When Public Markets Tank, Private Equity Gets Crowded

The Denominator Effect Explained

Imagine your investment portfolio as a pie chart. When stock markets crash, that pie shrinks fast. But here’s the twist: your private equity holdings don’t get marked down instantly like public stocks do—they use “lagging valuations.” So suddenly, your PE allocation looks way bigger as a percentage of the total pie, even though nothing actually changed.

That’s the Denominator Effect, and it’s wreaking havoc on fundraising right now.

Why This Matters for Fund Managers

Institutional investors (pension funds, endowments) have strict allocation rules. When the Denominator Effect kicks in, many hit their ceiling—they’re now over-allocated to private markets just because public markets fell. Result? They can’t write new checks, even if they want to.

Real-World Case Studies:

Wisconsin State Investment Board:

• Set private equity target at 12% (range: 9-15%) in late 2021
• One month later, after public market losses → PE allocation jumped to just under 15%
• Consultant recommended bumping the ceiling to 17% just to avoid freeze

Ohio Workers’ Compensation Bureau:

• Real estate jumped as % of portfolio (not because it performed that well, but because everything else tanked)
• Had to issue a temporary rebalancing waiver

NYC Fire Department Pension:

• Now modeling liquidity scenarios for potential 33% portfolio declines

The Opportunity in the Squeeze

Here’s the flip side: 84 LPs are still under-allocated to PE with $12.7B in available commitment capacity. This shrunk the playing field, but it means savvy fund managers can hyper-focus on investors who actually have dry powder.

The Denominator Effect is a ceiling for many, but a filtering tool for others.

The private markets crowding won’t ease until public markets recover and re-normalizes portfolio weightings.