Private equity (PE) is facing a significant shift. Traditionally, it’s a field of patient capital where funds invest for a decade to create value and then exit. However, with patchy exit markets since 2022, PE firms are turning to innovative liquidity solutions to keep capital flowing. While these solutions offer flexibility, they also challenge the fundamental ethos of long-term stewardship that many investors, particularly family offices, value.
Constrained Exits, Creative Solutions
After two challenging years (2022–2023) marked by stalled IPOs and a disconnect between buyer and seller valuations, the PE market saw signs of recovery in early 2024. According to McKinsey’s Global Private Markets Report 2025, distributions to limited partners (LPs) in the first half of 2024 surpassed contributions for the first time since 2015. However, with the IPO market remaining narrow and debt financing still expensive due to stabilizing but high interest rates, many firms are exploring new liquidity tools:
- Continuation Vehicles: General partners (GPs) can roll high-performing assets into new funds. This allows LPs to either cash out or maintain their investment in the new vehicle.
- NAV Loans: These loans use a fund’s portfolio as collateral to generate cash, which can then be used for distributions or follow-on investments.
- Preferred Equity Solutions: These provide LPs with interim cash flows without forcing a sale of the underlying asset.
The use of these mechanisms is surging. The regulators and industry bodies are closely monitoring them, citing concerns about valuation transparency and the potential for systemic risk if leverage is used too aggressively.
The Case for and Against These Tools
Opportunity: Enhancing Value and Flexibility
- Extending Hold Periods: Some assets, particularly in the industrial or infrastructure sectors, require more than a typical fund’s decade-long life to realize their full potential. Continuation funds allow managers to continue building value and avoid a premature exit.
- Smoothing Distributions: NAV loans and secondary sales can provide a way to return capital to LPs during slow exit periods, which can improve internal rates of return (IRR) and maintain investor confidence.
- Providing Investor Choice: These tools give LPs flexibility. A family office with a multi-generational horizon might prefer to double down on an asset, while a pension fund might need to take liquidity at a particular time.
Skepticism: Risk of Financial Engineering
The counterargument is that if misused, these tools can undermine the core principles of PE. Key concerns include:
- Valuation Opacity: A major issue is how assets are priced when they are rolled into a new vehicle. A conflict of interest can arise if the GP is setting the valuation for a transaction that benefits them.
- Duration Creep: LPs worry about being locked into “zombie assets” that are extended not because they have genuine upside but because the GP is struggling to find a buyer.
- Leverage Risk: Adding a NAV loan can layer fund-level debt on top of the existing debt of the portfolio companies, which can significantly increase downside risk during a market downturn.
According to the UBS Global Family Office Report 2025, family offices are particularly concerned about these issues. While they are increasing their allocations to PE, they prioritize transparency and governance over short-term liquidity.
Striking a New Balance for the Future
The long-term success of these liquidity innovations will depend on how they are used. Three principles are emerging as critical for striking the right balance between financial innovation and long-term stewardship:
- Independent Pricing: Continuation vehicles should involve third-party valuations and clear disclosure of GP incentives to prevent conflicts of interest and build LP trust.
- Tying Extensions to Operating Milestones: Fund extensions should be justified by tangible operational goals, such as margin expansion or a digital transformation rather than simply a hope for better market conditions.
- Tailored Investor Alignment: PE firms must recognize that different LPs have different needs. Structuring flexible vehicles that allow investors to opt in or out can accommodate these different investment horizons and risk appetites.
From Exits to Endurance
This debate over liquidity tools marks a fundamental shift in private markets. The industry is moving beyond a model solely defined by successful exits and toward one focused on endurance and lasting value creation. For general partners (GPs), the challenge is to prove that these innovations are a bridge to value, not a substitute for it. This requires a strong commitment to independent governance and a clear operating vision. For investors, particularly LPs and family offices, the imperative is to demand the transparency and conviction essential for long-term alignment. If this new balance can be struck, these innovations could become a significant and positive evolution for the private equity model, enabling managers to truly steward businesses through the long transformation arcs they need. If not, they risk undermining the very stewardship ethos that has long been the hallmark of private markets.
