The Great Exit Challenge: Navigating Extended Hold Periods and New Liquidity Solutions

Private equity firms worldwide are confronting longer average hold periods, at this point often stretching beyond six or even seven years, as compared to the traditional three to five-year window that defined the industry for decades. Recent years of market volatility, inflation, and geopolitical uncertainty have led to delayed exits, with many portfolio companies remaining unexited well past fund expectations. This dynamic impacts not just institutional investors awaiting returns but also the broader flow of capital within the industry, making liquidity and capital pacing more complex for limited partners and general partners alike.

New Liquidity Pressures and Their Impact

• Delayed Returns: Longer hold periods disrupt fund life cycles by delaying distributions to investors, causing challenges in funding new commitments.
• Operational Strain: Firms must sustain value creation initiatives longer, often requiring further operational improvements, debt management, and enhanced portfolio support.
• Valuation Pressures: Stretched timelines can affect how value is realized, as market conditions may change before an optimal exit window reopens.

Alternative Liquidity Solutions Gaining Traction

To navigate this challenging environment and avoid “forced” sales during unfavourable market cycles, private equity managers have innovated with new liquidity tools:

Continuation Funds

• Allow high-performing assets to be rolled into new vehicles as fund lives expire, giving managers more time to maximize value while offering existing investors options for liquidity or further participation.
• Especially popular for “trophy” assets or in sectors where exit windows remain unpredictable.

Net Asset Value (NAV) Financing

• Funds can borrow against the net asset value of their portfolios, unlocking short-term capital for distributions or follow-on investments, bridging the gap until more attractive exit conditions materialize.
• Used to provide interim liquidity to limited partners or for targeted add-on acquisitions.

GP-Led Secondaries and Preferred Equity

• GP-led secondaries: General partners offer stakes in existing portfolio companies to new investors, providing liquidity to existing LPs without selling the asset outright.
• Preferred equity: Firms raise additional capital at the asset or fund level, helping support growth or manage debt, all while preserving upside potential for existing investors.

Partial Exits and Strategic Sales

• Instead of full exits, PE firms are increasingly executing partial sales, management buyouts, or secondary sales to other PE sponsors, maintaining upside while securing some liquidity.

Signs of Recovery and Outlook for 2025

• Market Revival: Exit volumes and deal sizes have rebounded in 2024 and 2025, especially in North America and Europe, though activity in Asia remains sluggish.
• Strategic Flexibility Needed: While the M&A and IPO markets are showing signs of recovery, creative liquidity management (especially through secondaries and continuation vehicles) remains essential for optimal results.
• Key Sectors: Technology and healthcare continue to present the most promising growth and exit opportunities for sponsors able to hold through periods of market disruption, with a key trend towards artificial intelligence.

Navigating today’s “Great Exit Challenge” requires private equity managers to balance patience with ingenuity. Extended hold periods are the new normal, but with a sophisticated toolkit of liquidity solutions firms can offer investors enhanced flexibility and capital returns even in uncertain environments. Leading sponsors prepare early, remain disciplined, and continue to adapt exit strategies to evolving market dynamics, ensuring continued value creation and resilience for their stakeholders.