The New Liquidity Question: When Private Capital Must Prove Its Value

Private capital is entering a more demanding phase in which portfolio valuations, investor liquidity and transaction governance can no longer be considered separately. New guidance from the Institutional Limited Partners Association, alongside Blackstone’s latest results, highlights a structural challenge: creating value is only part of the investment proposition. Investors increasingly need credible mechanisms to realise it.

Private capital has expanded substantially over the past decade, supported by institutional allocations, the growth of alternative investment strategies and the increasing availability of capital beyond traditional public markets.

Yet the expansion of private asset ownership has created a more complex question.

How should investors assess the value of assets that remain privately held for longer, particularly when opportunities to realise that value become less predictable?

The issue is not necessarily deteriorating underlying business performance. A company may continue to grow revenues, strengthen margins and improve its competitive position while its shareholders face limited opportunities to convert those improvements into cash.

This distinction has become increasingly important for private equity managers, institutional investors and family offices.

Two developments during the past 72 hours illustrate why.

On 20 October, the Institutional Limited Partners Association (ILPA) released updated guidance on continuation vehicles, highlighting the importance of independent price validation, governance, conflicts management and informed investor decisions. ILPA estimates that continuation vehicles now represent approximately 14% of sponsor-backed exits globally. ILPA

Two days later, Blackstone reported third-quarter results showing continued investor demand alongside a more complicated environment for investment realisations.

The firm attracted US$63.3 billion of inflows during the quarter, taking assets under management to approximately US$1.37 trillion. It also reported US$33.1 billion of investment realisations, although net realisation-related earnings declined 34% year-on-year to approximately US$332 million. These are different financial measures: the latter reflects Blackstone’s earnings from realised investments, not total cash returned by its funds. Blackstone

Together, these developments point towards a broader structural shift.

In private capital, the ability to demonstrate value increasingly needs to be matched by the ability to realise it on credible terms.

1. Strong Asset Values Do Not Automatically Produce Liquidity

The distinction between investment performance and investment liquidity is fundamental.

Private market valuations reflect assessments of what an asset is worth, typically based on operating performance, market comparables, discounted cash flows and other valuation methodologies.

Liquidity reflects something different: the ability to convert that ownership position into cash through an actual transaction.

The two are related, but they are not interchangeable.

A business valued at a substantial multiple of EBITDA may remain commercially attractive even when prospective buyers are unwilling to pay that multiple.

Differences in financing costs, growth expectations, transaction risk and required returns can create a gap between the seller’s valuation and the price a buyer is prepared to offer.

This has become a persistent challenge across private equity.

According to Bain & Company’s Global Private Equity Report 2026, global buyout-backed exit value increased 47% to approximately US$717 billion in 2025.

Nevertheless, distributions to limited partners remained below 15% of net asset value for a fourth consecutive year.

Bain also estimated that private equity firms were holding approximately 32,000 unsold portfolio companies, representing US$3.8 trillion of value.

Average holding periods at exit had extended to around seven years, compared with approximately five to six years during much of the preceding decade. PR Newswire

These figures reveal a market in which underlying investment activity continues, but the circulation of capital remains constrained.

For investors, this changes the assessment of performance.

A strong reported portfolio valuation may provide evidence of potential investment returns.

It does not, by itself, demonstrate when those returns will be realised.

2. Continuation Vehicles Are Changing the Meaning of an Exit

One response to longer ownership periods has been the growing use of continuation vehicles.

Traditionally, a private equity fund would acquire a business, develop it over several years and eventually sell its interest through a strategic transaction, another financial sponsor or an initial public offering.

The resulting proceeds would then be distributed to investors according to the fund’s contractual arrangements.

Continuation vehicles introduce an alternative.

Instead of selling an asset entirely to an unrelated owner, a fund manager can transfer it into a newly established investment vehicle, frequently managed by the same sponsor.

Existing investors may be offered the opportunity to receive cash, reinvest their proceeds into the new vehicle or select a combination of both.

New investors provide capital to finance the transaction and potentially support further development.

This can be commercially attractive.

A company with substantial remaining growth potential may not benefit from being sold simply because its original investment fund is approaching the end of its intended holding period.

A continuation structure can provide a longer investment horizon while allowing some shareholders to obtain liquidity.

However, it also changes the nature of the transaction.

The original manager may effectively participate on both sides: representing the selling fund while continuing to manage the acquiring vehicle.

That creates questions that are less prominent in a conventional third-party disposal.

Is the agreed price independently supportable?

Are existing investors receiving sufficient information?

Is the transaction motivated by the best interests of investors or by the manager’s desire to extend ownership?

How are transaction expenses allocated?

And do investors who elect to remain invested receive appropriate economic terms?

These questions explain why continuation vehicles have become an increasingly important governance issue.

3. The Central Challenge Is Alignment Between Investors and Managers

ILPA’s updated guidance, published on 20 October, places particular emphasis on these governance considerations.

The organisation identifies early investor engagement, independent price validation, transparent disclosure of conflicts and adequate review periods as important safeguards.

It also stresses that continuation vehicles should be deliberate transaction solutions rather than default alternatives to conventional exits.

The guidance is principles-based and does not impose a single transaction model. It is intended to support fairer processes and more informed decisions rather than replace applicable legal or contractual requirements. ILPA

The underlying issue is straightforward.

Different participants in the same transaction may have legitimate but competing objectives.

An investor approaching the end of its allocation horizon may prefer immediate liquidity.

Another investor may be willing to maintain exposure to an attractive business for several additional years.

The fund manager may believe substantial value remains to be created.

New investors may seek a different return profile, governance structure or entry valuation.

These interests can coexist, but alignment cannot be assumed.

A credible process must demonstrate that each investor has sufficient information and a meaningful opportunity to evaluate the alternatives.

This is particularly important for institutional investors and family offices, whose own liquidity requirements may not correspond to the investment manager’s preferred timetable.

A transaction does not create genuine liquidity merely because ownership changes hands. Its credibility depends on price discovery, governance and the choices available to investors.

4. Price Discovery Is Becoming a Governance Discipline

One of the most important questions in a continuation transaction concerns valuation.

In a conventional competitive sale, the price generally emerges from negotiations between independent parties.

A continuation vehicle can involve a more complicated process because the same investment manager maintains an economic interest in the asset after the transaction.

This creates potential conflicts around pricing and the allocation of future value.

A valuation that is too high may disadvantage investors committing new capital.

A valuation that is too low may disadvantage existing investors choosing to sell.

The quality of the process therefore matters.

Independent valuation work can provide an important reference point, but an appraisal alone does not necessarily establish what an arm’s-length buyer would pay.

A robust transaction process may require competitive market testing, external financial advice, appropriate independent review and clear disclosure of the assumptions supporting the proposed price.

The distinction between valuation and market evidence becomes particularly important when assets are held for extended periods.

Financial forecasts may show increasing value even when the market’s required return has changed.

For example, higher financing costs can reduce what an acquirer can afford to pay without affecting the operating company’s underlying EBITDA.

Similarly, the valuation of a business supported by aggressive growth assumptions may be difficult to realise if prospective buyers apply more conservative forecasts.

The objective is not to eliminate valuation uncertainty.

It is to establish a defensible framework in which investors can understand the assumptions, risks and economic consequences of the proposed transaction.

The relevance extends beyond continuation vehicles.

The same principles apply to shareholder reorganisations, minority investments, management buyouts and other transactions involving parties with different economic interests.

5. Financial Engineering Cannot Replace Operational Value Creation

Continuation structures can improve liquidity management, but they cannot resolve weaknesses in the underlying business.

This distinction is essential.

A longer investment horizon creates value only when additional time allows management to execute opportunities that would otherwise remain unrealised.

Those opportunities may include geographic expansion, acquisitions, operational improvements, product development or changes to the company’s financing structure.

However, extending ownership without a credible value-creation plan may simply defer the original investment problem.

In March, Bain & Company and StepStone Group published a survey of more than 100 private equity professionals examining investment and liquidity strategies for 2026.

Approximately one-quarter of participating general partners reported having recently launched or completed a continuation vehicle, while around 40% expected to explore one within the following one or two years.

The same research identified valuation disagreements as a major reason transactions failed to close and emphasised the growing importance of operational improvements in generating investment returns. StepStone Group Inc.

These findings reinforce an important principle.

Transaction structuring should support a viable business strategy, not compensate for the absence of one.

A continuation vehicle should therefore be evaluated against a clear operating plan.

What additional value can management generate during the extended ownership period?

Which milestones support that expectation?

How much incremental capital will be required?

What risks could prevent execution?

And what realistic exit opportunities should be available at the end of the new investment horizon?

Without credible answers, the transaction may improve short-term liquidity for some participants while transferring uncertainty to others.

6. What This Means for CEOs, Shareholders and Family Offices

For operating companies, the broader implications are significant.

The growth of continuation vehicles reflects a changing relationship between company ownership, financing requirements and investment horizons.

A business may increasingly move between investment structures without necessarily changing its controlling management team or underlying commercial strategy.

That creates opportunities.

A mature company with a long-term growth programme may benefit from capital providers willing to finance the next stage of development without forcing an immediate strategic sale.

An entrepreneur-led business may attract investors whose ownership horizon better reflects the time required to execute an international expansion plan.

Family shareholders may also explore partial liquidity while retaining an economic interest in future growth.

Yet these opportunities require disciplined structuring.

Management should understand how the proposed transaction affects ownership rights, governance, leverage, incentive arrangements and access to future capital.

For family offices acting as investors, the relevant assessment extends beyond the headline valuation.

Liquidity terms, capital-call obligations, transaction costs, management incentives and expected holding periods all influence the economic attractiveness of an investment.

The distinction between realised and unrealised returns should remain clear.

Distributions to paid-in capital, or DPI, measure cash and qualifying distributions returned relative to invested capital.

Total value to paid-in capital, or TVPI, also incorporates remaining unrealised value.

Both metrics matter, but they answer different questions.

Recognising the need for greater comparability, ILPA has introduced updated performance-reporting standards intended for funds commencing operations from 1 January 2026, with greater consistency around performance calculations and cash-flow information. ILPA

For corporate boards, the lesson is equally relevant.

A credible capital strategy should consider potential liquidity events before they become urgent.

That does not require fixing an exit date at the outset.

It requires maintaining sufficient financial transparency, governance quality and strategic optionality to preserve several financing and ownership alternatives.

A business with reliable reporting, clear shareholder rights, defensible valuations and a credible execution plan is generally better positioned to attract new capital or negotiate an ownership transition.

These characteristics become particularly valuable when transaction markets are selective.

SMAM Perspective

The latest developments in private capital highlight a distinction that is becoming increasingly important for companies and investors.

Value creation, valuation and liquidity are three separate dimensions of the investment proposition.

A company can create substantial operational value without immediately achieving a higher transaction valuation.

It can also support a compelling valuation while offering shareholders limited near-term liquidity.

The challenge is to develop an investment architecture capable of reconciling these dimensions over time.

Continuation vehicles demonstrate that ownership structures are evolving to accommodate longer investment horizons and different investor objectives.

But more sophisticated structures also require greater discipline.

Transparent governance, credible price discovery, appropriate incentives and a clearly articulated value-creation strategy must remain central.

For CEOs, founders, shareholders and family offices, the implication extends beyond private equity funds.

A strong business should not be assessed solely on what it may eventually be worth.

Its strategic and financial architecture should also support the ability to finance its development, accommodate changing shareholder priorities and ultimately convert value into realised economic outcomes.

The most durable investment structures are those in which value creation and the capacity to realise value are designed together.