Private equity firms are facing a significant liquidity crunch, prompting them to devise new financial engineering solutions to return cash to their limited partners. With approximately $3.8 trillion in unsold assets globally and average holding periods extending to seven years (up from five in 2010), the industry is grappling with record-low distributions to paid-in capital (DPI). To address this, firms are deploying strategies such as dividend recapitalizations, NAV loans, and continuation funds. The latest and increasingly popular solution is structured equity, which are hybrid instruments, typically preferred stock with high fixed dividends (often in the mid-teens), that prioritize repayment ahead of common equity.
Structured equity deals allow PE firms to extract cash from portfolio companies for LPs without formally selling the company, avoiding additional traditional debt, and retaining potential upside. For example, CVC Capital Partners utilized this structure with Syntegon, selling a 37% structured equity stake to Apollo while also executing a €550 million dividend recapitalization. Apollo's hybrid capital practice, which offers structured equity and debt, has seen dramatic growth, with investments in the first half of 2026 tripling the pace of the first half of 2025. The firm has raised $6.5 billion for a dedicated hybrid strategy earlier this year, indicating the product's move from niche to mainstream.
This proliferation of financial engineering is a symptom of a structural problem in private equity: the traditional five-to-seven year holding periods with predictable exit markets (IPOs, strategic sales, sponsor-to-sponsor deals) have largely closed. The $3.8 trillion backlog of unsold assets carries substantial mark-to-market risk, as current valuations are set by PE firms' own quarterly marks, and forced exits could reveal significantly lower market-clearing prices. Critics, such as Oxford's Ludovic Phalippou, point out that often the same pension funds, endowments, and sovereign wealth funds are on both sides of these transactions, acting as LPs in PE funds receiving distributions and also as LPs in credit funds providing structured equity capital, essentially recycling capital while generating additional fees for intermediaries. While 60% of LPs in a recent ILPA survey prioritize long-term returns, the mid-teens pricing of structured equity reflects the true cost of liquidity, ultimately borne by these same investors.
