The Great Recalibration: Navigating Divergence and Liquidity in Venture Capital and Private Markets
A CIO's View of the Landscape
The first half of 2025 has presented a paradox to even the most seasoned capital allocators. A surface-level review of the private markets reveals a landscape of seeming contradictions. J.P. Morgan and Stout present a picture of caution, with deal counts down and late-stage capital retreating. Yet, at the same time, McKinsey data shows a robust rebound in overall private equity dealmaking and a record-breaking secondary market. This is not a contradiction but a critical signal. The private market is neither frozen nor frothy; it is undergoing a profound and necessary recalibration, a strategic rationalization that favors quality, operational rigor, and disciplined capital deployment. The era of cheap leverage and indiscriminate growth is over, replaced by a new, more discerning environment.
For investors this environment demands a proactive, sophisticated approach. Passive portfolio construction and a "wait-and-see" stance will not suffice. This insight report provides a strategic framework for outperformance, built on a deep, data-driven analysis of the forces shaping today's private-capital markets.
Part I: The Bifurcated Reality of Venture Capital
The most striking development in the venture capital landscape is the profound divergence between the early-stage and late-stage markets. Data from the first half of 2025 clearly illustrates a two-speed system, with distinct dynamics governing each end of the funding spectrum.
The early-stage segment, encompassing Seed through Series C rounds, has demonstrated remarkable resilience. On a quarter-over-quarter basis in Q2 2025, deal sizes in these rounds grew by 5% to 22%, while valuations rose by an even more impressive 3% to 60%. This strength is particularly notable at the Seed stage, which continued to outperform later-stage financings in the first half of the year. This resilience reflects a continued preference for newer startups, including those leveraging artificial intelligence to achieve efficiency and growth with less capital.
At the same time, the late-stage market for Series D+ rounds has experienced a sharp and unequivocal decline. In Q2 2025, these rounds saw an 8.9% decline in capital raised and a precipitous 48% drop in pre-money valuations. This stands in stark contrast to the Q1 2025 period, which had seen a 30% increase in capital raised for this segment. This pronounced decline is a direct result of a reduction in the number of large late-stage mega-rounds.
The divergence is not merely a statistical anomaly but a structural evolution of the venture ecosystem. The market is correcting for the frothy valuations and speculative capital that defined the pandemic era. This is evidenced by two key trends. First, fundraising timelines have extended across all stages. This elongation of the fundraising cycle has prompted a fundamental change in how companies approach their early financing. Seed rounds are structurally evolving and becoming larger, increasingly "adopting characteristics historically associated with Series A financings". This is a strategic response by companies to "bridge an increasingly long gap to Series A" and a clear signal that the market is now demanding that companies hit more significant milestones to justify their next round of capital.
Second, the Seed-to-Series A graduation pipeline is showing signs of fundamental health. J.P. Morgan notes that 21% of companies that raised a Seed round in Q2 2023 successfully went on to raise a Series A within the following two years. This is a significant increase from the 12% conversion rate observed just one quarter prior. This indicates that the capital deployed at the early-stage is not simply speculative but is finding a stronger foundation of viable companies that can achieve the operational and strategic milestones necessary to progress. The capital that fled late-stage is not just sitting on the sidelines; it is being deployed earlier and with greater discipline, seeking out fundamentally sound businesses that can endure and scale in a more demanding environment. This confirms the notion of a cautious but rational market, a viewpoint echoed by Fenwick.
The following table synthesizes the divergent performance across venture stages.
Table 1: Divergent Performance in Q2 2025 Venture Capital
Part II: The Liquidity Conundrum: A Historic Backlog Meets a New Ecosystem
The venture ecosystem's bifurcation is a symptom of a deeper structural issue: the historic exit backlog. The challenge is clear and its scale is unprecedented. McKinsey reports that the backlog of sponsor-owned assets awaiting an exit is "bigger in value, count, and as a share of total portfolio companies than at any point in the past two decades". The average buyout hold time for these assets has extended to a 20-year high of 6.7 years. This liquidity bottleneck is not merely a short-term inconvenience; it is a fundamental challenge for the private markets.
This backdrop makes the seemingly contradictory data on the secondary market a topic of intense interest. Both J.P. Morgan and McKinsey paint a largely optimistic picture, with J.P. Morgan noting that the secondary market has "stabilized with improving sentiment" and that 28.9% of H1 2025 transactions traded at a premium to the most recent equity round. This is reinforced by McKinsey, which reports that total secondary deal volume increased by a remarkable 45% in 2024 to an all-time high of $162 billion.
Stout however, presents a sharp counter-narrative, explicitly stating a significant decline in both the deal count (down 40.8%) and deal volume (down 40.1%) of secondary transactions from Q1 2025, marking the lowest point since Q4 2024.
This data is not contradictory; it is a tale of two distinct secondary markets. The massive volume and record-breaking figures reported by PitchBook and McKinsey are a result of a small number of high-profile, mega-deals and tender offers (e.g., SpaceX, OpenAl, and Databricks). These large-scale transactions, often facilitated by Special Purpose Vehicles (SPVs) and direct relationships, dominate the headlines and macro statistics, creating an outsized sense of market health. This concentration is the reason PitchBook's estimated market size of $61. billion is considered "modest relative to VC's liquidity needs," representing just 1.9% of total unicorn value.
The decline reported by Stout reflects the reality of the broader, mid-market. While a few marquee names are finding liquidity, the vast majority of secondary transactions remain small, with the average tranche size hovering between $1.2 million and $1.4 million. The decline in deal count in Q2 2025 indicates that the cautious sentiment has spread beyond the late-stage primary market to a wider range of secondary transactions, signaling that while a few winners can access liquidity, the overall market remains selective and challenging for most.
The rise of two specific trends – the use of founder preferred stock and the explosion of SPVs – are not disconnected phenomena. They are two sides of the same coin: a market-driven solution to a fundamental liquidity crisis caused by extended exit timelines. J.P. Morgan notes that the incidence of founder preferred stock, which is designed to facilitate tax-efficient founder liquidity, has accelerated to 11% in the first half of 2025, nearly double its share from just two years ago. This reflects an acknowledgement that traditional liquidity events like IPOs or M&A may take longer to achieve.
Concurrently, PitchBook data reveals that the number of secondary SPVs has grown by 545% over the last two years, with the total capital raised through these vehicles surging by 1,000%. SPVs are now central to how capital flows through top private companies, as they are a mechanism to bypass friction points such as the Right of First Refusal (ROFR), which has increased to 22.2% from a long-term average of 18.1%. This confluence of trends demonstrates a market where liquidity is now being actively engineered and pursued, not passively awaited. It is a direct response to the delayed exit environment, providing an essential off-ramp for key stakeholders and preventing talent flight or burnout.
The following table provides a clear comparison of the two distinct views of the secondary market.
Table 2: The Two Faces of the Secondary Market
Part III: Thematic Drivers and Strategic Opportunities
Beyond the market mechanics, a deep analysis reveals a set of powerful thematic drivers that are creating targeted opportunities for savvy investors. While the broad market is selective, a few sectors are commanding a premium for their perceived quality and future potential.
The most prominent of these is, unsurprisingly, Artificial Intelligence. J.P. Morgan states that AI companies have maintained "strong valuation premiums across multiple sectors at Series A". This is supported by data from PitchBook, which shows the staggering premium being paid for these companies. The median step-up for Series B AI startups is 2.1x, significantly higher than the 1.4x seen for their non-AI counterparts year-to-date.
However, this premium is not indicative of broad-based enthusiasm across the entire sector. Rather, it is a reflection of intense capital concentration. The J.P. Morgan report notes that AI's share of total funding has "plateaued or declined in H1 2025," with the exception of Series D+ rounds. This aligns perfectly with PitchBook's data, which shows that AI accounts for two-thirds of primary deal value but only one-third of primary deal count. This dynamic points to a "winner-take-most" environment where a few, highly-resourced, and defensible AI companies are commanding an outsized portion of available capital. The data lists several examples, including Anthropic and XAI, with valuations in the tens of billions.
The AI premium is not just about technology; it is about scarcity and a clear path to value and defensibility. Investors are paying a premium for what they perceive as category leaders, underscoring the importance of deep, granular diligence over a broad, passive market exposure.
This concentration of capital in a few key themes is not limited to venture. McKinsey data provides a broader context across private markets. The uneven recovery in real estate is a prime example, where certain alternative sectors are outperforming traditional ones. In 2024, data centers posted 11.2% returns, while manufactured housing achieved 11.7%. This highlights that a broad, passive approach to a sector is no longer sufficient; the opportunity lies in targeted investments with managers who possess the operational expertise to drive value.
Finally, the resilience of private debt stands out as a powerful and consistent complement to higher-risk assets. McKinsey notes that private debt outperformed private equity and real estate in 2024, with a 6.6% IRR. Furthermore, the asset class exhibits a significantly lower return dispersion, with a 4.7% difference between top and bottom quartile performance, compared to a 15% spread in private equity. This demonstrates that private debt has a stable and consistent return profile, making it a crucial component of an optimized portfolio in an environment of economic uncertainty.
Closing: Strategic Mandates for E&F CIOs: Positioning for Outperformance
The dynamics of the past six months underscore the importance of moving from passive allocation to active portfolio management. In an environment defined by divergence, an exit backlog, and concentrated opportunities, a disciplined and proactive strategy is essential for generating alpha.
Based on our analysis, the following strategic mandates are critical for E&F CIOs:
Re-underwrite the Venture Portfolio with Urgency. The valuation overhang in 2020-2022 vintage companies is significant. These firms last raised capital at pandemic-era valuations and are now trading at hefty median discounts of 31.1% to 59.2% in the secondary market. This reality demands a proactive portfolio triage. CIOs should work with expert partners to identify true winners and distinguish them from stagnant assets. This process should lead to a clear plan for managing capital calls and identifying potential assets for secondary liquidation.
Proactive Liquidity Management is the New Normal. The era of passively awaiting a traditional IPO or M&A event is over. The historic exit backlog requires a new approach. The secondary market, when accessed strategically, is a critical toolkit for portfolio management, not a last resort. CIOs should use instruments like SPVs and tender offers to access liquidity, providing retention incentives to key talent and allowing for portfolio rebalancing. The data on the explosion of SPVs and the increased use of founder preferred stock highlights that liquidity is being engineered, and forward-thinking CIOs should be at the forefront of this trend.
Capitalize on Thematic Premiums, with Caution. Invest with conviction in targeted, policy-aligned sectors like AI, defense, and fintech. However, a passive, fund-of-funds approach is insufficient. The data shows that the premium is for quality and concentration. It is imperative to partner with managers who have a demonstrated ability to source and gain access to these highly selective, top-tier deals. Deep, granular due diligence on the manager is as important as the underlying asset class.
Re-evaluate the Manager Toolkit. McKinsey highlights a fundamental shift in the drivers of private equity returns. The reliance on multiple expansion and leverage is waning, and the emphasis has moved toward operational value creation. CIOs should seek out GPs with a demonstrated ability to actively manage assets, improve net operating income, and drive returns through operational rigor, rather than financial engineering alone. This is the key to navigating a higher-for-longer rate environment and extended hold periods.
Expand the Portfolio Beyond the Traditional 60/40 Model. The outperformance of private debt and infrastructure, coupled with their stable, low-dispersion returns, highlights the need for a diversified, multi-asset approach. These asset classes can provide a crucial ballast for a portfolio, offering consistent income and a lower-risk profile to complement higher-risk venture and private equity allocations.
We believe these dynamics underscore the importance of disciplined portfolio management and a forward-looking strategy. In partnership with our experts, E&F CIOs can navigate these complex currents and position their portfolios for long-term outperformance.
Contact | Connect with our Experts — Wind River Capital Strategies