Investors in private equity funds are increasingly turning to structured, debt-like transactions to generate liquidity amid a prolonged slowdown in dealmaking and distributions, reflecting a shift in the secondary market dynamics. According to investment bank Jefferies, backers of buyout funds completed roughly $9 billion in such "alternative" deals last year, up from $6 billion in 2023, underscoring growing investor appetite for these creative financing solutions.

This trend emerges as traditional secondary market activity—where investors like pension plans and endowments sell stakes in existing buyout funds to specialist secondaries buyers at a discount—faces challenges due to a decline in company sales and slower cash returns from private equity vehicles. Scott Beckelman, co-head of private capital advisory at Jefferies, noted that private companies are being held longer, resulting in persistently low distributions over several years, which has increased investor demand for structured alternatives.

Preferred equity transactions have become a favored tool in this environment. In these arrangements, the buyer provides the seller with an upfront cash advance and subsequently receives all fund distributions until the advance and a predetermined minimum return are repaid. After this repayment threshold, the seller regains entitlement to most, if not all, remaining upside, allowing both parties to share potential gains while managing near-term liquidity needs.

Beckelman highlighted that such deals are typically pursued by fund backers including family offices and insurance companies rather than large institutional investors. The expansion of participants engaging in these transactions has been significant, with secondaries investors, preferred equity specialists, and alternative credit managers increasingly converging in this space. Notable credit funds managing these types of investments include BlackRock’s HPS, while equity and credit secondaries arms of firms such as Goldman Sachs Asset Management have also been active.

The rising interest in preferred equity deals is partly driven by investors seeking to avoid disposing of stakes at a loss while preserving exposure to existing fund holdings. The liquidity generated through these transactions is often redeployed into newer buyout funds, allowing backers to maintain exposure to private equity markets despite the challenging current environment.

A notable example from last year includes a transaction in which Carlyle AlpInvest, through its structured secondaries team, agreed to acquire $600 million in fund interests from Federated Hermes. These interests had initially been invested by the UK’s BT Pension Scheme, illustrating how such deals facilitate portfolio management and capital recycling within institutional frameworks.

As the private equity sector continues to navigate subdued exit activity and extended holding periods, these innovative debt-like structures are expected to remain a key feature of the secondary market for the foreseeable future.