When we last wrote an article about the surge in alternative liquidity in late 2024, broader markets were concerned with uncertainties tied to the U.S. presidential and congressional election outcomes. However, they were optimistic that a friendlier regulatory environment under the new administration and increasing prospects for lower interest rates would mean a return of traditional exits and a robust M&A market.

Activity in the first quarter of 2025 indeed reflected a high level of optimism, but the onset of tariff policy friction in April and May and its resulting uncertainty had a chilling effect on both M&A deal activity and broader credit market financing activity.

While these market uncertainties slowed traditional M&A exit activity for sponsors, general partner-led (GP-led) secondary transactions continued to expand at a rapid pace, cementing their status as a common liquidity solution for sponsors with adoption expanding across strategies, sectors, and type of asset. Dividend recapitalization transactions provided a further outlet for sponsors to return capital to limited partners (LPs), navigating credit market waves to elevated levels in 2025.

This article provides an update into the key trends shaping the PE liquidity landscape thus far in 2025, the continued momentum of alternative exit and liquidity options, and the heightened fiduciary and legal considerations they require.

PE M&A Market Trends

Traditional PE Exits Remain Difficult¹

Private equity exit activity reversed in Q2 2025 following a steady rebound in activity through Q1 2025, hitting its lowest level with an estimated 314 exits (down 46.4% on a value basis and 24.9% on a deal count basis from Q1 2025). This sharp pullback reflects the impact of tariff induced uncertainty and reflects a market where high-quality assets are still marketable with the remaining portfolio continuing to age in the fund.

PE Exit Activity by Quarter

The inventory of sponsor-backed portfolio companies grew to 12,552 companies by the end of Q2 2025. This translates to an 8.5-year inventory based on the annualized pace of exits in the first half of 2025. This difficult exit environment has extended the age of PE-backed companies, with the median hold time increasing to 3.8 years, the highest since 2011.

PE-Backed Company Inventory by Deal Year

Median PE Company Holding Time (Years)

Alternative Liquidity Strategies

As these figures indicate, PE sponsors face a significant inventory backlog with aging assets and prolonged holding periods, underscoring the need for a more favorable exit environment to manage the backlog more effectively. In the context of this muted exit environment, sponsors increasingly relied on alternatives to gain liquidity for LPs in 2025, primarily through secondaries transactions and secondarily, if credit markets allow, through dividend recapitalization transactions.

GP-Led Secondary Transactions

Secondary transactions have become an increasingly popular method for providing liquidity to limited partners (LPs).

The role of secondary transactions as a means of providing liquidity to LPs continues to grow, with many in the industry believing the market is still in the early innings of growth. The secondary transaction market is generally split into two categories: LP-led secondary transactions and GP-led secondary transactions.

In an LP-led secondary transaction, an LP will sell their commitment in a fund to a secondary buyer. In a GP-led transaction, the sponsor decides which asset or pool of assets will be transferred from one vehicle into another vehicle, commonly known as a continuation fund. LPs will typically be given an option to either roll-over their interest in the assets to the new fund or be cashed out.

Benefits of Secondary Transactions

For LPs in existing funds, secondary transactions allow for a way to generate liquidity and rebalance a portfolio. Investors in GP-led secondary transactions have enhanced transparency into the underlying asset and may benefit from a track record of proven, ongoing sponsor-led value creation activities on the underlying asset with a potentially shorter hold period until liquidity.

From the sponsor’s perspective, GP-led secondary transactions allow them to retain control of an asset for a longer period, driving value-enhancing strategies, all while continuing to earn asset management fees and potentially crystalizing a portion of their carry.

Market Trends and Volume²

In the first half of 2025, secondary transaction volumes surpassed record 2024 volume, with total secondary market volume growing 51%. GP-led secondary transaction volume also reached record levels at $47 billion in the first half of 2025, up 68% relative to the first half of 2024. The table below highlights recent annual transaction volume as well as Jefferies’ estimate for another record year in the secondaries market in 2025.³

Annual Transaction Volume ($B)⁴

GP-Led Market Expansion

Historically, GP-led secondary market volumes have been constrained by the availability of capital. As the market continues to mature and gain adoption, new investor groups, driven by specialized secondaries funds, have entered the market and provided much needed capital. Secondaries funds raised $70.9 billion in the first half of 2025, as compared to $107.6 billion raised in all of 2024. The anticipated record fundraising activity in 2025, along with $255.4 billion of secondaries-focused funds available to deploy on December 31, 2024, point to a continued favorable environment for secondaries activity, including GP-led secondaries.⁵

Secondaries Fundraising Activity

Dry Powder by Vintage

Jefferies projects that GP-led secondary volume in 2025 will exceed 2024’s record year and eclipse the $100 billion mark. Activity is broad based, as nearly 75% of the 50 largest GPs have utilized continuation vehicles (CVs) to provide LPs with liquidity. Transaction sizes also continue to grow with available capital, supporting several +$2 billion transactions in 2025. In this challenging M&A market, GP-led secondaries are a growing exit alternative, increasing to an estimated 19% share of sponsor-backed exit volume.

GP-Led Annual Transaction Volume ($B)⁶

Private Credit, Real Assets, & Venture Capital Join the CV Party

The private credit market has seen strong momentum in the adoption of CVs. In 2024, several large credit-focused CV transactions entered the market, driven by a growing pool of dedicated capital, including new entrants like evergreen retail vehicles. While GP-led credit secondaries currently account for less than a third of total credit secondary volume, they are projected to surpass half of the market by the end of 2025.

In the infrastructure sector, legacy secondary investors have focused on raising record amounts of capital for high-demand digital infrastructure assets that are well-suited for CV structures. Sponsors have used the secondary market to provide liquidity and raise capital, enhance M&A flexibility, and support fundraising.

In the venture capital space, GP-led secondary transactions have gained significant traction, representing around 8% of the venture capital secondaries market in the first half of 2025. This growth is fueled by persistently low distributions from mature-vintage funds, high levels of NAV held by funds, and a sizable pool of late-stage venture-backed companies demonstrating strong growth and profitability. Despite subdued IPO and M&A activity, secondary transactions involving well-known later-stage companies have become a key liquidity solution, allowing investors to access high-performing businesses with clear paths to liquidity.

Addressing Complexity and Governance Issues With Fairness Opinions

Continuation vehicle transactions are inherently conflicted transactions, as both the selling fund and buying fund are entities controlled by the same private equity sponsor. This creates governance and process issues that need to be carefully considered and addressed early in the transaction process with proper planning and preparation.

Sponsors and their advisors can mitigate this risk by engaging an independent financial advisor to provide a fairness opinion in connection with the transaction. A fairness opinion directly addresses the valuation underlying the transaction and states whether the proposed transaction is fair from a financial point of view.

An independent fairness opinion from an experienced expert like Stout can help bolster the record and protect the sponsor from those who may wish to challenge the transaction in hindsight.

Dividend Recapitalization Transactions

Dividend recapitalization transactions continue to provide an avenue for sponsors to provide liquidity to their fund investors. Sponsors can return capital while continuing to work on value creation activities, biding time to allow valuations to improve for a later traditional exit.

Heightened Activity in 2025

The use of dividend recapitalization transactions tends to fluctuate based on the health of the credit markets and in reaction to potential changes in the tax environment. The two-year period starting in 2022 was characterized by increasing interest rates, putting pressure on new debt issuances and in turn dividend recapitalization transactions. The resurgence in dividend recapitalization transactions that began in 2024 has continued and strengthened in 2025.

Leveraged Loans and High-Yield Bond Activity

Through the end of the third quarter, dividend recap volumes are approaching 2021’s record levels. Leveraged loans remain the primary method for private equity portfolio companies to execute dividend recapitalizations, with over 80% of dividend recapitalization transactions funded with leveraged loans. Leveraged loans have accounted for solid majorities of dividend issuance in each year since the Global Financial Crisis.

Dividend Recap Leveraged Finance Volume, YTD ($B)

Overall, private equity sponsors have extracted $34.7 billion via dividends financed in the leveraged loan market in the year to September 30, exceeding the full year 2024 total and nearing the full year 2021 volume of $35.1 billion. Sponsors continue to access the leveraged loan market to fund dividends and provide liquidity to LPs.

Dividends Paid to PE Sponsors Via Leveraged Loan Market ($B)

Interestingly, like the overall extension of sponsor holding periods for portfolio companies, the holding period through dividend recap has extended in recent years. Nearly half of this year’s dividend recap issuers have been held for five years or longer. We often see sponsors take a dividend ahead of an anticipated sale process, possibly foretelling an increase in traditional M&A exit activity in 2026.

Holding Period Distribution for BSL-Financed Dividends

Stabilization of Borrowing Costs

Sponsors are taking advantage of a healthy credit market following a pause in activity in April and May tied to tariff uncertainty. Both new-issue yield as well as new-issue spread are at or near recent lows and provide a healthy backdrop for continued new issuance activity through the remainder of 2025 into 2026.

Average New-Issue Yield Vs. Average New-Issue Spread, Secured

Average New-Issue Yield Vs. Average New-Issue Spread, Unsecured

Addressing Heightened Corporate Governance Risks with Solvency Opinions

Dividend recap transactions, especially those funded through additional debt obligations, present a heightened corporate governance risk. If the issuer were to experience financial difficulties after the dividend recapitalization transaction, creditors may claim that the transaction rendered the company insolvent and therefore was a fraudulent transfer or fraudulent conveyance under the laws governing bankruptcy in the U.S. Successful fraudulent transfer claims have the potential of unwinding the transaction in question, even years after the transaction was completed. Shareholders may have to repay dividend proceeds and directors may face significant personal liability.

Solvency opinions are designed to protect board members from these increased risks, bolstering the record and providing evidence supporting the board’s discharge of its fiduciary duty of care in reviewing and approving a transaction. A solvency opinion provides support and confidence to key stakeholders that the company can continue servicing debts and perform ongoing operations and that the deal will not result in a fraudulent conveyance. A solvency opinion from an expert like Stout can assist corporate directors in carrying out their fiduciary duties and following best practices in corporate governance.

1. Pitchbook US PE Breakdown, June 30, 2025.
2. Pitchbook US Credit Markets Quarterly Wrap, September 30, 2025 
3. “H1 2025 Global Secondary Market Review: July 2025,” Jefferies, 2025.
4. Ibid.
5. Pitchbook Q2 2025 Global Private Market Fundraising Report
6. “H1 2025 Global Secondary Market Review: July 2025,” Jefferies, 2025.