The exit winter for private equity persists, writes William Edwards, Director, Financial Institutions, S&P Global Ratings.
Even as the number of private equity sales increased year over year, the volume of buyout fund exits reached a five-year low in 2024. Data by S&P Global Market Intelligence suggest that the total deal volume declined to USD515 billion last year, down 35 per cent from the peak in 2021. Volatility has surged through the second quarter of 2025 and weakened the outlook for exits this year.
S&P Global Ratings expects private equity will continue to ramp up its use of continuation funds to increase the number of exits. In combination with existing and novel debt financing strategies–for example, general partner (GP) financing and dual-pledge financing–these vehicles can unlock liquidity for GPs and limited partners (LPs), which rejuvenates fund lifecycles for managers.
Short-term flexibility comes at a cost
Continuation fund financing can help GPs thaw frozen liquidity, but it increases financial risk by introducing leverage to often unencumbered asset pools. In our view, this is part of a broader increase in secured funding to mature private equity funds.
Estimates suggest that secured funding to private equity, which is underpinned by a fund’s net asset value (NAV), represented about USD100 billion in 2024. While this amount is increasing rapidly, it is still low, compared with the private equity sector’s unrealised NAV of more than USD7 trillion.
Continuation funds helped weather the exit freeze in 2024
Private equity markets recovered slightly in 2024. Distributions to LPs exceeded capital calls for the year, while performance was strong enough to recover the value that was lost in the valuation drawdown in 2022.
Nonetheless, fundraising across the sector declined year over year, as did the number of new deals. Exit volumes were subdued and older vintages continued to see slow returns to LPs.
Against this backdrop, continuation vehicles were a release for the industry. Continuation vehicles are designed to aid funds in the later years of their lifecycle. These funds, also known as GP-led secondaries, purchase assets from a GP’s mature funds. This returns liquidity to the maturing vehicles that can be returned freely to LPs. LPs can then follow the manager into the continuation fund or cash out and retain the returns. After a strong first half in 2024, estimates suggest that continuation fund deals comfortably exceeded USD50 billion last year, with some estimates approaching USD80 billion.
Debt can help establish a continuation vehicle
The success of continuation vehicles hinges on GPs’ ability to invest into the new fund.
However, a significant portion of GPs’ cash is tied up in stakes in prior fund vintages and can only be unlocked by asset sales. These stakes are placed in management companies, which also aggregate the management fees payable to GPs in their role as fund managers.
This is where GP financing comes in. It enables GPs to invest fresh equity into a continuation fund by unlocking the liquidity of the management company. The funding is secured by the aggregated value of existing ownership stakes held in the management company–including past gains on fund vintages–and the stream of contractual cash flows from managing underlying funds.
Once established, continuation funds use leverage across their lifecycle
Traditionally, fund finance facilities are secured separately on the key assets of a fund through its lifecycle, uncalled capital commitments (subscription financing), and NAV (NAV financing). Yet certain structural features of continuation strategies impair their access to traditional funding.
First, the concentrated asset base of continuation funds can be restrictive. These funds often include less than 10 individual assets, which is significantly below the typical borrowing base of a conventional NAV facility.
On top of this, the LP base of a new vehicle can be similarly concentrated and only include a handful of essential investors. This reduces the value of collateral that is available under many subscription line lenders’ underwriting methodologies.
Together, these features can make traditional funding prohibitively scarce and expensive. Fund finance providers have therefore introduced new structures, such as dual-pledge facilities. Also referred to as hybrid facilities, they enable a concentrated fund to borrow against its uncalled capital and NAV across its entire lifecycle. This can support a fund’s investment strategy, enabling invested assets to fund further expansion or prop up their financial condition.
S&P Global Ratings’ approach to continuation funds
We rate continuation funds and their debt.
Continuation funds that hold private equity assets fit into our alternative investment fund (AIF) methodology. The characteristics of a continuation fund affect nearly all key inputs in our framework and, together, influence the final issuer credit rating. The balance of a continuation fund’s strengths and weaknesses can support an investment-grade rating, in line with our existing ratings on mature private equity funds.
We believe the extension of security across uncalled capital and NAV to a dual-pledge facility lender provides material uplift to the facility’s creditworthiness. An uplift of up to two notches is possible if the amount of uncalled capital is significant and overcollateralisation is available to repay the facility at the end of its life.
