Portfolio Finance and the New Liquidity Frontier in Private Markets

Private markets are entering a new phase where liquidity solutions are becoming as central as traditional capital commitments. Carlyle’s AlpInvest unit is preparing to raise more than $4 billion for a new portfolio finance fund, underscoring how secondaries and financing strategies are moving to the center of private market investing and evolving into core businesses, rather than just niche opportunities.

According to Bloomberg, commitments could ultimately reach closer to $5 billion, with co-investment opportunities expected alongside the vehicle. The initiative follows AlpInvest’s $20 billion close of its latest secondaries fund earlier this year and highlights how firms increasingly rely on secondaries and related financing strategies as core growth engines. Carlyle reports that these businesses now account for roughly 21% of its total AUM.

The move comes against a backdrop of record secondaries activity. According to the Wall Street Journal, deal volumes reached $162 billion in 2024, up 45% year-on-year. What was once a niche corner of the private equity ecosystem has become a critical pressure valve for investors facing asset convertibility constraints.

A Market Confronting a Liquidity Bottleneck

Private equity’s growth over the past decade has been built on long-dated, illiquid structures. However, in the current environment, where IPO markets remain subdued, M&A volumes are down, and distributions have slowed, limited partners are struggling to generate cash returns. Many LPs face the so-called “denominator effect,” where private market valuations lag public market declines, leaving portfolios overallocated to illiquid assets.

For general partners, slower deployment in flagship buyout funds has made fundraising more difficult, compressing timelines and pressuring internal rates of return. In this environment, exit pathway solutions, secondaries, NAV lending, and portfolio finance are no longer optional. They are becoming essential mechanisms for recycling capital, managing commitments, and supporting portfolio companies.

Beyond Secondaries: The Rise of Portfolio Finance

Traditional secondaries transactions, buying LP interests at a discount, remain the backbone of the market, while portfolio finance has expanded the toolkit:

• NAV Lending: Loans secured against the net asset value of fund portfolios, often used to accelerate distributions or support follow-on investments.
• Preferred Equity: Capital injections structured as equity with downside protection and capped upside, offering GPs flexibility without requiring a sale.
• Collateralized Fund Obligations (CFOs): Securitizations backed by private equity portfolios. AlpInvest’s $1.25 billion CFO, the largest publicly rated instrument of its kind, illustrates the growing institutionalization of this format.
• Hybrid Facilities: Blending characteristics of credit and equity, tailored to the specific cash-flow needs of LPs and GPs.

Secondary platforms are evolving into full-service liquidity providers by expanding into these structures. This positions them not just as buyers of assets, but as financing partners able to deliver tailored solutions across market cycles.

Why Managers Are Leaning In

The strategic rationale for managers is clear: These strategies are capital-intensive but fee-generative, offering recurring revenues and attractive risk-adjusted returns. For diversified firms like Carlyle, they provide a counterweight to slower deployment in buyouts and growth equity.

By solving capital accessibility barriers, portfolio finance provides the chance to deepen relationships with both LPs and GPs, secure co-investment opportunities, strengthen fundraising for future flagship vehicles, and expand their influence across the private capital landscape. In many ways, portfolio finance is becoming an ecosystem play, and firms that can provide multiple monetization solutions stand to capture a greater share of client capital and wallet.

The Appeal for Allocators

For institutional investors, portfolio finance vehicles offer exposure to a segment of the market with distinct risk-return characteristics. Yields are often higher than traditional credit, with downside protection through collateralization and seniority. Returns are less dependent on exit markets than conventional buyouts, offering diversification benefits.

Allocators also see value in accessing the spread between illiquidity discounts in secondaries and the financing cost of portfolio loans. In an environment where private equity exit timelines have extended beyond traditional 5-7 year hold periods, often reaching 8-10 years or more. These vehicles can provide an attractive complement to traditional fund commitments.

However, the complexity of structures requires careful due diligence. NAV loans, for example, may carry recourse risk if collateral values decline. Preferred equity structures may alter alignment between LPs and GPs. CFOs, while offering scale and rated tranches, can introduce leverage and securitization risk unfamiliar to some investors.

Risks and Structural Considerations

The rapid growth of portfolio finance raises important questions for both managers and allocators:

• Valuation Risk: Financing against NAV requires robust, transparent valuation practices. In downturns, write-downs can strain collateral coverage and create mismatches.
• Liquidity Mismatch: While portfolio finance provides liquidity to LPs and GPs, the underlying assets remain illiquid. Stress scenarios may reveal cracks if redemptions or repayment obligations surge.
• Conflicts of Interest: Managers offering both secondaries and financing must carefully manage potential conflicts, such as setting terms that advantage one pool of capital over another.
• Regulatory Scrutiny: As structures like CFOs gain prominence, regulators are likely to examine disclosure practices, leverage, and systemic implications.

If allocators view portfolio finance as leverage and structuring that redistributes liquidity across the system, they will recognize that understanding who ultimately bears the risk becomes the critical factor.

The Bigger Picture: From Niche to Core Strategy

The scale of Carlyle’s initiative, alongside similar efforts from peers, reflects how portfolio finance is becoming embedded as a fundamental business pillar rather than a peripheral strategy. Initially designed as opportunistic solutions for LPs under stress in the aftermath of the global financial crisis, these approaches have now matured into a structural component of the private markets toolkit.

Much as secondaries developed from discounted sales into a $160 billion market, portfolio finance appears to be the next stage of evolution. The boundaries between secondaries, structured credit, and private lending are narrowing, and firms with the expertise to operate across this spectrum are increasingly positioned at the center of capital formation and liquidity in private markets.

Is It Structural or Cyclical?

A central question is whether the current surge in portfolio finance is a structural or cyclical response to today’s asset convertibility bottleneck. If IPO activity rebounds and M&A volumes normalize demand for financing may moderate. Still, demographic shifts, capital-intensive private strategies, and the sheer growth of private markets suggest that financial flexibility needs will remain permanent.

After the global financial crisis, secondaries became institutionalized, and portfolio finance appears poised to follow a similar trajectory, albeit with greater complexity and potential for systemic interlinkages.

The Bottom Line

Carlyle’s $4 billion portfolio finance fund is more than a fundraising milestone and reflects a broader transition in private markets. Liquidity, once seen as a constraint to endure, is now a commodity to be structured, priced, and traded. For managers, this is an opportunity to diversify revenues and deepen client relationships, and for investors, it is a new source of returns and a new layer of complexity.

The measure of success will lie not in the volume of financing raised, but in the discipline with which it is deployed. Structures that balance innovation with transparency and alignment will enhance private markets’ resilience, while those chasing volume without adequate underwriting may create fragility.

As secondary and portfolio finance converge, the industry is entering a new chapter in which liquidity management is as central to private equity as deal selection. Adapting to this reality will be critical for allocators and managers alike in determining who thrives in the next phase of the evolution of private markets.

To learn how these market trends might affect your investment strategy, consult with an experienced Arootah Advisor. Schedule your discovery call today to get started!