Preferred Equity: Another Option in the Fund Finance Toolkit

The market for private equity (PE) secondaries, or the buying and selling of pre existing PE fund interests, has grown rapidly over the past decade—by one estimate, at a CAGR of approximately 40% from 2013 to 2018. Within this sophisticated market, traditional secondaries, in which limited partners (LPs) sell their PE fund interests to third parties, have proven to be a relatively dependable source of liquidity for LPs looking to exit a fund early in most market conditions. 

As with many aspects of the global economy, however, the market for traditional secondaries is now experiencing a period of depressed activity and an uncertain future. In these circumstances, PE sponsors may look for creative solutions to address the liquidity needs of both LPs and portfolio companies. Preferred equity financings, one relatively less-developed facet of the broader secondaries market, may provide an avenue of relief. Importantly, these transactions have the potential to generate liquidity while minimizing disruptions to existing capital structures and fund economics, without reliance on third-party demand for existing fund interests.