Goldman Sachs' $10B Hybrid-Capital Fund: A Strategic Lifeline for Strained Private Equity?

In the shadow of a stagnant private equity exit environment, where mergers and IPOs have faltered under macroeconomic headwinds, Goldman Sachs has unveiled a $10 billion hybrid-capital fund designed to bridge the liquidity gap. This move reflects a broader industry pivot toward innovative financing tools as private equity firms grapple with prolonged hold periods and reduced capital recycling. But does hybrid capital truly offer a transformative solution, or is it merely another stopgap in a crowded market of alternatives?

The Liquidity Crisis in Private Equity

Private equity has long relied on traditional exit mechanisms—M&A, IPOs, and secondary sales—to unlock value for investors. However, these avenues have dimmed in recent years. According to a Bloomberg report, global M&A activity in 2025 remains 30% below pre-pandemic levels, while IPO markets remain selective, favoring only the most mature or high-growth companies [1]. For private equity firms, this means holding onto assets longer than planned, straining cash flow and diluting returns.

Goldman’s hybrid-capital fund aims to address this by offering a blend of debt and equity financing. Structured as a loan with equity-like flexibility, the fund allows portfolio companies to generate dividends and return cash to investors without fully diluting ownership [1]. This is particularly appealing in a market where overleveraged balance sheets and uncertain valuations make traditional debt financing risky.

Hybrid Capital vs. Continuation Vehicles and Secondaries

Hybrid capital is not the only tool in the liquidity toolbox. Continuation vehicles (CVs) and secondary transactions have gained traction as GPs and LPs seek alternatives. CVs, for instance, let GPs extend the life of underperforming or high-potential assets by transferring them to a new fund, offering LPs the option to roll, sell, or partially exit their stakes [5]. By 2025, GP-led CVs accounted for nearly 50% of all secondary transactions, with 90% of GP-led deals in 2024 classified as CVs [3].

Yet hybrid capital distinguishes itself through its structural adaptability. Unlike CVs, which require new capital commitments and often involve complex governance resets, hybrid capital operates as a financing instrument. It can be tailored to specific needs—whether recapitalizing a portfolio company, funding growth, or re-equityzing overleveraged assets—without transferring ownership [2]. This makes it particularly attractive for firms seeking liquidity without ceding control.

Moreover, hybrid capital offers features that traditional debt or equity alone cannot. For example, Goldman’s structured notes, part of its ESG Portfolio I offering, provide downside protection and coupon payments with a target net yield of 8-9% over two years (plus an optional one-year extension) [1]. Such terms appeal to risk-averse investors in a low-yield environment, where even high-quality private equity assets struggle to justify long-term holds.

Goldman’s Strategic Play: Capital Solutions Group and Market Positioning

Goldman’s foray into hybrid capital is part of a larger strategy to dominate the liquidity solutions space. The bank’s newly created Capital Solutions Group integrates its financing, origination, and risk management capabilities, positioning it as a one-stop shop for both corporate and investor clients [4]. This vertical integration allows Goldman to design bespoke solutions, such as its $10B hybrid-capital fund, while leveraging its existing $212 billion private equity asset base [2].

The bank’s parallel $15B secondaries fund further underscores its commitment to liquidity innovation. By investing in continuation vehicles and secondary transactions, Goldman is hedging its bets across multiple exit strategies. However, the hybrid-capital fund’s focus on flexible, asset-specific financing may give it an edge in a market increasingly prioritizing agility.

Risks and Skepticism

Critics argue that hybrid capital is not a panacea. Its success hinges on the performance of underlying assets, which remain vulnerable to macroeconomic shocks. Additionally, the lack of standardized terms—such as redemption rights, covenants, and payment structures—can create valuation complexities [2]. For LPs, the opaque nature of hybrid instruments may also pose due diligence challenges.

Furthermore, while hybrid capital avoids the governance resets required by CVs, it does not eliminate the root causes of liquidity constraints. As one LSTA report notes, hybrid capital is best suited for companies with strong cash flows and clear growth trajectories, leaving underperforming assets still reliant on traditional exits [2].

The Bigger Picture: A Market in Transition

Goldman’s hybrid-capital fund is emblematic of a broader shift in private equity. As dry powder piles up and investor patience wanes, the industry is moving toward a “portfolio-centric” model, where liquidity solutions are tailored to individual assets rather than fund-level exits [3]. This aligns with the rise of GP-led secondaries and the maturation of the secondary market, where terms like management fees and carry structures are becoming more investor-friendly [4].

However, the ultimate test for hybrid capital will be its ability to scale. While Goldman’s $10B fund is a significant bet, it remains to be seen whether other banks and private equity firms will follow suit. For now, the fund offers a compelling case study in how hybrid capital can serve as both a lifeline and a strategic lever in a constrained market.

**Source:[1] Goldman Sees Lucrative Lifelines in Easing Private Equity Logjam [https://www.bloomberg.com/news/articles/2025-09-03/goldman-sees-lucrative-lifelines-in-easing-private-equity-logjam][2] Opening the Aperture: Developments in Hybrid Capital [https://www.lsta.org/news-resources/opening-the-aperture-developments-in-hybrid-capital/][3] Mid-Year Outlook: Alternative Routes to Resilience [https://am.gs.com/en-ch/advisors/insights/article/2025/asset-management-mid-year-outlook-2025-alternatives-megatrends-disruption][4] Continuation Vehicles Report 2025: Maturing Market Finding Deal Term Norms [https://www.morganlewis.com/news/2025/04/continuation-vehicles-report-2025-maturing-market-finding-deal-term-norms][5] A Closer Look at Continuation Vehicles in Private Markets [https://www.ssga.com/us/en/institutional/insights/a-closer-look-at-continuation-vehicles-in-private-markets]