Growth equity is getting interesting again. After a multi-year period of lackluster returns starting at the end of 2021, we believe growth equity—investments in mid- to late-stage private companies—now provides a compelling opportunity for investors.
There are several factors to thank for this: an increasing amount of value is accruing in private markets; meaningful growth potential in long-term secular themes, such as artificial intelligence (AI), healthcare innovation and defense technologies; revitalization in capital market activity leading to a recovery in distributions.
To boot: we believe we are at the outset of a Federal Reserve rate-cutting cycle that we expect will coincide with a resilient economy that avoids recession. This has historically been a constructive environment for growth equity funds that invest in mid- to late-stage companies.
Pulling these elements together, growth equity may be well positioned for improved performance that could offer investors access to opportunities that are less available in public markets. Investors with limited exposure to this space may not fully participate in potential opportunities that could arise in the current environment.
Let’s explore why.
Companies with the size and scale to IPO are staying private longer, creating meaningful value in the private markets. There are three reasons for this:
Companies are staying private for longer at a time of a meaningful technological advancement—a stark contrast to historical norms.
Historically, there are four stages of a technological innovation cycle: infrastructure buildout (physical and digital), platform technology built on top (e.g., operating systems, cloud, APIs, foundational LLM models), and finally application to bring it to wide use (e.g., consumer and enterprise-facing products like search engines, e-commerce, AI copilots).
In the development of the internet and, later, cloud computing, value across all four stages was primarily found in public markets. Why? Infrastructure tends to be more capital intensive, and 20 years ago the private markets were too small to fund those needs. Private markets did play a bigger part at the application stage—where most of the value was created—although roughly 70% of the overall value creation occurred in public markets at that stage, as companies went public earlier (Exhibit 2).
Tech companies now tend to be larger and older when they go public: the median age of a tech IPO is now ~14 years, when the company has median sales of about $220 million. That compares with ~7 years, and less than $20 million in revenue, in the late 1990s.3
The speed of innovation in AI is unprecedented and the ultimate winners of the AI race may not yet exist. Innovation requires patient capital combined with strategic advice, and those exist primarily within growth equity. We believe investors who do not have exposure to growth equity may miss a meaningful amount of value creation in AI.
While a majority of the value thus far has accrued to the infrastructure players (e.g. semiconductors and hardware powering AI training and inference), we believe that in a similar way to how the prior tech innovation cycle unfolded, a majority of the value will accrue during the platform technology and application stages. This opportunity will be underpinned by the evolution of ‘software as a service’ to ‘services as software.’ This could represent a $3–5 trillion opportunity over the next five years, and upwards of $15 trillion over the next 10–15 years4. Indeed, we see artificial intelligence not as a sector-specific theme but as a broad-based force for innovation affecting nearly every industry. Promising emerging AI sub-sectors, in our view, include:
In contrast to the prior tech innovation cycles, however, we believe the majority of value created in the application stage will be in the private markets as a) ~95% of software companies are private and b) companies stay private for longer (and may not IPO at all). We are already seeing this playout in real-time: if the top three private companies by capitalization (SpaceX, ByteDance and OpenAI) were to go public, they would be among the top 30 S&P 500 companies, by market cap.
Growth equity’s enduring appeal lies in its ability to capture long-term secular themes that are underrepresented or inaccessible in public markets. AI is a major theme, but we believe the opportunity is larger than that. Innovation in healthcare (drug engineering, digital health) and defense represent robust multi-year growth themes.
We believe the underlying growth potential of these themes will remain resilient regardless of the larger business cycle, as these businesses are increasingly perceived as critical to countries’ long-term economic competitiveness. To boot – private companies in high-conviction sectors, such as later stage software and healthcare businesses, trade at a meaningful discount to their public market counterparts, despite similar growth profiles.
Exit activity by founders and distributions to investors are both starting to look up. Global M&A and IPO volumes have begun to recover, albeit with IPOs concentrated in AI.
Importantly, M&A and buyouts continue to provide liquidity, while secondary markets are maturing. This includes transactions led by limited partners and also continuation vehicles and tender offers. This is critical as these other approaches offer additional exit options outside the public markets.
Sector-specific dealmaking is surging: AI-related private transactions topped $140 billion in the first half of this year, up dramatically from $25 billion in 2024.7 Software continues to account for roughly 40% of deal volume, peaking near 50% in 2025 (Exhibit 3).
For investors, recent returns have also been a concern. That said, history may offer growth equity investors a positive message. Rate-cutting cycles that avoid recessions—such as the one in the mid- to late-1990s—were periods of strong venture and growth performance. During that time, median returns were approximately 1.5x higher than the historical average.8 It is important to note that this is just one timeframe, but an important lesson from history nonetheless.
Lower short-term rates make future earnings more valuable today, boosting the valuation of companies that are expected to make most of their profits in the future. At the same time, lower interest rates make it less expensive for companies to hire, develop new products and make acquisitions—exactly the levers growth-stage companies tend to pull.
If current conditions follow this precedent, growth equity allocations could be entering a favorable regime (Exhibit 4).
Past performance is no guarantee of future results. It is not possible to invest directly in an index.
The growth equity market is at an inflection point. An increasing amount of value is being created in private markets, secular growth opportunities are accelerating, valuations remain attractive relative to public peers, and historical precedent suggests we could be entering a favorable macroeconomic environment for growth-oriented investments.
We believe it’s time to consider strategic allocations to growth equity (~10-25% of a private market portfolio allocation, depending on investor goals). With the potential for outsize returns to be concentrated among top managers, thoughtful selection and disciplined investment are critical to capturing what we expect to be the asset class’ resurgence.
To learn more about growth equity, and whether it may be appropriate for your portfolio, contact your J.P. Morgan team.
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