Private Equity's Liquidity Dilemma: Navigating the Maze of NAV Lending and Continuation Funds

The private equity industry is facing a liquidity crisis that's reshaping its playbook. With IPO markets largely closed since 2023 and exit activity plummeting by 46% in Q2 2025, general partners (GPs) are scrambling to unlock value for limited partners (LPs). The result? A surge in alternative strategies like NAV lending, continuation funds, and fund finance. But while these tools offer lifelines, they come with risks that investors must dissect carefully.

The Stagnant IPO Window and the Liquidity Vacuum

The IPO market has been a ghost town for years. In 2024, total IPO value hit $41 billion, a fraction of the $100+ billion seen in 2021. Even when deals like Viking River Cruises' $10 billion IPO break through, they're the exception, not the rule. Meanwhile, exit activity has shrunk to a 12-month low, with 314 transactions totaling $119 billion in Q2 2025—a 25% drop in volume and 46% in value. This has left private equity funds with a backlog of 12,000 deals, equivalent to eight years' worth of transactions, and valuations now at 12.2x EBITDA—up from 10.5x in 2023.

The problem? High-quality assets are moving, but lower-tier ones are stuck. GPs are forced to either wait for market conditions to improve or pivot to creative liquidity strategies.

NAV Lending: A Double-Edged Sword

NAV (Net Asset Value) lending has emerged as a key tool. By borrowing against the value of portfolio companies, GPs can fund growth, execute add-ons, or return capital to LPs without selling assets. As of 2024, the NAV lending market hit $150 billion in facilities, with projections to double in two years.

The appeal is clear: GPs can deploy 100% of LP commitments, earning spreads between loan costs and investment returns. For example, a $1 billion fund borrowing at 6% against a 10% return on a portfolio company generates a 4% margin. But risks lurk. Hidden leverage is a concern—NAV loans are often layered with subscription lines and asset-level debt, obscuring total leverage. If valuations drop (as they did in 2022), forced asset sales could trigger liquidity spirals.

Investors must ask: Is the GP using NAV loans to fund value creation or engineer distributions? Capstone Partners' survey shows 40% of LPs are neutral to positive on NAV loans, but skepticism remains.

Continuation Funds: A Lifeline or a Loophole?

Continuation vehicles (CVs) have become a lifeline. By transferring assets from expiring funds into new vehicles, GPs retain control while offering LPs liquidity. In 2024, CVs grew fourfold in five years, with AUM hitting $601 billion. KSL Capital Partners and Astorg's multibillion-dollar CVs exemplify this trend.

The benefits are tangible: CVs preserve high-value assets and align with LPs' desire for partial liquidity. Returns are on par with the broader buyout sector, with narrower dispersion. However, risks include extended holding periods and conflicts of interest. GPs may prioritize their own interests over LPs', especially if valuations are inflated.

A case in point: New Mountain Capital's $3 billion CV for Real Chemistry. While it preserved value, it also required rigorous governance—like independent fairness opinions—to mitigate conflicts.

Fund Finance: The New Frontier

Fund finance, including secondary sales and tender offers, is another avenue. Stripe's $92 billion secondary tender in 2025 highlights how these mechanisms can return capital in a stagnant market. However, regulatory scrutiny (e.g., FTC/DOJ antitrust enforcement) has dampened M&A activity, pushing GPs toward refinancings. In 2025, refinancings outpaced new money issuance by $9 billion, signaling a shift toward capital preservation.

The Road Ahead: Balancing Risk and Reward

For investors, the key is balance. NAV lending and CVs offer liquidity but require transparency. LPs should demand clear disclosure of leverage ratios, valuation methodologies, and governance structures. For example, ILPA's guidance on NAV facilities—requiring inclusion in leverage calculations and LP involvement in key decisions—is a step in the right direction.

Investors should also diversify their exposure. While top-quartile GPs dominate fundraising, smaller funds with innovative strategies may offer higher returns. But caution is needed: Overreliance on partial realizations (e.g., 65% of funds used them by 2024) could mask underperformance.

Final Take

The private equity landscape is evolving rapidly. NAV lending, continuation funds, and fund finance are not just stopgaps—they're strategic tools for navigating a liquidity crunch. But they demand discipline. Investors must weigh the rewards of enhanced returns against the risks of hidden leverage, valuation ambiguity, and governance gaps.

For now, the message is clear: In a world of compressed exits and stagnant IPOs, creativity is king—but only if it's built on transparency and prudence.