Alternative Liquidity Solutions in a Constrained IPO Market

With the IPO market still constrained, investors and fund managers are increasingly turning to alternative liquidity solutions. High levels of unrealized assets, pressure for distributions, and evolving private market dynamics are driving a shift in exit strategies. As we head into 2025, three key trends are shaping the landscape: M&A taking the lead as the primary exit route, private debt unlocking new liquidity options, and continuation vehicles gaining mainstream adoption. Understanding these shifts will be critical for private market participants looking to navigate the changing exit environment.

M&A: The Leading Exit Route in 2025

The Backlog Driving Urgency

A growing backlog of unrealized portfolio companies is creating urgency for fund managers to find exit opportunities. With limited companies going public via IPOs, mergers and acquisitions (M&A) are poised to dominate as the leading exit route in 2025. Private equity firms face mounting pressure from limited partners (LPs) expecting distributions from mature investments.

Favorable Conditions for Dealmaking

Several factors are aligning to make 2025 a prime year for private market M&A transactions. Declining interest rates and more affordable debt financing are lowering the cost of capital, supporting increased dealmaking activity. Buyers have greater capacity to leverage up for acquisitions.

Strategic buyers are pursuing M&A to fuel growth, access new technologies like AI, and enhance operational efficiencies. Private equity sponsors are also incentivized to drive exits, with ample capital from recent funds that needs to be deployed.

Robust Deal Prospects

Looking ahead, the prospects for a robust M&A environment in 2025 appear promising. Analysts forecast a resurgence in deal activity following a more cautious 2024, driven by stabilizing economic conditions and the need for strategic repositioning.

Key sectors like technology, healthcare, energy, financial services and consumer/retail are anticipated to lead the way. With the supply of targets, availability of financing and strategic rationale aligned, M&A exits are well-positioned to experience significant momentum over the coming year.

Private Debt Unlocking New Liquidity Paths

The Rise of Private Credit Funds

The private credit market has undergone significant expansion in recent years, with the number and scale of private credit funds increasing dramatically. This growth has shifted the dynamics of deal-making, unlocking new liquidity paths for companies and investors alike.

Financing the Unbankable

As traditional lenders tightened their lending criteria, private credit funds have stepped in to finance transactions once deemed too risky for traditional bank loans. Dividend recapitalizations, which allow private equity firms to extract cash from their portfolio companies while retaining ownership, are a prime example of this trend.

An Alternative to Traditional Exits

This influx of private credit has provided general partners (GPs) with an alternative to traditional exit strategies, such as IPOs or M&A. By leveraging private debt, GPs can realize partial liquidity through dividend recaps while maintaining upside exposure to their portfolio companies’ future growth.

Acceleration Expected as Rates Fall

While this trend was already visible in 2024, the use of private debt for liquidity purposes is expected to accelerate as interest rates continue to decline in 2025. Lower borrowing costs will make these transactions even more attractive, further fueling the growth of this alternative liquidity path.

As the IPO market remains constrained and traditional exits become more challenging, private credit is emerging as a vital source of liquidity for companies and investors in the private markets. By leveraging the flexibility and customization offered by private debt, market participants can unlock new opportunities for growth and returns, even in uncertain economic conditions.

Continuation Vehicles: A Mainstream Exit Strategy

Continuation funds have transitioned from a niche liquidity tool to an integral part of the private equity landscape. As fund managers adapt to the constraints of a stagnant IPO market, these innovative vehicles offer a dual advantage.

Retaining Promising Assets

For GPs, continuation funds enable them to retain exposure to high-performing assets that may not be ready for an optimal exit. By setting up a new vehicle to purchase these assets, GPs can extend the holding period and maximize value creation without being forced into premature exits during challenging market conditions.

Recycling Capital for LPs

At the same time, continuation funds provide liquidity options for existing LPs who may wish to exit the original fund. These transactions allow LPs to cash out while enabling GPs to recycle capital back into their prior funds, maintaining alignment with successful investments.

Win-Win for New Investors

The allure of continuation funds extends beyond existing stakeholders. New investors gain access to de-risked, high-quality assets managed by sponsors they are familiar with, creating a win-win structure. This influx of fresh capital supports the continuation fund transaction and facilitates extended value creation.

Mainstream Adoption

As the private equity industry evolves, continuation funds have become a mainstream feature. Their use has grown significantly, with the total volume of GP-led secondary transactions reaching over $51 billion in 2023, up from just $9 billion in 2015. This trend is expected to accelerate as sponsors seek alternative liquidity solutions amidst constrained IPO markets.

The rise of continuation funds reflects the private equity industry’s adaptability and innovation. By offering portfolio management flexibility, expanded investor bases, and alignment with longer-term value creation, these vehicles have cemented their role as a viable exit strategy in today’s evolving market landscape.

Final Thoughts

The private market’s exit landscape is evolving, with alternative liquidity solutions becoming a necessity rather than an option. M&A, private debt, and continuation vehicles are providing fund managers with new paths to liquidity in a challenging environment. As these strategies continue to gain traction, the ability to adapt will be a key differentiator for investors and firms looking to optimize returns and manage portfolio liquidity effectively. While IPO markets may rebound in the future, the innovations and approaches emerging today are likely to shape private market exits for years to come.