An estimated 15-20% of all private equity "distributions" in the last two years were not traditional sales or IPOs, but "inorganic" transactions like continuation funds and NAV loans. This means the actual yield from organic, market-driven exits is even lower than the already-dismal headline numbers suggest.
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While the dollar value of PE distributions has been stable, the unrealized book value (NAV) has tripled in five years. This has caused the distribution yield—distributions relative to NAV—to plummet to a historic low. This yield metric, not raw dollar exits, is the critical factor constraining LP capital and new fund commitments.
The market's liquidity crisis is driven by a fundamental disagreement. Limited Partners (LPs) suspect that long-held assets are overvalued, while General Partners (GPs) refuse to sell at a discount, fearing it will damage their track record (IRR/MOIC) and future fundraising ability. This creates a deadlock.
The traditional PE model—GPs exit assets and LPs reinvest—is breaking down. GPs no longer trust that overallocated LPs will "round trip" capital into their next fund. This creates a powerful incentive to use continuation vehicles to retain assets, grow fee-related earnings, and avoid the fundraising market.
The creation of tertiary funds—funds that buy LP interests in secondary funds—indicates that private markets are so starved for liquidity that capital is being layered multiple levels away from the actual value-creating companies. This complex financial engineering mirrors the CDOs of the 2008 crisis and suggests a potential market top.
PE firms are struggling to sell assets acquired in 2020-21, causing distributions to plummet from 30% to 10% annually. This cash crunch prevents investors from re-upping into new funds, shrinking the pool of capital and further depressing the PE-to-PE exit market, trapping investor money.
The private equity market has abundant capital and willing companies, yet transactions are stalled. This is because General Partners (GPs) fear selling at low returns and Limited Partners (LPs) fear over-commitment due to liquidity concerns, creating a gridlock where no one wants to act.
Private equity's reliance on terminal value for returns has created a liquidity crunch for LPs in the current high-rate environment. This has directly spurred demand for fund finance solutions—like NAV lending and GP structured transactions—to generate liquidity and support future fundraising.
Howard Marks highlights a critical issue in private equity: a massive overhang of portfolio companies needing to be sold to return capital. Higher interest rates have made exits difficult, creating a liquidity bottleneck that slows distributions to LPs and commitments to new funds.
To generate returns on a $10B acquisition, a PE firm needs a $25B exit, which often means an IPO. They must underwrite this IPO at a discount to public comps, despite having paid a 30% premium to acquire the company, creating a significant initial value gap to overcome from day one.
Institutional allocators are currently over-allocated to illiquid private assets due to the denominator effect. When distributions from these funds finally resume, the initial wave of capital will be used to rebalance portfolios back toward public markets, not immediately recycled into new private equity commitments, a trend private GPs may not see coming.