Private funds market in 2025: fundraising, liquidity and other trends

Democratization of private funds

As in the year prior, 2024 was marked by a challenging fundraising environment, including because many institutional investors had met their allocation limits for private funds. Despite a more promising fundraising outlook for 2025, we expect many sponsors will continue to focus on increasing their product offerings and broadening their capital pool.

Evergreen funds

Unlike the drawdown construct that has historically been a defining feature of the private funds industry, evergreen funds are not subject to a defined fundraising period and allow investors an ability (albeit limited) to redeem from the fund at will. Evergreen funds are more prevalent in the context of investments in income-producing assets (i.e., real estate and debt) given the need to meet rolling redemption requests, although there has been an uptick in evergreen fund launches in both the infrastructure and private credit spaces. More recently, as liquidity features (such as secondaries and co-investments) become more common, evergreen funds have launched in strategies that are much less liquid in nature (i.e., private equity and venture)¹.

For GPs, the “perpetual capital” afforded by an evergreen fund lends a break from continued fundraising efforts without a mandated deadline for returning capital to investors (subject to redemption rights). Further, the cadence of managing the investor side of evergreen funds is often cheaper than the starts and stops of marketing closed-end funds, leading to higher operating margins for the sponsor.

While evergreen funds typically target the same pool of institutional capital as “drawdown” funds, they are also well-suited for the rapidly growing private wealth market, given their enhanced liquidity profile.

Retail investors 

Many fund sponsors, particularly the larger players in the market, are more actively targeting “retail” investors (i.e., high-net-worth individuals and family offices) who are similarly looking for ways to participate in private funds, which can offer more attractive returns relative to the public markets and provide greater diversification. According to Bain & Company², retail investors hold approximately 50% of global assets under management but represent less than 20% of assets under management held by private funds.

A separate group, composed of various intermediaries (such as banks, financial advisers and digital platforms) that sit between fund sponsors and retail investors also has skin in the game, as they see the potential for a substantial new stream of fee income linked to an expansion of retail investors’ participation in the private markets.

The growing interest in retail investing is benefiting from a number of recent advances in regulation, innovation and technology that are lowering the hurdles that have generally blocked broader participation. Certain regulators are showing signs of a willingness to expand access to the private markets. For example, in the U.S., the Securities and Exchange Commission recently amended its definition of “accredited investor” to include individuals with sufficient investment “knowledge and expertise” (e.g., an individual with professional certifications, designations or credentials) who may not otherwise satisfy the existing wealth-based criteria. In addition, sponsors are using innovative fund structures that comply with existing applicable regulations but are available to more of the retail market. At the same time, improvements in technology—largely being driven by fintech firms, including user-friendly digital platforms—are making it easier and cheaper to facilitate retail participation.

Continuation vehicles

While traditional investment exit routes may begin to recover in 2025, we expect to continue seeing more creative and longer-term structures to increase exposure to, in many cases well-performing, portfolio companies. GP-led secondary transactions or continuation funds, which are liquidation transactions by a sponsor that enable the sponsor to continue to manage a portfolio investment or group of portfolio investments, are likely to remain a popular construct. Continuation funds are viewed as a means of extracting additional value from well-performing investments or a means of giving the sponsor more time to develop an asset with an influx of new capital.

In connection with the formation of a continuation fund, the sponsor transfers one or more portfolio companies from its existing fund to a new special purpose vehicle, and the existing fund investors are given the option to reinvest the proceeds from—or roll their interest in the relevant portfolio companies into—the continuation fund or to otherwise receive a cash distribution in respect of their interest in the continuation fund (and such cash component is funded by new investors in the continuation fund). Often there is a new commitment associated with rolling interests to be considered. Sponsors may look to bake preapproval of a GP-led secondary into their fund documents and, on execution of the continuation vehicle, will look to reset fees and carry paid by, at a minimum, new investors in the vehicle. Investors, for their part, are hesitant to preapprove any such transactions and will look for both an advance Limited Partner Advisory Committees consent requirement as well as the provision of a fairness or valuation opinion relative to the pricing on the transaction.

NAV facilities

Although exit activity is anticipated to improve in 2025, we expect net asset value-based credit facilities (NAV facilities) to remain a longer-term fixture in the private funds space as a useful liquidity solution. Unlike subscription line facilities, which are secured by investors’ unfunded commitments and intended to be used as a cash management tool to smooth out capital calls, NAV facilities are secured by the value of a fund’s underlying assets and can be used for a variety of purposes, including to pursue growth opportunities and follow-on investments, support distressed portfolio companies and facilitate early distributions to investors.

Despite their rapidly rising popularity, NAV facilities continue to be a hot-button issue for many fund investors. Sponsors willing to take the time to communicate with investors regarding (1) their intentions for using NAV facilities, (2) why they may be a better solution than other liquidity options, and (3) what the proceeds will be used for are having greater success getting investors comfortable with the enhanced borrowing flexibility. On the other hand, investors often expect to see parameters in the constating documents around when the NAV facility can be used (e.g., after the fund has deployed substantially all its unfunded commitments), how much can be borrowed under the NAV facility (e.g., as a percentage of aggregate NAV) and for what purpose the borrowed amounts can be utilized.

In particular, the question of whether sponsors should be permitted to use NAV facilities in order to make early distributions to investors (and/or to pay themselves carried interest) is a controversial topic in fund negotiations, as investors seek to prohibit this practice due to concerns around the cost associated with such early distributions (i.e., significant interest expenses that will ultimately eat into their returns), unnecessary risk being put on the fund’s portfolio and the possibility of sponsors seeking to use the flexibility to boost their performance metrics.