Looking for liquidity: continuation funds and NAV loans to the rescue

A cycle of rising interest rates and macroeconomic uncertainty has put the brakes on private equity exits and LP distributions during the last two years, and managers are still working hard to clear the backlog. Interest rate dislocation all but shut the traditional pathways managers have relied on for realisations and liquidity pathways. UK exits via M&A deals have fallen for the last three years and are still below pre-pandemic levels, while UK IPO activity has also been on a downward trajectory, with only 16 UK listings in 2024, down from 20 in 2023 and 42 in 2022.

With exits hard to come by, hold periods have dragged out and distributions to investors have dried up. Average buyout hold periods are now sitting at 6.7 years, 12 months more than the long-term average of 5.7 years, according to McKinsey figures, leaving the number of unexited companies in private equity portfolios at a two-decade high.

With very little cash flowing in from exits, distributions are down and have constrained the ability of LPs to make allocations to new funds. This has impacted fundraising across all regions, including the UK, with global fundraising down 23% year on year in 2024, according to Bain & Co analysis.

Exploring the alternatives

In a market where conventional pools of liquidity are constrained, GPs have had to find alternative routes to unlock cash from portfolio companies. Bain & Co reports that almost 30% of companies in buyout portfolios have undergone some kind of liquidity transaction, bringing in$360bn via dividend recaps, NAV loan finance, minority stake sales and GP-led continuation fund secondaries deals. These alternative sources of capital have provided much-needed respite for GPs under pressure to make returns to their fund investors.

Lenders have been key partners for GPs through this period, providing flexible debt finance packages that GPs have been able to draw on to realise value from portfolio companies and expedite distributions to LPs.

Dividend recapitalisations, where private equity-backed portfolio companies raise new debt finance to fund payments to shareholders as special dividends, are one of the ways financial sponsors have worked with lenders to up realisations.

Dividend recap loan issuance in the UK totalled $820m in the first quarter of 2025, the second highest quarterly total since the first Covid-19 lockdowns. Dividend recaps have proven a valuable way to generate cash from portfolio companies without having to sell an asset into a flat M&A market at a sub-optimal valuation.

The rise and rise of NAV loans – a form of fund-level finance where managers raise loans secured against the net asset value (NAV) of the equity investments in their funds – is another example of how lenders have supported GPs with innovative liquidity options.

After the first lockdown, NAV finance expanded rapidly as GPs and portfolios sought to extend capital runways, and later as an efficient financing option in a higher interest rate environment. A poll by fund administrator Citco found NAV facilities for private markets clients growing at a compound annual rate of 30%. NAV loans, characterised by conservative loan-to-value ratios and secured against multiple fund assets, can offer attractive flexibility for GP borrowers.

In addition to the cost-of-capital benefits, NAV financing has supported managers and portfolio companies during extended hold periods. It helps portfolio companies at their leverage ceilings raise finance without impacting covenants. NAV financing also funds GP commitments to new funds and allows managers to distribute proceeds to LPs.

Alongside NAV finance, GP-led continuation fund deals have emerged as another major source of liquidity through the cycle of interest rate dislocation.

Continuation vehicle (CV) deals, where GPs take select groups of assets and place them in a new fund backed by a secondaries investor, have enabled managers to offer their LPs the option of either rolling over their existing stakes in the assets into the new fund structure or taking liquidity.

The ability of CV deals to provide LPs with the option to take liquidity prior to full exit have driven significant growth in the GP-led secondaries market, with increasing numbers of financial sponsors using these fund structures as an additional exit route alongside M&A and IPOs.

Jefferies reported an all-time high of $75bn in global GP-led secondaries dealflow in 2024, an increase of more than $20bn from the previous year. Continuation funds accounted for 13% of sponsor-backed exits in 2024. UK private equity firms have been active in this market, with Phoenix Equity Partners closing a multi-asset continuation fund deal in 2024 and other UK-based managers preparing similar deals for UK portfolio companies.

Continuation funds initially gained traction as structures GPs could use to stay invested in prized, crown-jewel assets, but through the downcycle of the last two years the use case for these funds has expanded to include expediting distributions to fund investors in a flat exit market.

As investment strategies evolve and new players continue to enter the CV space with differentiated market propositions, private equity managers will benefit from an ever-widening suite of CV exit options.

The significant uptake of NAV financing and CV deals by GPs has been primarily driven by necessity. Managers have had to explore new liquidity options in order to narrow the delta between capital flowing into new funds and distributions going out to investors.

As private equity takes a deep breath after a challenging two-year period and hopes grow that interest rate stability will reawaken IPO and M&A markets, mainstream exit pathways should reopen. But even as conventional exits rebound, NAV finance and CV deals are expected to remain firmly on the radar of buyout firms, which have seen the value and flexibility that these financing tools can offer in all market conditions.

For many GPs dipping their toes into the unfamiliar NAV and CV waters, this may have initially been a matter of necessity. However, as sponsors have become familiar with these structures, NAV finance and continuation fund transactions have become a firmly established part of their financing toolbox.

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