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Investors in private equity funds are increasingly turning to creative debt-like deals to generate cash amid a dearth of payouts, as the sector’s dealmaking downturn stretches on.
Backers of buyout funds agreed $9bn worth of “alternative”, structured transactions last year to bring in cash from their stakes in the vehicles, up from $6bn in 2024, investment bank Jefferies told the FT.
The bank predicted the trend would continue this year, with some investors seeking to avoid selling stakes in funds at a loss and because of growing demand for creative deals, including from credit funds.
The newfound popularity of these preferred equity deals for stakes in private equity vehicles marks the latest evolution in the secondary market, where investors back ageing assets rather than new deals or funds. Supply from sellers has ballooned as buyout firms have sold fewer companies and returned less cash to their original fund backers.
“All of this is driven by the fact that private companies are being held for longer, there have been persistent low levels of distributions now for several years,” said Scott Beckelman, co-head of private capital advisory at Jefferies.
The mainstream secondary market sees backers, such as pension plans or endowments, of existing buyout funds selling their stakes in those vehicles to dedicated so-called secondaries investors at a discount.
Preferred equity deals, meanwhile, involve the buyer handing the seller a cash advance and the buyer receiving all cash distributions from the underlying funds until their advance and a minimum return are paid back. After that, the seller enjoys most or all of any remaining upside.
“[Fund investors] are now being proactive and they’re using all the tools available to them,” Beckelman said, adding that clients were using that cash to invest in newer buyout funds rather than turning to other asset classes.
He and another leading adviser said fund backers such as family offices and insurers, rather than large institutions, were typically cutting such deals.
A recent “dramatic” expansion in the buyer universe had driven demand, Beckelman said. “There’s been a convergence of secondary investors, preferred equity specialists and alternative credit managers [buying them].”
Opportunistic credit funds such as those run by BlackRock’s HPS invest in preferred equity deals for fund stakes, as do equity and credit secondaries funds such as those managed by Goldman Sachs Asset Management.
Last year a Carlyle AlpInvest team focused on structured secondaries deals agreed to buy, as preferred equity, $600mn-worth of fund interests from Federated Hermes, which had originally invested in those funds on behalf of the UK’s BT Pension Scheme.
Beckelman added that slow distributions had also triggered for the first time significant standalone secondary sales of co-investments, industry speak for direct holdings in companies that buyout backers can own alongside funds.
