Private equity exit dilemma remains unsolved; structured equity becomes a new "recovery" tool

The private equity industry is responding to a years-long liquidity crisis with a new type of financing tool.

Amid high interest rates and obstacles to asset sales, major global funds are turning to “structured equity” transactions. By entering into customized financing agreements with private capital giants such as Apollo Global Management and Bain Capital, they are returning cash to investors without having to sell assets.

This trend is spreading from the US and Europe to Asia, and has become one of the core methods for the industry to break the exit deadlock.

Currently, global buyout funds hold approximately $3.8 trillion in unsold assets, with the average holding period extended to seven years. This situation has pushed down a core indicator for measuring fund returns—Distributions to Paid-In (DPI)—to a historic low last year since 2000. Rahel Schneider, a partner at McKinsey, calls it a “structural issue” for the industry.

Structured equity transactions usually take the form of preferred shares or convertible securities, providing private capital providers with medium-to-high annual returns (typically in the teens percentage), while allowing funds to retain assets and avoid forced sales during depressed valuations.

However, critics point out that such tools are essentially “an expensive temporary solution” and do not solve the fundamental exit dilemma of the industry. Meanwhile, they cycle capital among the same institutional investors, creating additional fees for intermediaries.

Exit Deadlock Spurs "Structured Equity"

The liquidity pressures facing the private equity industry have deep roots. During the era of low interest rates, major buyout funds made aggressive acquisitions at high valuations, with total assets approaching $4 trillion. Once rates rose, sale conditions worsened and investor payouts have been delayed.

Data from Bain Consulting earlier this year show that the industry as a whole holds $3.8 trillion in unsold assets, with an average holding period of seven years—a significant increase from five years in 2010.

McKinsey data shows that measured on a five-year rolling period since 2000, industry-wide DPI fell to a historic low last year.

The importance of DPI is being re-recognized by limited partners (LPs). McKinsey’s survey shows that four years ago only 8% of surveyed fund investors listed it as the most critical performance metric, while by 2025 this proportion has surged to 21%.

Syntegon Case: Retaining Assets While Returning Capital

CVC Capital’s handling of German industrial machinery maker Syntegon is a typical example of structured equity transactions.

Headquartered in the outskirts of Stuttgart, Syntegon mainly produces packaging machinery, with clients including pharmaceutical enterprises like Bayer and food companies such as Alfred Ritter, the parent company of Ritter Sport chocolate. CVC acquired the company from Bosch Group in early 2020 and began exploring exit options by the end of 2025.

According to media reports, CVC had contacted potential buyers, targeting a valuation of over 4 billion euros ($4.7 billion), and was considering listing in Zurich.

In the end, CVC chose another path: In March this year, CVC announced the sale of a 37% stake to Apollo, with the transaction structured in the form of structured equity. Meanwhile, the company also underwent a “dividend recapitalization,” adding new debt and paying out more than 550 million euros to shareholders.

Power Home Remodeling: Combined Use of Preferred Shares and Convertible Bonds

Pennsylvania-based home renovation company Power Home Remodeling completed a transaction in May this year, showcasing another form of structured equity.

According to S&P Global Ratings, the company reached agreements with Bain Capital, Sixth Street, and the structured capital division of Harvest Partners, with a financing plan including $450 million in redeemable preferred shares and $1.2 billion in convertible securities, along with a dividend recapitalization arrangement.

This transaction enabled Harvest Partners’ private equity division, an existing shareholder, to return cash to LPs while retaining its stake in the company.

Co-CEO Asher Raphael noted that the financing provided a total of $360 million in cash bonuses for all employees. “It is the hard work of the employees that created the value of the organization, and we have always believed that they should share in that value,” he said in a written statement.

Apollo Leads, Market Size Rapidly Expanding

Although structured equity transactions are typically reached through private agreements and lack systematic data, market participants generally report that they are expanding rapidly in the US and Europe, and discussions are beginning in Asian markets as well.

At Apollo, such transactions are a core component of its hybrid capital business. Reportedly, Apollo’s hybrid business investments to date this year are three times the scale of the same period last year.

Alex Temel, Co-Chair of Private Equity at Paul Hastings' Boston office, says he has seen a significant increase in deal volume and number of participating institutions in hybrid tools, calling it “a very important part of the industry's future.”

Barnaby Lyons, Global Head of Special Situations at Bain Capital, describes such transactions as a natural extension of the capital return path for LPs. “The essence of private equity is to invest LP capital and gradually return it over time,” he said. “Historically, this was mainly achieved through company sales; now, the options available are much richer.”

Criticism: Capital Cycling and Fee Extraction

Not everyone views this trend positively.

The Institutional Limited Partners Association (ILPA) found in a survey at the end of last year that 60% of respondents prioritize long-term returns over short-term liquidity.

Neal Prunier, managing director of industry affairs at ILPA, said LPs generally prefer to hold quality assets rather than trade long-term returns for early distributions. “Sometimes the preferred share approach is appropriate, sometimes it frustrates LPs,” he said. “So it’s crucial to communicate intentions with investors in advance.”

Ludovic Phalippou, a professor of financial economics and industry critic at Oxford Saïd Business School, is even more direct in his doubts. He believes that structured equity is economically no different from a dividend recapitalization—both are ways to finance shareholder distributions with “expensive capital.”

“What worries me most is the cyclicality of capital flows,” he said. “Ultimately, the same group of pension funds, endowments, and sovereign wealth funds stand on both sides of these transactions. On a single deal basis, this may be quite rational; but at a systemic level, it’s just capital circulating among different tools held by the same investors, generating additional fees and spreads for intermediaries.”

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