- Global buyout firms are sitting on approximately $3.8 trillion of unsold assets — with average holding periods now at seven years, up from five in 2010 — and distributions to paid-in capital (DPI) hitting record lows per McKinsey, driving the industry to embrace structured equity deals: hybrid instruments blending stock and debt features, typically preferred stock with high fixed dividends (mid-teens returns) that rank ahead of common equity in repayment priority, issued by portfolio companies to private capital giants like Apollo and Bain Capital.
- The mechanics are purpose-built to solve PE’s specific problem: structured equity allows a firm to extract cash from a portfolio company for limited partners (boosting DPI) without formally selling the company, without adding traditional debt (which many overleveraged companies cannot absorb), and while retaining upside if the company continues to grow — CVC Capital Partners used exactly this structure with German packaging machinery maker Syntegon, selling a 37% structured equity stake to Apollo while also executing a €550M dividend recapitalization.
- Apollo’s hybrid capital practice — which provides structured equity and debt to business owners wanting capital without relinquishing control — has grown dramatically: investments in H1 2026 are running three times the pace of H1 2025, with the firm having raised $6.5 billion for a dedicated hybrid strategy earlier this year, reflecting how thoroughly the product has moved from niche to mainstream across the private markets ecosystem.
- The core critique, articulated by Oxford’s Ludovic Phalippou, is circular: “The same pension funds, endowments and sovereign wealth funds sit on both sides of these transactions” — as LPs in the PE fund receiving distributions, and as LPs in the Apollo/Bain credit funds providing the structured equity capital — meaning “capital [is] being recycled between vehicles owned by the same investors while generating additional fees and spreads for intermediaries,” with 60% of LP respondents in a recent ILPA survey saying they prioritize long-term returns over near-term liquidity.
What Happened?
Private equity firms have added structured equity to their toolkit of financial engineering solutions for the industry’s central problem: they cannot sell companies at the prices they want, yet investors are demanding cash returns. The industry has already deployed dividend recapitalizations (raising new debt to fund payouts), NAV loans (borrowing against portfolio company baskets), and continuation funds (moving assets into new vehicles). Structured equity — typically preferred stock with no maturity date, high fixed dividends, and governance rights — is the latest addition. Power Home Remodeling’s deal with Bain Capital, Sixth Street, and Harvest Partners illustrates the template: $450 million in redeemable preferred equity and $1.2 billion in convertible securities, allowing existing backer Harvest’s PE arm to return cash to its LPs while retaining ownership of the company. Apollo’s Matt Nord, head of the hybrid business, framed the demand driver: “The need for hybrid reflects the cost of financing, the difficulty taking companies public and, in some cases, varying opinions on value.”
Why It Matters?
The proliferation of structured equity is a symptom of a structural problem: private equity’s business model was built on five-to-seven year holding periods with predictable exit markets (IPOs, strategic sales, sponsor-to-sponsor deals), and the simultaneous closure of all three exit channels has created an industry-wide liquidity crisis that financial engineering is papering over rather than resolving. The $3.8 trillion backlog of unsold assets represents enormous mark-to-market risk — these assets are carried at valuations set by PE firms’ own quarterly marks, and a forced exit environment (LP redemption pressure, credit market tightening) could reveal that market-clearing prices are substantially below current marks. Structured equity’s mid-teens pricing reflects the true cost of liquidity for these assets — a cost that is ultimately borne by the pension funds and endowments who are simultaneously funding the liquidity solutions and receiving the distributions they generate.
What’s Next?
The durability of structured equity as a solution depends on whether exit markets reopen — through an IPO revival, improved M&A conditions, or lower interest rates that ease the debt burden on potential buyers — or whether the holding period problem continues to compound. If DPI continues at record lows and LP patience continues to erode (the share of investors calling DPI the most critical performance metric jumped from 8% to 21% in four years), the pressure on PE firms to generate real exits — rather than engineered distributions — will intensify. The ILPA’s warning that 60% of LPs prioritize long-term returns over near-term liquidity suggests a growing gap between what LPs say they want in surveys and what PE firms are delivering in practice.
Source: Bloomberg
