Inside LPs' growing liquidity toolkit

The LP-led secondary's market is long established, with $58 billion of volume transacted in the first half of 2026 alone, according to PJT partners. Not every LP, however, wants to part ways with lines within their underlying portfolios. Structured secondaries like collateralized fund obligations, nav financing and preferred equity are on the up PJT partners as said, with investors tapping these tools to accelerate liquidity while retaining future upside. PJT's Adrian Milan told me the partial liquidity market comprised around 10% of LP-led secondaries volume last year, which reached $117 billion. I'm Madeleine Farman, Editor of PEI Secondaries and Vista, and welcome to the second thoughts podcast. In this episode, Adrian, a partner at PJT Park Hills Private Capital Solutions Group, and John Ketnik, a member of Stepstone's private equity team, focusing on secondaries, walked me through the trends and dynamics shaping the LP-led structured secondaries market, where these options do or don't work for investors portfolios, and what the growth of this corner of the market means for the growth of broader secondaries market volume moving forward. Adrian began by walking us through what tools are available to investors, how they differ from a traditional LP portfolio sale, where interests are transferred through a typical three-month-on-average process, and why, broadly, they're being used by investors. In the partial liquidity market, you have really three main areas of partial liquidity. There is the nav loan market, which is typically driven by more traditional banks. You have the preferred equity market, which is driven mostly by specialist investors that have pooled capital around that specific solution, and then you have the CFO market, which is selling rated debt against a series of interests in the liquidity format that we'll talk about with usually the investor retaining the equity or retaining some portion of the equity, and then debt being sold to investors that are looking for rated paper. That's what really sits outside of a traditional sale, right? That's Stipstone's John Ketnik. Even if, I mean, theory, like a strip of a portfolio is partial liquidity, but you're giving up the return on that equity if you're selling a strip, right? Yes. I think that if we then zoom out, and I think one of the focus areas that we wanted to spend time on, is that the CFO, PREF, and nav loan parts of the market all are premised on just John. As you said, the investor retaining a forward view that the asset upside is greater than maybe what they could get through an alternative, i.e. a traditional sale, and this part of the market is more interesting for them to play for that upside potential in a given portfolio. Let's move on and quantifying how much of the sort of secondary's activity that we see in the market is based upon the partial liquidity market. Adrian, let's start with you here. I don't know if you have any facts or figures as to how much activity is taken up by these types of transactions in the market or observations more broadly. Maybe just to zoom out, total market last year, I think there's general agreement. Our numbers would point to kind of 225 billion dollars of total market activity. About half of that was in the GP-led space, and half of that was in the more traditional LP-led space. If we focus in on the 50 odd percent that was in the LP part of the market, what portion of that was in the partial part of the market. We're talking more or less around 10 percent if you aggregate all three of those activities or less. I think that because this market is often executed in more of a bilateral agreement between kind of counterparties, there's less observation around how much actual activity goes through this part of the market. Yeah. I haven't seen data aggregated particularly well because it is such a nascent part of the market. You rewind five, ten years ago, it's probably 1 percent of the market to say it's 10 percent today that is still a small segment of the overall kind of market, but it's grown very rapidly just as kind of adoption has been -- and I think as regulation has been kind of sorted out in more recent years. John, if we stay with you, what types of LPs are using this? From my perspective, I would assume it's large sophisticated LPs. Is that the correct assumption? Yeah. I think that's right. I mean, our general view is you want to have at least a kind of half a billion or so dollar transaction for it to justify the kind of fixed-cost legal costs, upfront costs that are associated with these types of transactions. So you need at least a certain scale for it to make sense, but as you get in and around the size of half a billion and a billion dollars or so for LPs, that tends to be a good size where you can curate LPs, have these vast portfolios, right? And oftentimes, what is going to price at par may not be the perfect fund or basket of funds for a CFO. What price is at 80 cents, an LPs may not want to sell, but it actually might be a great asset for a CFO. And so, you know, as you kind of get to more of these larger scale sophisticated, oftentimes insurance companies, pension funds, that sovereigns are kind of at the scale you might think. You get to really a level where the oftentimes have assets you can kind of pick and choose. You know, it's at that scale that makes a lot more sense from our perspective for these LPs to be thinking about this just as a tool like any other that they can use to kind of create value and maximize value for the institution. And we've kind of grouped these all together as kind of one solution set. They are very different in where they should be applied and how relevant they are to a particular LP is going to be driven by a few factors. One, I think, has to do with cost of capital. If you look at the nav loan market and the CFO market, those are relatively similar costs of capital and are much lower depending on the portfolio than the preferred equity market. And the preferred equity market, as, you know, I think there's been plenty of conversation is inside of where the traditional LP market is. So if we take some break points, if we say that the LP market is at a 15% cost of capital plus or minus, you know, the pref market is at maybe a 10% cost of capital or low double digits to maybe high single digits. And then the nav loan and CFO market all in depending on LTV is going to be inside of that. So I think that as LPs think about liquidity and which portfolio makes sense, they're going to have to overlay the cost of capital against what they think that Ford return is. And so if we stay with nav and CFO, the nav loan market is typically constrained because it's much shorter duration, and it is much more meaning five ish maybe six years at maximum. And it is also much more stingy about the assets that are allowed to be included in the collateral package. So what we've seen more broadly is that more and more LP attention is being focused on the CFO market that has more breath to it and a little bit more of an ability to structure for a longer period with more flexibility in, you know, the experience and potentially the type of deal that can be executed upon and also the scale. Someone you've participated in this part of the market, how does Stipstone think through these types of transactions? We've done four transactions, two is a GP, really two, you know, kind of as a GP. In one case, even had clients want to seed a vehicle as a GP. And then two more is just regular way LP is saying, hey, I could sell this portfolio or I could do a nav loan or a perfect equity deal, but actually the best solution is really more of a CFO solution. So the way we've kind of gone about it at least in terms of just curating what goes into that portfolio. The optimal portfolio just kind of maybe taking a step back looks different for a nav financing versus a CFO versus just an outright sale and it does come back to your go forward return expectations. but I also would just argue, really what you're trying to accomplish, right? I think that's a lot of what Stepstone was founded on is just being a solutions provider. Our role is to augment Adrian and his team, right, to come alongside of them, but they're gonna be the experts in navigating, getting something rated, getting navigating the whole process with the agencies selling debt, but it's our role to figure out what goes into that in hand and hand, and what I would say is it comes back to, like what does the portfolio look like? And some of the key things that I think we've been focused on is diversification, right? You want a basket of assets that are well diversified. You want near-term liquidity, you want cash flowing assets, really kind of near-term cash flow is a critical component, almost like a, think about it as a yield. It may not be yielding assets, but if you think about mature secondary funds that get liquidity every week, you know, some form of liquidity kind of hits a mature secondary fund, probably every week is they're diversified across thousands of companies. You know, that's a good potential candidate for a CFO, but you need a basket of kind of duration and risk, and so ultimately you come down to a mix of assets that has that liquidity coming, that yield-like component has, you know, I would argue long-term capital appreciation upside has good diversification geographically by strategy oftentimes, by industry sector, but if you can kind of curate all of that, and you just look at, okay, a CFO versus a NAV financing, you're gonna likely end up with, you know, a lower cost of capital for a CFO transaction. You're gonna end up with, to Adrian's point, for a duration you're a term perspective and more attractive mix debt structure, you're also going to end up with just the ability to probably have, and I would argue almost twice as high of a kind of LTV ratio. And so you actually as an LP, able to pull out a lot more of your capital and reinvest it. And that's the key is for these LPs, if you believe in the upside, but you're faced with the problem that every LP is faced with, right? Last four years of distributions have been very slow, right? LPs are having to kind of take that a bit more into their own hands to create that liquidity for themselves. This allows them to create that liquidity, retain the equity upside, but kind of get back to investing and make sure that they're deploying capital at the same time. And, you know, if all goes to plan, right? That's a win-win, provided the equity actually performs in the CFO structure, which we have no, no reason to think it won't, but, you know, it does take the right portfolio, the right mix of assets for one of these to really work. So if I summarize if we just think about PrEP, Nav, and CFOs, and the sort of theme of partial liquidity solutions, right? It's kind of in the name there that you're not doing an outright sale and getting rid of your stakes completely, you're looking through these solutions that are available to you for a solve while retaining that upside. Once you've made that decision, you have three separate options that can meet the variety of those needs, and it basically is down to the limited partner on where best or what tool it makes the most sense to meet those objectives. Does that sound about right? Is that a correct summarization? - There isn't a decision tree that says for this portfolio, the best solution is this. It really goes to, there's gonna be trade-offs with each, and I think that that's why oftentimes a lot of the clients that we're bringing to market with maybe a traditional LP portfolio sale also want to run a dual track process for one of these partial liquidity solutions that then when they see pricing, they can say, I think that that's the right path, clean break, traditional sale. Or you know what? I think there's a little bit more upside than I'm being paid for by the market. This is the solution that fits best against that portfolio, and there's all sorts of reasons which we would need probably 20 podcasts to go through that get into the minutia of why some corner cases might drive towards one deal versus another. There's tax, there's covenants, there's jurisdictions. There's a lot of pieces that come into the puzzle, but in the base form of just what direction of travel you wanna go, it's gonna come down to, what are you trying to solve for? And then you kind of work backwards. - I've been hearing a lot more about these partial liquidity options over the past 18 months. There's certainly not new. Timisick has a very long track record and history of doing CFOs, for example. But I wanted to ask you both why now? What's driving the conversation and the use of structures like Nav, Pref and CFOs by institutional investors as we sit here right now in 2026? - 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. 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. And then it's really in the last, as you said, 12 to 18 months that you've seen a real spike in activity. By our count, there was a tripling of deals, so call it 70 to 80 in the 2025 period with over $40 billion of issuance. So what drove that, I think, is a couple of things. There's been a lot of adoption from general partners to using these tools for fundraising as they've looked to capture insurance capital and more debt capital to raise larger funds and also to access more pools of capital in the market. And then you have all that we've been talking about today, LPs are getting smarter about the liquidity that they take on and the cost of that liquidity. And so this solution is a lower cost, solution relative to some other that have been more in the traditional course. And I think as more and more LPs are educated, they see the trade-offs, they understand, you know, maybe the long-term kind of asset value recovery that comes with these structures relative to taking a discount on a straight sale, you're starting to see more LPs looking at these as kind of the liquidity option of choice, or at least one of their tools that they are using more and more as they think about liquidity going forward. And so I think that we're evolving into a market where there is gonna be kind of an off-ramp for traditional LP portfolio sale liquidity. There's gonna be the growing continuation vehicle off-ramp for liquidity that's a GP driven and that's gonna continue to grow its share. And then you're gonna have the partial liquidity market continuing to also be a big driver for the cases that don't meet the prior to where LPs are gonna be spending their time. That's how, you know, I would think about kind of growth over the last, call it five or so years. - Yeah, it makes sense, right? Just if you think at a higher level, right? LPs in the last four plus years have faced distributions coming in and around half of what a normalized year should be, right? So closer to 10% than the historical 20% of prior year NAF. That dynamic has forced LPs to start taking a bit more control around creating liquidity for themselves. So just evolution of private equity as an asset class, right? So 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 a 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. And naturally, it shouldn't be too much of a surprise to people, right? And actually, as LPs have to generate that liquidity thinking through what are all my options. I can sell the assets, but if I really like the assets and I believe in the upside, I just need to kind of normalize my exposure and my program. You're going to get LPs who want to find alternatives than just truly giving up the great exposure that they work so hard to build. And so naturally, out of that, I think these types of solutions have come up. And a CFO market has gained a lot of traction in part because it is a capital efficient way for them to retain that upside, kind of minimize the cost of debt. And at the same time, I think there's a time of demand from insurance companies that's come in because they're pretty attractive credit profile. And so it's just kind of lining up different investors across the asset classes that we all operate in and allows equity investors to keep their upside, allows credit investors who want that risk return profile associated with the A, B, tranches of the CFOs to kind of get that exposure that they want. And the NAIC rulings, obviously more recent years, has helped kind of create a bit more of a fuel for that just over the last kind of couple years. But to me, that's kind of a little bit about how it evolved, but also just the rationale why it makes so much sense for LPs now to be thinking about partial liquidity. John, you're working with limited partners to offer the best solve for their needs. But as you say, Stipstone itself has looked at this platform from the GP side, how does the broader business look at and deploy into these partial liquidity options? I mean, as I think about just Stipstone's business, right? There's a few different pillars of our company. A lot of our business has grown from client demand. Actually, our venture into CFOs came from clients saying, "Hey, you've done such a great job for me here. I need partial liquidity. I don't want to give up the equity upside. How can we think about doing something?" And it's at that point we're bringing in groups to partner with like Adrian, for example, NPJT. But as I think about just our capital deployment, I sit more on the equity side. So I would think about these more as, should I consider issuing a CFO because I've got a great portfolio that we're acquiring that really fits the mold of what we think you want for a CFO transaction. Let me take the LTV numbers up from maybe a traditional nav financing, which are more commonly used in everyday secondary transactions. As a credit investor within, you know, Stipstone, we have a very large credit team. We also think they're very attractive, kind of risk return. We are less active in, call it senior, kind of lower returning debt strategies. And so I think, you know, kind of our team is probably more focused on, you know, beetronch, CFOs, for example, pref equity opportunities. But, you know, as we just take a step back, they're great risk return opportunities really across the chain and across every trunch, in my opinion. But, you know, you just have to match kind of the client demand for capital and the product that we're offering and the pool of capital we're investing out of with kind of the risk return opportunity set that we're thinking about. Adrian, I'd be curious to know more broadly across as we sort of define the traditional secondary's market, whether you're seeing more demand from buyers or appetite from buyers to enter into, for example, pref deals or nav deals on the part of limited partners seeking these opportunities or problem solves. Indeed. So, look, I think if we say by 2030, there's going to be at least a doubling of the 225 that we're at right now. And, you know, there've been estimates that, you know, get to a trillion plus by that next four or five-year clip. I think the only way that we get there is if more debt capital, debt being nav, pref, CFO comes into the market. We will not get there only through expansion of equity capital, because I think that with very large funds at the top end of the spectrum and more new players coming in, more LPs participating in the market, there's a finite amount of incremental growth that can come from the equity side of the market that it has to be debt and debt broadly defined that drives the capitalization problem that the secondary market has overall. There is a discussion about does the CFO market or does the pref market cannibalize the traditional LP market? I would argue it expands it. There is some cannibalization, right? We did do a few deals last year that maybe started as traditional deals that went to the pref market. We have done pref deals that have been over a billion dollars in terms of liquidity back. So these are big transactions on the pref side. And similarly, we've done several billion dollar liquidity CFOs that are potentially challenging the traditional channel's growth. I would argue, though, that the deals that are going to that channel would not have otherwise gotten done in the traditional market because they didn't get to a certain level of pricing or they didn't get to a certain level of scale. So I think that these are market expanders, not necessarily market cannibalizers. That's not 100% of the time, but that certainly is the view that I think we take as we think about growth and expansion and outlook. And I think that also, we haven't talked about it, but we're in a fairly low interest rate environment and we have been for some time. As some of the factors that underpin these deals change, the mix is going to change. The LP equity market may be more interesting if interest rates go up and vice versa, interest rates may be received a little bit. So these are all the things that I think we're focused on as we continue to advise clients around options. And I hope you're wrong. That the equity market can't you can't substantiate a trillion dollar market, but I agree with you and I completely agree with you. I think you need the debt capital. You know, as an equity guy, I do hope that the LP demand is there, but it's pretty far from where we are today. I think there's so much opportunity when you just think about the supply of secondary volume versus actually the buy side dry powder. You know, we're sitting at like one year's worth of dry powder across all buyers out there and that effectively means, you know, as a buyer, we have to refresh all of our dry powder, you know, as an industry annually, just to kind of keep up with where we sit today. That's not growing full wrecks from where, you know, we are today. And so as much as I wish, there was enough demand from LPs to get us to that trillion dollar level, I think we do need to see the debt markets really kind of continue to drive a lot of that growth. And I think you will. And one thing we haven't said is you just kind of go back in history. Part of why this has become such an interesting part of the market is just you look at LP books that went through the GFC that buyers bought kind of pre GFC. If you look at a lot of the diversified LP interest transactions going back decades, you'll find really, I think the very few to none of them have lost money, right? And so a lot of them have actually performed very well for credit investors, for even the equity investors through very volatile periods of time. And so with that, it kind of as we now actually as an industry have enough data to say, actually, this is a pretty low risk way of getting access to private market exposure. If you're thinking about this, you know, kind of coming to the senior tranches of a CFO for, you know, insurance company, for example. And so, you know, part of that's why you're seeing this now kind of grow. Again, the LPs need the liquidity, but I think you're also seeing enough data and proof points of this is just a great credit to invest in for an insurance program. We've talked a lot about where this works, partial liquidity options work. I wanted to take the other side and discuss where potentially something like nav, pref or a CFO won't work. Adrian, where would you advise a client against considering one of these options? Well, I guess let's take the extremes because it's always better to start there and then you can go. If you have a portfolio that has a very muted go-forward return, low single digits because it's older and most of its upside has, you know, left the system and most of that liquidity is coming out in the next three years. The traditional sale market is probably a better avenue for you than levering with debt costs that will be in excess of that go-forward return. So that's where it doesn't work, right? It doesn't work in very aged portfolios. John talked a lot about you need to have diversity. This doesn't work with concentrated portfolios. So you need to have a certain level of GP diversity. You need to have a certain level of asset diversity. You also need to be thoughtful about if you think about what works and doesn't work in different parts of the market. There are certainly asset class preferences and underlying portfolio characteristics that will work better in some of these deals and won't. So for instance, you can't sell a highly public portfolio into the secondary market easily, broadly across a bunch of buyers. But that could work quite well in a CFO because that liquidity could generate paydown of debt and the investor could play for that upside of those public look-throughs securities. The contrary, if you have a portfolio that is highly public in a CFO and those publics go down pretty drastically, that could really ramp up the exposure and LTV of that debt stack and leave little asset protection for the lender group. So the extremes, you know, cut both ways depending on your view of the forward. And that's why it's so important, I think, to spend the time to understand kind of what you own before you start getting into, you know, which path you want to take. Yeah. I think I would add, you may have a great portfolio of venture capital exposure, but that's probably another area where if you just think about liquidity and a path to kind of near term liquidity, not that there isn't liquidity and venture actually think it's an interesting space right now where you've got things like SpaceX and Andrew, another great companies that, you know, open AI even today talking about going public right path to liquidity. But just fundamentally, it's a harder space to predict that liquidity. And so that's what you really want in a CFO or partial liquidity transaction is predictability of distributions. Maybe a venture capital portfolio might be more appropriate for a pref deal, right? As opposed to something where you actually need current income or current cash flow coming off. Now, but that's one of the thing is I would just say venture, you know, or even like emerging markets, equity, you know, China, certain areas where it's just it's hard to get liquidity out of those markets right now, hard to predict, not necessarily a great CFO fit in our opinion. And just arguing that there are two sides to every coin, John, as you were making your points of reference, I think one thing to raise, you know, is also transferability of assets. You know, the venture market constrains liquidity sometimes because there's not too many that can access those funds, doing a partial liquidity trade, the LP can retain those relationships and bring that liquidity out of the system without having to transfer it to a very limited universe of buyers that may kind of constrain the set of options. So predictability, 100% agree, but transferability is the other side of that coin. As we say, you may argue you can get that you can get it done on a venture portfolio or emerging markets, you know, equity, private equity portfolio. Our view in what we tell prospective CFO investor clients is just maybe you can't get it done. You know, as I think about the optimal mix that credit investors want to see, it's probably not, you know, all else equals probably not top priority, something to include. Yeah, I think, you know, hopefully, whatever one is taking away is there has to be balance across whatever, and that that's kind of an underpitting for the whole secondary market. I think it's pretty hard to do anything with an extreme, and especially an extreme quickly. We haven't talked about timeline, so maybe that's a last place to spend some time. You know, these deals typically take a bit longer because you have a rating agency component that takes a number of weeks, call it six to eight weeks, raising the debt, depending on how deep you go, is a process that can be parallel tracked, but we typically counsel clients that this is a four to five month process as opposed to a two to three month process in the more traditional LP market. And so I think that you certainly get synergies if you're a second or third time issuer, right? So the first deal may take some set up costs and time and effort that, you know, once you have the blueprint, you can become more programmatic about it, but there is also a time element that should be factored in as you weigh, you know, those options as well. Thanks for tuning in to the latest edition of AEI Secondary's Investors Second Thoughts Podcast. Subscribe to get notified of our regular Secondary's episodes. You can find us wherever you listen to podcasts, or go to www.peidashsecondary'sinvestor.com/podcast. If you have any interesting tips for the podcast or you'd like to get involved, do get in touch by sending me an email, medallion.if@peidotgroup, or get in touch with me on LinkedIn.