VC fund distributions will rebound in 2025

A version of this article was originally published as part of PitchBook’s 2025 US Venture Capital Outlook.

In 2025, venture fund LPs can expect distribution yields to increase for the first time since they peaked in Q3 2021.

Distribution yields measure the proportion of the aggregate US VC fund net asset value that was distributed over the subsequent year. The most recent quarters have been some of the lowest on record, approaching the global financial crisis (GFC) lows of 4.2%.

The recent dearth in distributions is not systematic; it is a hangover from the recent period of expedited market dynamics.

Unlike the current absence in distributions, the GFC lows were emblematic of the broader economic crisis stifling US capital markets. We are not facing the same economic turmoil. Unemployment remains low, inflation is decelerating, and public market indexes are posting strong returns.

From 2010 to 2019, quarterly distribution yields averaged 16.4%. Over this period, it took VC-backed companies a median of 9.2 years to go from founding to an exit via public listing. Similarly, the median time between capital raises for VC funds remained stable at 2.7 years.

These historical market dynamics began to shift in 2020 due to the low-interest-rate environment and an increased investor appetite for risk. VC-backed companies accelerated their timelines for public listings, dropping the median years since founding to 7.5. The increase in exit activity stimulated fund distributions, which peaked at 33% in Q3 2021. The deluge of capital returned to LPs gave firms the opportunity to raise new funds at the quickest pace since 2010.

When the music stopped, the ecosystem was stripped of many companies meant to fuel current distributions, and the leftovers were shackled by lofty valuations. Despite the lack of recent distributions, the average quarterly distribution yield since 2020 sits at 14.1%, near the historical average. This is further evidence supporting the theory that the drought in current distributions was caused by expedited market dynamics and not a systematic disruption.

The last two years have given the ecosystem time to recover. The influx of dry powder has kept the market afloat while allowing firms to be more selective with their investments. The additional time has also given early-stage companies the ability to germinate and mature companies the time to grow into their valuations. The delay in distributions has also increased the demand for exit alternatives, leading to growth in secondary markets.

As we head into 2025, we expect distributions to reverse their current downtrend and head toward the historical average. GPs are under pressure from current LPs to start returning capital, and the reset in market dynamics has finally opened the door for exit opportunities. There is a robust population of mature unicorns representing a substantial portion of venture capital, and the incoming administration plans to loosen restrictions on M&A activity.

Liquidity risks

Public listings are the largest source of capital to fuel distributions. Understandably, companies prefer to enter the public markets during periods when investor risk appetite is elevated. The current public market environment remains sturdy. Much of this performance can be attributed to stable employment, disinflation, and the Fed loosening monetary policy. Any change to this macroeconomic backdrop could adversely affect public markets, leading private companies to stave off public listings.

Another risk to our distribution projections is the shift in incentives for private market employees. Historically, payouts for founders and employees have been tied to the company’s exit outcome, just like payouts to investors. Recently, companies such as Stripe and SpaceX have been able to raise tender offers to compensate employees with vesting stock options. Deals such as these allow employees access to early liquidity and decrease internal pressure for companies to push for an exit. Currently, these deals represent exceptions to traditional funding rounds caused by increased demand for exposure to these highly sought-after cap tables. However, if deals like this become more common, companies may stay private for longer to avoid the scrutiny of public market disclosures.

Fundraising impact

VC fundraising activity is expected to surpass 2024 levels in 2025, but it will remain constrained by historically low distribution rates and limited LP liquidity.

The gradual recovery in exit activity anticipated in 2025 points to a possible reversal of fortunes for GPs. Healthier M&A volumes and the thawing of the IPO market are expected to unlock LP liquidity, providing momentum for new fundraising cycles. This shift could help alleviate fundraising challenges for smaller and first-time funds, which have faced acute difficulties in securing capital. Only 77 first-time funds have been raised YTD, a sharp decline compared with 215 in 2023.

In our base case, capital raised for 2025 is projected at approximately $90 billion, compared with $71 billion in 2024 through mid-November. Downside scenarios estimate $70 billion, while upside projections reach $110 billion if market conditions improve earlier than anticipated.