Liquidity Tools: Swiss Army Knife or Rusty Spoon?

Private Equity Liquidity: Pressure Builds and New Avenues Emerge

After a prolonged exit drought caused by economic volatility and rising interest rates, general partners (GPs) are now facing intensifying pressure from limited partners (LPs) to return capital. As thousands of portfolio company exits have been delayed, new strategies — and some old ones — are coming under renewed scrutiny.

The Pent-Up Pressure to Exit

According to PwC, between 4,000 and 6,500 PE exits have been delayed over the past two years. This backlog could unleash a wave of M&A transactions beginning in early 2025, driven by investor demands for liquidity. While alternatives like NAV financing and continuation funds have emerged, these tools may not be sufficient on their own.

Liquidity needs are vastly outstripping the capacity of secondary market funds. The first chart illustrates this growing gap:

In 2024, dry powder targeting GP-led buyout secondaries falls short by a factor of 4.2x. By 2026, that gap is projected to widen to 5.5x. This stark disparity signals that many GPs will be compelled to pursue traditional exits, including trade sales and IPOs, in greater volume.

Continuation Funds Lead the Way — But Are They Enough?

In response to this liquidity squeeze, GPs are turning to continuation funds, dividend recapitalizations, tender offers, and NAV financing. However, LP sentiment is not uniformly supportive. A recent survey from Coller Capital found that 92% of LPs expect GPs to use continuation funds most actively in the next 12–18 months.

NAV financing, while gaining traction, is viewed with caution. Only 7% of LPs fully embrace it, and 36% accept it with reservations. Their biggest concern? The introduction of additional leverage, especially among European LPs. Meanwhile, North American LPs worry about using NAV loans to prop up weak portfolio companies. That said, most LPs agree that using NAV financing to fund add-on acquisitions is acceptable.

IPOs and the Broader Exit Outlook

Public markets may offer the most scalable path to liquidity — especially for larger portfolio companies. IPO activity has picked up in 2024, with post-IPO performance encouraging investor interest. Yet, the timing of exits will still hinge on macro variables, notably:

U.S. election outcomes in November 2024

Federal Reserve interest rate decisions

If interest rates drop and market stability improves, IPOs may become a preferred route for PE exits. Firms with strong cash flow, growth potential, and robust KPIs will be prime candidates. However, if volatility persists, sponsor-to-sponsor transactions and corporate sales will likely dominate.

The Road Ahead

To succeed in this evolving landscape, GPs must remain flexible and begin preparing their portfolio companies now. Whether targeting public markets, strategic acquirers, or secondary buyers, timing, readiness, and value-creation strategies will be key. Tools like AI-driven customer experience upgrades and cloud transformation can significantly enhance exit readiness.

Private equity is entering a new phase — one where liquidity planning is no longer optional, but mission critical.

Sources & References

Coller Capital. (2024). Coller Capital’s 40th Global Private Capital Barometer, Summer 2024. https://www.collercapital.com/40th-barometer-nav-financing/#:~:text=Over%20two%2Dfifths%20of%20LPs,with%20GPs%20employing%20it%20freely 

PwC. (2025). Capital considerations: End of PE exit drought will put thousands of companies in play. https://www.pwc.com/us/en/services/consulting/deals/library/capital-considerations-private-equity-exit-drought.html