Key Takeaways

  • Annual private equity distributions dropped from a historical average of 20 percent of prior-year net asset value to roughly 10 percent over the past four years.
  • Structured secondaries expanded from roughly 10 issuances a year before 2020 to between 70 and 80 transactions worth over $40 billion in 2025.
  • Institutional LPs are replacing outright portfolio sales at deep discounts with collateralized fund obligations, NAV loans, and preferred equity to preserve upside.
  • Insurers have become the primary anchor for structured liquidity, buying investment-grade senior and mezzanine tranches under favorable regulatory capital treatment.

The Passive Allocation Model Broke Down

For three decades, institutional private equity investing followed an unspoken rule: commit the capital, wait for the sponsor to sell portfolio companies, and redeploy the proceeds. That cadence kept LP balance sheets in balance. When exit velocity stalled, the entire cash flow equation collapsed.

John Kettnich of StepStone Group points out how sharp the drop has been across the market. “LPs in the last four plus years have faced distributions coming in at around half of what a normalized year should be, right? So closer to 10% than the historical 20% of prior year NAV,” Kettnich explained. “That dynamic has forced LPs to start taking a bit more control around creating liquidity for themselves.”

The old habit of waiting on sponsor timelines is no longer viable for institutions managing annual payout commitments, capital calls, and rigid asset allocation ceilings. Kettnich observed: “Historically you commit to a fund, you just can kind of sit back and in many cases LPs took the view, 'I'll sit back, I'll wait for my liquidity to come when the GP sells the company. I'll get my liquidity. It'll follow a certain cash flow profile.' That era, not that that's gone necessarily, but I think in the last few years LPs have been forced to take a bit more of a proactive stance to liquidity.”

Insurance Capital Meets the Secondary Market

Selling portfolios outright at 15 to 20 percent discounts locks in immediate losses that institutional CIOs want to avoid. That hesitation created an opening for structured balance-sheet engineering, particularly collateralized fund obligations (CFOs), preferred equity lines, and NAV debt.

Adrian Millan of PJT Park Hill tracked the speed of this shift across institutional desks. “If you look back to the pre-COVID period, 2019, 2020, you had maybe at most 10 or so issuances a year and low single digit billions of volume,” Millan noted. “You then fast-forward to more of an adoption period that happened in the 2021 through '24 period, and deal count tripled to quadrupled, right? You went up to 25 to 35 deals in market and about $10 to $15 billion worth of issuance.” By 2025, Millan tracked “a tripling of deals, so call it 70 to 80 in the 2025 period with over $40 billion of issuance.”

This volume would not clear without a motivated buyer on the other side. Insurance balance sheets, seeking rated yield under capital-efficient solvency guidelines, stepped into the senior tranches.

Kettnich explained how the two sides align: “There's a ton of demand from insurance companies that's come in because it's a pretty attractive credit profile, and so it just lines up different investors across the asset classes that we all operate in. It allows equity investors to keep their upside, allows credit investors who want that risk-return profile associated with the A, B tranches of these CFOs to get the exposure that they want.”

Why It Matters

This structural expansion marks a permanent shift in institutional portfolio management, turning LP stakes into bond-like collateral pools. It proves that liquidity in private markets is no longer solely dictated by GP mergers, acquisitions, and IPOs. Institutional LPs are taking balance sheet risk into their own hands, permanently altering how cash flows through private equity funds.