Borrowing Against Tomorrow: How Private Equity Is Living With Its Liquidity Problem

Private equity runs on a simple promise. Investors commit capital, wait patiently while firms buy and improve companies, and eventually receive their money back with a substantial return. Executives forgo predictable salaries in exchange for carried interest, their share of the profits when those companies are sold. The entire system, from the pension fund (a limited partner, or LP) down to the individual dealmaker, is built around the expectation that exits will eventually happen and cash will eventually flow.

That cash is not flowing. And at every level of the private equity food chain, the people waiting for it are finding increasingly creative ways to manufacture liquidity without the underlying problem being solved.

The LP Problem

When a pension fund or endowment invests in a private equity fund, the standard exit from that position is either to wait for the fund to wind down and return capital, or to sell the fund stake in the secondary market to a dedicated secondaries buyer. The secondary market has historically involved selling at a discount to the fund's Net Asset Value (NAV), accepting a loss in exchange for immediate liquidity. That discount has widened as the exit drought has persisted and NAV figures have become harder to trust, making the standard secondary route increasingly unattractive for LPs who do not want to crystallise a loss.

The response has been the preferred equity deal, a structure that has grown from $6 billion in 2024 to $9 billion last year and is continuing to expand in 2026, according to investment bank Jefferies¹. The mechanics are worth understanding properly because they are quite elegant as a financial instrument. Rather than selling the fund stake outright at a discount, the LP receives a cash advance from a buyer who then collects all distributions from the underlying fund until that advance plus a minimum return is repaid. After that threshold is met, the original LP recovers most or all of the remaining upside. It is structured like debt in that it has a priority claim on cash flows, but it sits against an equity asset, allowing the LP to avoid booking a loss while still accessing cash now.

Scott Beckelman, co-head of private capital advisory at Jefferies, described the driver plainly: "All of this is driven by the fact that private companies are being held for longer, there have been persistent low levels of distributions now for several years."¹ Crucially, the cash raised through these deals is not leaving private equity. Beckelman noted that clients were using it to invest in newer buyout funds rather than rotating into other asset classes¹. The LP is not abandoning the industry. They are borrowing against old positions to fund new ones, recycling within the system rather than exiting it.

The Executive Problem

One layer down from the LP sits the PE executive, whose compensation is built around carried interest, the 20 per cent share of profits above the fund's hurdle rate that dealmakers receive when holdings are successfully exited. In a functioning exit market, carry flows relatively predictably. In the current environment, with average holding periods now at seven years and rising from a historical norm of five to six², carry that was expected years ago has not arrived. The executives are waiting, and while they wait, they still have capital calls for newer funds to meet, mortgages to service, and lives to finance.

The solution an increasing number are turning to is the carried interest loan, borrowing against the forecast value of carry they expect to receive based on current fund valuations, including unrealised holdings. Inquiries to London broker Enness Global about such loans ran at 459 between January and mid-June 2026, more than three times the 134 recorded in the same period last year². Islay Robinson, founder of Enness, said he had never seen such high demand, closing two to three transactions per month in 2026, significantly more than in previous years².

The services are offered by private banks including UBS, Citi, and Deutsche Bank, with loans secured against the forecast carry rather than personal assets, meaning a lender cannot seize an executive's property if the carry never materialises². That structure is important. It tells you lenders believe in the eventual realisation of these carry positions enough to extend credit against them, even if they apply conservative assumptions and examine historical fund performance carefully before doing so².

The Same Problem, Three Times Over

What connects the preferred equity deal, the NAV loan, and the carried interest loan is that they are all variations of the same response to the same problem. The exit market is blocked. Cash is not flowing through the system. And rather than waiting indefinitely, every participant in the chain is finding a way to borrow against future value that has not yet been realised.

The LP borrows against the fund stake through preferred equity. The fund borrows against its portfolio through NAV loans. The executive borrows against their carry through specialist lenders. Each layer of the system is doing the same thing independently, and each layer's ability to keep doing it depends on the underlying assets eventually being worth what the current valuations suggest. As Kleinman argued at SuperReturn, these structures ameliorate the problem rather than solve it.³

Our view is that the preferred equity and carry loan data are best read not as signs of desperation but as signs of a system that believes in its own recovery while being unwilling to wait for it passively. The LP recycling preferred equity proceeds into newer funds is making a bet that the next vintage will outperform the current one. The executive borrowing against unrealised carry is making a bet that their fund's portfolio companies will eventually be sold at valuations that justify the loans. Both bets could prove correct, particularly if rate cuts materialise in the second half of 2026 and the exit window begins to open.

The risk is that these structures become load-bearing rather than bridging. If the exit drought extends further, the preferred equity buyer eventually needs their advance repaid from distributions that are not coming. The carry lender eventually needs confidence that the unrealised valuations holding up the collateral are real. A system that has layered creative liquidity solutions on top of a blocked exit market is more fragile than the headline activity numbers suggest. The $9 billion preferred equity market and the tripling of carry loan inquiries are not evidence that private equity has solved its liquidity problem. They are evidence of how inventively it is living with it.

Footnotes

1. Alexandra Heal, Private equity fund investors turn to debt-like deals in downturn↗ (opens in a new tab), Financial Times, 30 June 2026. ↩ ↩² ↩³

2. Alexandra Heal and Ortenca Aliaj, Private equity bosses turn to carried interest loans as payouts stall↗ (opens in a new tab), Financial Times, 23 June 2026. ↩ ↩² ↩³ ↩⁴ ↩⁵

3. Ivan Levingston and Alexandra Heal, Apollo executive says private equity got ‘a little out of whack’↗ (opens in a new tab), Financial Times, 10 June 2026. ↩