The LPs want their money back.
2025 was supposed to be the year when initial public offerings and mergers and acquisitions came roaring back. Instead, tariff threats and global volatility have slammed shut an incipient thawing of the IPO market and caused would-be acquirers to hit pause. That’s prolonging an exit drought that has left private equity funds and their limited partners without needed liquidity. Capital distributions to limited partners are at an all-time low.
Making matters worse, the stock market decline has deflated the value of the public equities holdings of pension funds, endowments and other institutional investors, leaving them over-allocated to private equity — what’s known as the denominator effect.
Pension funds were already facing pressure to rebalance. Global pension funds had a median target allocation of $306.8 million and a median actual allocation of $330.3 million in the first quarter, according to an S&P Global Market Intelligence analysis. California State Teachers’ Retirement System had the largest over-allocation to private equity, at $7.5 billion above its $46.4 billion target.
The mismatch is driving the red hot secondaries market, as limited partners, or LPs, chafe at increasingly long-in-the-tooth investments. These investors are now scrutinizing a fund manager’s track record of returning capital when evaluating new allocations, making it harder for fund managers to raise fresh capital.
“DPI is the new IRR,” declared Jean Francois Roberge of Mubadala, the $300 billion Abu Dhabi sovereign wealth fund, at the recent Super Return conference in Miami. Roberge was referring to “distributed to paid-in capital,” or DPI, a measure of the capital returned to investors in a private equity fund relative to the money invested. (IRR is the internal rate of return on private investments calculated by fund managers).
The situation has prompted new urgency around alternative pathways to exits that enable fund managers to return capital to their LPs. The pathways include established vehicles such as secondary funds that buy up LP stakes, and continuation vehicles set up by GPs to hang onto favored assets. GPs have also sold minority stakes in their portfolio companies to raise some cash while maintaining exposure to further upside.
Other investors are crafting innovative new strategies, such as liquidity guarantees that promise to buy out investors on a moment’s notice. And still others are rethinking their primary investment structures to avoid the need for IPOs and acquisitions altogether.
Secondaries and CVs
The secondaries market reached a record $152 billion last year, up from $109 billion in 2023. That number includes so-called continuation vehicles, or CVs, a hot corner of the market that allows GPs to transfer assets they don’t want to part with into a new fund in order to return capital to LPs.
Not long ago investors shied away from CVs, which were considered rife with potential conflict. GPs, for example, set the price for the underlying assets, an imperfect art in the best of times, not to mention in a volatile market. Today they are an accepted strategy for GPs to hold onto “trophy” assets while providing liquidity to their limited partners and giving new investors an opportunity to buy into a quality investment.
The continuation vehicle “has become a go-to mechanism, but not an easy mechanism,” says Timothy Cunningham of Touchstone, a private equity placement agent. “They are way more complicated than many investors recognize.”
Terms are negotiated between GPs and their counterparties, and deal documents can stretch to 1,000 pages. GPs often charge nominal management fees and even reduce their carry. Despite that, most LPs are opting to cash out of existing partnerships when presented the option.
No bargains
Big secondaries players have raked in tens of billions of dollars to feed the demand. In January, Ardian Capital, a spinout from the insurance giant AXA, raised a whopping $30 billion for its latest secondaries fund from major pension funds, insurance companies, sovereign wealth funds, financial institutions and high-net worth individuals. “We are actively capitalizing on a generational buying opportunity for secondaries,” said Ardian’s Mark Benedetti.
Other big players in the secondaries market include Blackstone, Apollo Global Management and Lexington Partners. Research firm Preqin has identified 257 such funds in the market seeking a total $94 billion.
The competition has reduced spreads, or the difference between an investment’s book value and the price it is sold for. “If you think you’re getting a bargain, you probably don’t understand the underlying portfolio in some fashion,” says Cunningham.
“Generally, if you’re getting a 12% discount, you’ve done a nice job, and some of that is relationship building.”
Impact secondaries
It’s a different story for impact secondaries, a much sleepier market. North Sky Capital is one of the few managers offering an impact secondaries fund. Last summer, the Minneapolis-based firm raised $250 million for its ninth impact secondaries fund.
“Our strategy, broadly speaking, is to bring the full secondary toolkit to the impact marketplace and provide those liquidity solutions to both LPs and GPS,” North Sky’s Tom Jorgensen told ImpactAlpha.
North Sky’s secondaries strategy looks for positions in climate and decarbonization solutions, as well as sustainable agriculture and health and wellness. The latest fund has 25 transactions under its belt, and is three-quarters committed. In addition to fund stakes, it is also working with some large family offices on direct secondary transactions.
Why hasn’t the secondary market caught fire for impact investments? LPs in impact funds have generally gotten liquidity in other parts of their portfolio, Jorgenson says. And many seek primary impact around a specific thesis with their capital.
“There’s still some additional education that we need to be able to provide, and we regularly do provide to the market, on how this drives value,” he said. “It drives the ecosystem. It provides liquidity to the system. It allows people to reinvest. There’s a misconception that when you make a secondary investment, you’re not making any new primary impact.”
Liquidity guarantees
Others are nibbling at the opportunity. British International Investment is looking to seed a secondary market for impact funds as a way of derisking emerging market fund investments and recycling capital to new fund managers. Last year, it sold its stakes in funds run by Aavishkaar, Novastar Ventures and Adenia Capital to Swiss impact investment firm Blue Earth Capital.
Blue Earth Capital, established by founders of the private equity giant Partners Group, launched its secondaries fund in 2023. Late last year it reached a first close on an evergreen, “semi-liquid” private credit fund designed to win over mission-driven investors that hesitate to invest in private markets due to the lack of liquidity.
Earlier this month, Blue Earth and Partners Group backed a $250 million stake in Grupo GetCompost, a waste-to-value company owned by Suma Capital, a European sustainability-focused investor. Altamar Capital, Mercer and Unigestion also invested in the continuation vehicle set up by Suma Capital.
Octobre, co-founded by financial risk managers Cardano Development and Innpact, which structures and manages impact funds, is taking a different tack. Its Liquidity Guarantee Facility, launching this year with support from the European Commission, offers a commitment to buy out the stakes of impatient impact investors at any time, in less than 10 business days.
“The idea is that if you can make this investment into an impact fund as liquid as listed equities or listed debt, suddenly you can increase by 10-fold or 100-fold the amount of capital that can flow into impact,” Octobre’s Sylvain Goupille told ImpactAlpha on the sidelines of the GIIN conference last fall.
Octobre expects to sign its first liquidity guarantees this summer, Groupille says. It is also talking to banks about using the liquidity guarantee to offer liquid investment products to retail and private banking clients.
The relative lack of competition provides breathing room, and perhaps a competitive edge, for impact secondaries. “When we have those conversations with counterparties, we’re really in direct conversation with them and not battling a competing offer,” says Jorgenson.
Structural shifts
The recent market turmoil is sending more LPs into the secondary market, even as it makes privately held assets harder to value. More than 30% of private equity-backed companies had been held by fund managers for at least five years.
Even if the market turmoil subsides, secondaries and other liquidity options are likely to continue to play an important role, as companies stay private longer than the four to ten-year hold times of most fund managers amid a broader merging of the public and private markets.
“There’s a lot of runway ahead for secondaries, and particularly impact secondaries,” says Jorgenson.
“Less than 1% of all of the impact capital that’s raised is focused on secondary strategies. We think that that number should be probably closer to 3% or 4% to be more consistent with the general private equity market and how secondaries are allocated or capitalized there.”
Other fund managers are looking at more preemptive strategies. Tokunboh Ishmael of Alitheia Capital, a Nigerian fund that invests in gender inclusion, is looking at structuring investments in ways that don’t rely on public markets, acquisitions, or fire sales. That includes “self-liquidating” structures, such as revenue-based financing or certain mezzanine financing, and redeemable instruments that sell equity back to founders.
