Continuation Funds and the Hybrid Capital Boom: How Junior Debt Is Bridging the GP-LP Liquidity Gap

The private equity industry faces a structural liquidity crisis. Five-year DPI (distributions to paid-in capital) has fallen to its lowest level in over a decade, with the last U.S. vintage year to achieve 1.0x DPI being 2016.1 For 2018 vintage funds, historical benchmarks suggest DPI should approximate 0.8x, yet actual performance stands only slightly above 0.6x.2 With more than $1 trillion of NAV trapped in older vintages and traditional exit routes constrained, sponsors and their capital partners have engineered increasingly sophisticated solutions to bridge the GP-LP liquidity gap. At the center of this innovation: continuation vehicles and the hybrid capital structures that enable them.

The Scale of the Liquidity Challenge

The numbers are stark. Global PE dry powder reached $2.62 trillion at mid-2024, with buyout dry powder alone at $1.2 trillion.3 More concerning is the aging of this capital: funds held for four years or longer now constitute 24% of total dry powder, up from 20% in 2022.4 Average holding periods have stretched beyond five years, and LPs are recalibrating their performance expectations accordingly. In McKinsey’s 2025 LP survey, 2.5 times as many limited partners ranked DPI as a “most critical” performance metric compared to three years ago.5

The fundraising environment reflects this pressure. U.S. buyout fundraising declined 20% in 2024 versus 2023, with fund closures dropping to their lowest count since at least 2008.6 Sponsors with strong performance but lower DPI have struggled to raise successor funds, while those demonstrating both strong IRR and timely capital return are commanding premium terms. As Hugh MacArthur, Global Private Equity Practice Chairman at Bain & Company, observed: “We’re talking about a 5+ year problem… This is not going to go away in 2025 or 2026. It’s going to be continued pressure on the institutional LPs for liquidity over the course of the next several years.”7

Continuation Vehicles: From Niche to Mainstream

The secondaries market has emerged as the primary solution mechanism. Total secondary transaction volume reached $162 billion in 2024, a 45% increase from 2023, with the market holding approximately $315 billion in dry powder as of Q3 2025.8 GP-led transactions have driven much of this growth, climbing to a record $47 billion through H1 2025 alone.9 Continuation funds now account for approximately 90% of GP-led secondaries volume, with 46% of respondents in Dechert’s 2026 Global Private Equity Outlook survey utilizing GP-led secondaries or CVs to navigate fundraising challenges — nearly double the prior year’s figure.10

The mechanics are straightforward: a GP transfers one or more portfolio companies from an existing fund into a newly established vehicle, giving incumbent LPs the option to roll their stakes or take cash. Secondary investors provide the capital for cash-electing LPs while gaining exposure to mature, de-risked assets. The structure enables sponsors to avoid forced sales in unfavorable markets, reset economics and continue value creation with management teams they know well. GP alignment is increasingly robust — nearly 90% of single-asset continuation fund deals involve active GP members rolling 100% of available proceeds.11

Technology has emerged as the dominant sector, accounting for 24% of GP-led secondaries deal value in H1 2025, compared to 16% in full-year 2024.12 Major transactions have included Vista Equity Partners’ $5.6 billion continuation vehicle for Cloud Software Group and New Mountain Capital’s $3 billion multi-asset CV for healthcare marketing company Real Chemistry.13

The Hybrid Capital Solution

Continuation funds often require capital beyond what secondary investors are willing to provide. This gap has created substantial demand for junior and hybrid capital structures — preferred equity, mezzanine financing and NAV-based lending — that fill the space between senior debt and common equity. Morgan Stanley notes that “the number of aging private equity funds stepped up dramatically in 2025 and will remain elevated for several years,” making these funds “prime candidates for hybrid capital and continuation solutions.”14

Preferred equity has emerged as a particularly flexible tool. These structures position capital higher than common equity in the capital stack while remaining junior to existing creditors, frequently utilizing PIK (payment-in-kind) features that defer cash interest and preserve operating cash flow. Deloitte’s March 2025 analysis found that unitranche-backed financing accounted for 66% of private debt transactions in the UK and 53% in Europe, with senior debt constituting only 12% and 29% respectively.15 Major asset managers including Ares Management, Apollo, BlackRock, Sixth Street and Blue Owl have raised dedicated funds for structured equity financing.

NAV lending has grown alongside these structures. The ILPA estimates the NAV facility market at approximately $100 billion currently, with potential to reach $600 billion by 2030.16 While NAV facilities serve multiple purposes — from portfolio company support to follow-on investment funding — their use in conjunction with continuation vehicles has proven particularly compelling. Secondary buyers with lending affiliates are increasingly backing GP-led deals involving highly levered assets, with plans to right-size capital structures post-transaction.17

Middle Market Dynamics

The middle market presents distinct opportunities. Continuation vehicle penetration among large-cap GPs has reached approximately 70%, but middle-market adoption remains at only 30%.18 This gap creates runway for continued growth as mid-market sponsors adopt structures that larger peers have refined. Golub Capital’s October 2025 launch of a dedicated GP-led secondaries strategy, backed by an initial $1 billion commitment, explicitly targets “high-quality U.S. and European middle market businesses, primarily through GP-led continuation vehicles.”19

The economics favor middle-market transactions. Pricing for diversified LP portfolios has tightened to the low-90s (as a percentage of NAV), up from the mid-80s a year ago, with high-quality buyout portfolios often clearing at or near par.20 Single-asset continuation funds have seen particularly strong pricing, with 91% of 2024 transactions pricing at 90% of par or better, compared to 73% in 2023.21

According to Secured Research analysis, approximately 40% of middle-market private credit lenders now actively participate in continuation vehicle financing, either through refinancing existing portfolio company debt or providing incremental capital for follow-on acquisitions. The combination of familiar borrowers, established underwriting relationships, and seasoned collateral creates attractive risk-adjusted return opportunities compared to new originations.

Ecosystem Implications

For PE Sponsors: Continuation vehicles provide a release valve for aging portfolios without sacrificing control or upside participation. The key considerations are alignment demonstration (rolling carried interest and committing fresh capital), valuation process integrity (running genuine market tests) and LP communication. Sponsors running frequent CV transactions are building track records that increasingly inform LP re-up decisions. The opportunity cost of not exploring these structures rises as competitors establish themselves as sophisticated users of the liquidity toolkit.

For Private Credit Lenders: The hybrid capital boom creates multiple origination channels. Preferred equity and mezzanine strategies offer higher returns than senior lending with structural protections unavailable in common equity. Lenders with existing portfolio company relationships are well-positioned to participate in CV refinancings, while those building dedicated junior capital capabilities can access an expanding opportunity set. The blending of debt and equity characteristics requires evolution in underwriting approach — less focus on traditional coverage ratios, more emphasis on equity cushion, business quality and downside protection structures.

For Investment Bankers: GP-led advisory has become a meaningful revenue stream. Running single-asset or multi-asset CV processes requires differentiated capabilities — valuation expertise, secondary investor relationships and transaction structuring knowledge that differs from traditional M&A. Banks building dedicated teams are capturing market share as transaction volume scales. The combination of advisory fees on the GP-led transaction and potential financing fees on associated debt creates attractive economics.

For Legal Advisors: CV transactions involve complex multi-party negotiations across LPA amendments, fairness opinions, tax structuring and intercreditor arrangements when hybrid capital is involved. SEC examination priorities for 2025 specifically cite disclosure of conflicts of interest in continuation fund transactions as a focus area, elevating the importance of governance documentation and process integrity. Firms building specialized CV practices are differentiating themselves in an increasingly commoditized M&A legal market.

For Turnaround Advisors: The intersection of continuation vehicles and stressed assets creates opportunity. Sponsors holding underperforming portfolio companies may utilize CV structures to bring in fresh capital and operational expertise rather than pursuing distressed sales. Turnaround advisors who understand both the operational improvement requirements and the structural mechanics of continuation vehicles can position themselves as value-add partners to secondary investors evaluating complex situations.

Looking Forward

The continuation fund and hybrid capital trend shows no signs of slowing. Verdun Perry of Blackstone predicts annual secondaries deal value could reach $220 billion by year-end 2025 and $400 billion by 2030.22 Private wealth channels, now representing 18% of near-term secondaries fundraising, are providing steady capital that necessitates quick deployment and fueling higher CV pricing.23 The private credit secondary market, while still nascent at approximately $18 billion in 2025, is expected to expand significantly as the $2 trillion private credit asset base matures.24

For middle market participants, the message is clear: the tools that large-cap sponsors have pioneered are now accessible at scale. Sponsors who master the liquidity toolkit will maintain LP relationships and fundraising momentum. Lenders who build junior capital capabilities will access differentiated origination. Advisors who develop CV expertise will capture growing transaction flow. The liquidity challenge facing private equity is not a temporary dislocation — it is a structural shift that rewards adaptation.

Sources:

1. NEPC, Quarterly Private Markets Report: Q2 2025. https://www.nepc.com/quarterly-private-markets-report-q2-2025/
2. Bain & Company, Private Equity Midyear Report 2025. https://www.bain.com/insights/private-equity-midyear-report-2025/
3. Moonfare, What is dry powder in private equity: definition, 2025 trends. https://www.moonfare.com/glossary/dry-powder-in-private-equity
4. Ibid.
5. McKinsey & Company, Global Private Markets Report 2025. https://www.mckinsey.com/industries/private-capital/our-insights/global-private-markets-report
6. NEPC, Quarterly Private Markets Report: Q2 2025. https://www.nepc.com/quarterly-private-markets-report-q2-2025/
7. Ropes & Gray, U.S. Private Equity Market Recap – September 2025. https://www.ropesgray.com/en/insights/alerts/2025/09/2-us-pe-market-recap
8. Ropes & Gray, Secondaries Q3 2025 Update. https://www.ropesgray.com/en/insights/alerts/2025/11/secondaries-q3-2025-update
9. Dechert LLP, GP-led Secondaries and Continuation Vehicles Boost DPI, December 2025. https://www.dechert.com/knowledge/onpoint/2025/11/gp-led-secondaries-and-continuation-vehicles-boost-dpi.html
10. Ibid.
11. William Blair, 2025 Secondary Market Report. https://www.williamblair.com/-/media/downloads/ib/2025/williamblair-pca-secondary-market-report-survey-march-2025.pdf
12. Ropes & Gray, Secondaries Q3 2025 Update. https://www.ropesgray.com/en/insights/alerts/2025/11/secondaries-q3-2025-update
13. White & Case, Unlocking liquidity: How secondaries and continuation vehicles are freeing up the PE exit pipeline. https://mergers.whitecase.com/highlights/unlocking-liquidity-how-secondaries-and-continuation-vehicles-are-freeing-up-the-pe-exit-pipeline
14. Morgan Stanley, Private Credit Outlook: Estimated $5 Trillion Market by 2029. https://www.morganstanley.com/ideas/private-credit-outlook-considerations
15. Acuity Knowledge Partners, Demystifying hybrid capital, September 2025. https://www.acuitykp.com/blog/demystifying-hybrid-capital/
16. Goodwin, Fund Finance: 2024 Reflections and Looking Ahead to 2025. https://www.goodwinlaw.com/en/insights/publications/2025/02/alerts-privateequity-fund-finance-2024-reflections-and-looking-ahead
17. Ibid.
18. William Blair, 2025 Secondary Market Report. https://www.williamblair.com/-/media/downloads/ib/2025/williamblair-pca-secondary-market-report-survey-march-2025.pdf
19. Golub Capital, Golub Capital Launches GP-Led Secondaries Strategy, October 2025. https://golubcapital.com/news-insights/golub-capital-launches-gp-led-secondaries-strategy/
20. Financier Worldwide, Private equity’s new liquidity playbook. https://www.financierworldwide.com/private-equitys-new-liquidity-playbook-creativity-now-rivals-capital
21. William Blair, 2025 Secondary Market Report. https://www.williamblair.com/-/media/downloads/ib/2025/williamblair-pca-secondary-market-report-survey-march-2025.pdf
22. Ropes & Gray, Secondaries Q3 2025 Update. https://www.ropesgray.com/en/insights/alerts/2025/11/secondaries-q3-2025-update
23. Ibid.
24. Evercore, Private Credit Secondary Market Commentary, August 2025. https://www.evercore.com/wp-content/uploads/2025/09/Private-Credit-Secondary-Market-Commentary-August-2025.pdf