforward. In a rapidly evolving private markets landscape, the strongest returns often emerge from disciplined partnerships, diversified portfolios