Offering investors liquidity solutions in private closed-ended funds has been a developing trend for over a decade. When a limited partner (LP) subscribes for an interest in a closed-ended fund, they have agreed that their investment will remain deployed until the end of the fund’s term (subject to interim distributions), which may be extended. A lack of liquidity and delays in distributions to LPs in private funds have caused distributed to paid-in capital to become a key metric for general partners (GPs) in marketing their products and demonstrating their strength in managing capital.
How can LPs get their money back?
Historically, if an LP sought to realize their investment in a fund prior to the fund’s assets being fully realized and the proceeds of realization being distributed, their only option would be a secondary sale (i.e., finding a buyer to purchase their interest in the fund with the consent of the GP).
In recent years, however, a combination of market factors at various times – including slower M&A activity, higher interest rates, weak capital markets, and the “denominator effect” (where declines in public market valuations reduce overall portfolio values, making relatively illiquid private fund holdings appear over-allocated) – has constrained traditional exit routes. As a result, both LPs and GPs are increasingly seeking alternative liquidity solutions.
Those solutions include tender offers, continuation vehicles, NAV financing, preferred equity arrangements, and asset-level financing combined with dividend recaps. We explore each of those options below.
Tender offers
An alternative to an individual LP secondary is a tender offer, which involves a GP obtaining bids to acquire a given value of secondary interests in a fund from LPs that would like to sell their interests. The GP would typically carry this out alongside a financial advisor, who would approach and seek offers from potential bidders. The GP would then present the best offers to all LPs. While key terms can be proposed as a prerequisite to participating in this transaction as a selling LP, each selling LP would need to individually negotiate and accept the terms of the proposed sale of their fund interests. This process can be unnecessarily time-consuming and is therefore not the preferred option for GPs or LPs.
Continuation vehicles
The use of continuation vehicles (CVs) is increasingly common for GPs seeking an extended holding period for one or more of a fund’s assets. According to research from Lazard, in 2025, GP-led CVs exceeded $116 billion in volume. In short, these transactions involve obtaining bids for fund interests by reference to the value of the underlying assets to be transferred to a CV (continuation assets). The bidding process is managed by a financial advisor. The most compelling bids are presented to the existing fund’s limited partner advisory committee (the LPAC). In consultation with the LPAC, the GP determines which bid to accept and then presents the winning bid to the wider LP base in an election pack. The election pack sets out, among other things:
- A description of CV structure;
- Key terms applicable to the CV;
- Any required conflict waivers;
- Details of the sale price and underlying financial data by reference to which bidders arrived at their bids; and
- An election notice by which LPs will choose either to receive interests in the CV or sell those interests to a new vehicle (feeder fund) comprising the winning bidder(s).
The implementation of the CV structure ordinarily involves the contribution by an existing fund of its assets to a new, “clean” structure, being the CV. That contribution is made in exchange for the existing fund receiving interests in the CV. LPs who elect to remain exposed to the continuation assets are distributed, in specie, an interest in the CV from the existing fund. LPs who choose to realize their interests in the existing fund receive a final cash distribution from the existing fund in respect of their interests in the continuation assets. That cash distribution is funded by the feeder fund, which subscribes for interests in the CV. The upshot is that LPs in the existing fund that wish to remain exposed to the continuation assets will become LPs in the CV, while those that wish to receive liquidity in respect of those assets will be cashed out, and the feeder fund will become an LP in the CV. The feeder fund LPs may also offer the GP stapled commitments for the purpose of making investments outside the CV.
NAV financing and preferred equity
In the context of providing LPs with liquidity, GPs can obtain NAV loans based on the net asset value of a fund’s investment portfolio, either at fund level (subject to the fund’s borrowing restrictions) or (more commonly) at the level of a fund’s master holding vehicle. Amounts drawn under a NAV loan can be used to fund distributions to LPs, providing liquidity without the need for a sale of any fund assets or for LPs to sell their interest in the fund.
NAV lenders typically take security over equity interests in holding vehicles and bank accounts, rather than direct security over underlying portfolio assets. As a result, they are structurally subordinated to asset-level lenders, who benefit from direct security over operating assets. This may trigger intercreditor tension, particularly where upstream distributions are restricted by asset-level financing or where enforcement by NAV lenders (via share security) may be impacted by prior claims at the portfolio-company level.
Preferred equity financing works in a similar manner to NAV financing but, in the context of fund-level (as distinct from holding company-level) preferred equity, these arrangements can be structured to avoid the borrowing restrictions applicable to fund-level borrowings. In short, a preferred equity provider will capitalize a fund (or a master holding vehicle) in exchange for a preferred right to receive distributions until it has received its principal plus a fixed return. The benefit of this arrangement is that the amounts injected into the fund or the master holding vehicle by the preferred equity provider can be used to make distributions to LPs, and all amounts generated by the fund in excess of the preferred equity provider’s principal and fixed return can (subject to the fund settling its other liabilities) be distributed to the LPs.
Asset-level financing
GPs can also obtain financing, or refinancing, at the portfolio-company level for the purpose of a dividend recapitalization (i.e., making a distribution to LPs). Such financing is well-trodden and attractive, as the cost of capital from a lender (a fixed interest rate plus a benchmark rate) is competitive relative to the cost of LP capital (usually 8% IRR, compounding annually, plus 80% of the fund’s profits), provided that portfolio companies have sufficient cash flow to service this debt.
From a structuring perspective, asset-level lenders will typically have first-ranking security over the portfolio company’s assets and cash flows, placing them at the top of the capital structure. Dividend capacity is usually governed by restricted payment covenants, which may limit the fund’s ability to upstream cash, creating a natural tension with any NAV financing sitting above. While formal intercreditor arrangements between asset-level and NAV lenders are not necessarily present, the relative priorities and enforcement dynamics between these creditor groups are a key consideration in downside scenarios.
Executive summary
As is evident from the above, LPs have a variety of solutions available to realize their investments in closed-ended private funds. Certain of those solutions have developed more than others. The market for liquidity solutions is continually evolving, however, and we expect to see the implementation of more innovative solutions, such as collateralized fund obligations and LP-led solutions, to provide LPs with the liquidity they have come to expect from GPs. Each of these solutions requires specialized expertise to deliver efficient execution across taxation, private funds, company law, finance, and structured finance.