2026 Liquidity Trap: How Top Fund Managers Pay Investors In Illiquid Markets

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The Private Equity market in 2026 is facing a massive DPI liquidity trap with a $3.2 trillion backlog of unsold companies. 

Are you a fund manager sitting on unrealized gains but zero cash to distribute to your LPs? In this masterclass, Ryan Miller breaks down the architect’s blueprint for survival, exploring how to manufacture liquidity when the IPO window is shut. We dive deep into NAV facilities, continuation vehicles, strip sales, dividend recaps, and preferred equity to help you move from a "paper tiger" to a capital solution architect.

This isn't just a podcast; it's a strategic briefing on the advanced financial engineering and secondary market maneuvers used by the world’s elite firms. From mastering LPAC negotiations to surviving forensic audits, we’re showing you how to satisfy the liquidity demands of pension funds and family offices without sacrificing your internal growth engine. 

Stop managing paper dreams and start distributing real-world alpha.

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[THE HOST]: Ryan Miller is a recovering CFO turned angel investor in technology and energy.

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Transcript

Ryan Miller   

There's a ghost haunting the halls of every private equity, venture and real estate firm on the planet right now. This isn't down rounds, and it isn't even value compression. It's what I call the DPI liquidity trap. So if that sounds like you right now, you're likely sitting on a successful fund. You have marks at 3x, your internal dashboards are all green, but your LPs are calling you every day, asking for one thing, where's the cash? See, they're over allocated, they're bleeding in their public portfolios, and if you can't give them a distribution, are you really a fund manager, or are you a glorified librarian for a portfolio of paper dreams, otherwise called a paper tiger. 

Ryan Miller  

You see in 2026 the market has zero empathy for your unrealized gains. According to Bain's 2025 global private equity report, the industry is sitting on a record $3.2 trillion backlog of unsold companies. So if you don't manufacture liquidity in the next 12 months, your fund for or your next fund is dead before you even write your PPM, and your reputation is tied to the wire, not to the spreadsheet. So today I'm going to give you a market update from my perspective, and giving you the architects blueprint for survival, is what I like to call it. We're going to explore some of the dark corners of the credit markets now, facilities, continuation, vehicles, strip sales and dividend recaps. I'm going to show you how the titans like Robert Smith in Orlando Bravo are literally printing liquidity when the IPO window is slammed shut. And if you stay with me to the end the final minute of this masterclass, I'm going to provide you with the DPI Liquidity Execution Pack, and it's not a brochure. This is high density technical files that we use, the billion dollar Rolodex of every firm mentioned today, the exact legal scripts for your LPAC and the forensic valuation checklist your CFO needs to survive a 2026 audit. 

Ryan Miller  

So hopefully, by the time we're done, you'll have the keys to unlock liquidity in your fund. Let's get to work, and before we get into that, just a disclaimer. This program is for educational and entertainment purposes only, architecture, not advice. Consult your own professional counsel before moving a single dollar here. 

Ryan Miller  

So let's talk about the first strategy to even consider, which is a synthetic exit called the NAV strategy. So let me give you a hypothetical situation. You're managing a concentrated portfolio, your winner is a say SaaS powerhouse sparked at 10x. But the secondary market is asking you for a 40% haircut to buy you out you can't sell. You'd be fired for leaving that much alpha on the table and meanwhile, your LPs are facing a liquidity crunch. You have a $500 million NAV, but your bank account is empty and your fundraising momentum for the next vehicle is stalling because your DPI is precisely 0x, you are asset rich and cash poor, and the clock is ticking on the fund life. 

Ryan Miller  

So let's, let's open that up. So the logic dictates that if you cannot sell the asset, you must borrow against the certainty of the asset. So you're treating your fund like a high end property. You don't sell your house to pay for a renovation, but sometimes you could take out a HELOC. Well, a NAV facility is similar. It is a fund level HELOC that allows you to pay your LPs today using the value you've created without losing a single share of the upside. So essentially, you're synthesizing an exit by pulling forward future proceeds into the present day. 

Ryan Miller    

So I want to tell you a story about Vista Equity Partners where this shows up. See, Robert Smith is arguably one of the most sophisticated software investors on the entire planet, and in 2023 the entire market was in a tailspin. So rather than forcing an exit of his best companies in fund seven, he secured a one and a half billion dollar NAV loan, and he didn't wait for the IPO window to crack open. He walked into the credit markets, leveraged the massive value of the portfolio and wired the money to his LPs. See, in that scenario, he manufactured a win while his competitors were still waiting for a phone call from the investment bank. And this move didn't just provide liquidity, it secured his reputation as a manager who delivers cash in any climate. So one of the moves you can discuss, along with all the other moves here, is the entry level move on this one is the standard fund level revolver. You call a lender like, say, Crestline, they look at your diversified NAV and give you a 10% LTV loan. It's simple, it's 200 basis points over SOFR, but it's rigid, and it usually requires a diversified pool of at least five to seven assets to satisfy the lender's risk model. So you want to look for that. Now, the pro move here is what sometimes is called the no cash sweep PIK toggle. This is where the engineering really happens. So this one's very important to talk to your attorney about. 

Ryan Miller    

See, most banks want every dollar of profit from your companies to go toward paying back the loan immediately. And the pro move is negotiating a structure where interest accrues, sometimes the PIK or payment in kind. And this means your companies keep their growth capital to keep scaling. Well, the LPS get their distribution check, so you're shifting the burden to the final exit event, preserving the growth engine in the meantime. And so areas you really want to look for on that is one, the LTV you want that typically around 10 to 25% for a buyout and 5 to 15% for venture and typically, where you might discuss terms with some of these providers, SOFR plus 350, to 550, basis points, is probably where you'll come in at. And so the NAV market, it's projected to hit $700 billion by 2030, that's not that far, that is a big market. So you must really try to negotiate how asset value is calculated. 

Ryan Miller  

So if the lender uses a liquidation value instead of a fair market value, your borrowing capacity can drop by 50% so a thing you want to look for is you want to check your LPA for any anti pledge clauses, because if you can't pledge shares of your portfolio companies, you may need to pledge the right to call capital instead. So here's a few areas that you can look at, if this sounds like something that you and your legal and financial team think is a good move. One is 17Capital. So the number 17 and then the word Capital, they're the undisputed category leader for large cap NAV loans. The other ones you can look at is Crestline Investors, they're high execution certainty for middle market GPS and then Hark Capital, H, A, R, K. They specialize in late life fund liquidity, and they tend to produce flexible mandates. 

Ryan Miller    

All right. Now that brings me to the second scenario where you may need to force liquidity. And that's the continuation vehicle. This is sometimes I call it the crown jewel reset. Now let's talk about another hypothetical story that you maybe face. You have a winner, still in hyper growth. It's year nine of your fund, your LPA says you must exit, but selling now would be a fiduciary crime, because the company is about to hit its stride. So your LPs are split. The pension funds need their cash back, but the family offices want to stay in the fund for the next five years, or even a 5x. So you're kind of trapped in this scenario between a legal calendar and a compounding Goliath. So if the asset growth curve is longer than your fund's life, you change the fund, not the asset. So you sell the company from old fund to the new fund, which is a continuation vehicle. 

Ryan Miller    

This can reset the clock and allow sellers to get their DPI and allows the believers to roll their interest into a new five year term. So you keep the management fee, you keep the carry and you keep the asset. And I'll give you an example of where this has shown up. So in Clear Lake Capital, and this deals with their move with Avanti. It's a textbook case. So in 2021 they realized Avanti had much more room to run. They moved it into a CV valued at one and a quarter billion dollars. They returned massive capital to their early investors, which allowed them to go back out and raise a record breaking flagship fund. They didn't exit, they recapitalized their own success and doubled down on a winner they already knew immediately. So the entry level and pro moves here that you want to discuss with your legal team is a single asset secondary. This is the entry level move so you find one buyer to set the price for your company. You offer your LPS a roll or sell option. This is the simplest way to provide an exit for those who need it while maintaining GP control. Now the pro move is the stapled primary and what that is, is this move is for the emerging manager, for example. So you tell the secondary buyer, you can have a piece of this trophy asset, but only if you commit to an equal amount of capital into my new fund, fund three, or whatever it is. So you're using the desire of your past success to bridge the gap to your future fundraising. And so the cool thing about this is, I was shocked to find in my research that 46% of fund managers are now using continuation vehicles. That is awesome, this is a huge industry. See, when you're discounting assets in continuation vehicles or CVs, they typically trade at 0 to 10% discount to NAV. It's much better than the 30% discount in the broader secondary market. 

Ryan Miller    

So somewhere to look is my friend Kim Flynn at XA Investments. Now you must discuss the Evergreen or interval fund transition. So Kim is the undisputed champ and the expert on moving these assets into permanent capital vehicles, so you never have to face a fund life expiration ever again. So if that's kind of stressing you out, and you got great assets, but they still got room to run, and the close ended fund that you're in is starting to end. This might be something worth looking at with your attorney, your providers, and, heck, even XA alongside you. 

Ryan Miller   

So what you're after is a conflict of interest disclosure, since you're both the buyer and the seller, you need a formal conflict waiver from the LPAC or LP Advisory Committee. And so you, what you do here is you hire a third party like Kroll, K, R, O, L, L to verify the price. See, without that you're you're actually kind of vulnerable to self defeating lawsuits. And so you want to ensure your continuation vehicle doesn't turn your sovereign wealth LPS into. Commercial entities for tax purposes don't do that. So the places you can look for the first one I already mentioned is XA Investments. And Kim Flynn is definitely the pro there, but her entire team will be able to help you there. So Kim is the architect of the Evergreen pivot, in my opinion, she's brilliant at it. But there's also other people, Evercore or PJT Park Hill, the top tier advisors for price discovery and LP management, and then even the big law firm, Kirkland & Ellis, that's the gold standard for drafting your continuation vehicle documentation. 

Ryan Miller    

That brings me to my next one, which is the strip sale, or sometimes I like to call it precision liquidity. So let's talk about a hypothetical scenario to see if this sounds somewhat familiar. So you have 10 companies, all are doing well, but none are ready for a full exit. You need to prove to your LPS that your marks are real. So you're feeling the pressure of paper wealth versus real wealth. You need a win to show the market before you launch your next fundraise. So what do you do? Well, an example here is you don't sell the company, you sell a vertical slice, a strip sale and a strip sale is the ultimate de-risking maneuver, in my opinion. So you, for example, so you will sell 10% of every company in your fund a secondary buyer. You monetize a portion of the fund's value across the board, without ceding control of any individual company. 

Ryan Miller  

And I'll give you an example where this kind of played out. So AlpInvest Partners, which is Carlyle's secondary arm. So they have pioneered this liquidity provider model. So by buying strips of portfolios, they allow GPS to show a 0.2x DPI bump mid-cycle. And this is social proof, and it is often the only thing that allows a mid market manager to successfully close a new fund when the IPO window is closed. It proves your valuations are not just spreadsheet magic, that's the key. And so the entry level move to discuss with your team of advisors and professional lawyers is selling a 10% economic interest. So in that scenario, you get the cash, you wire it out to the LPs, and the secondary buyer becomes a passive participant in the fund's future upset. And the pro move to review is the synthetic board observer move. So you sell the economics, but you keep 100% of the voting rights and the board seats. The secondary buyer gets the money, but you keep the power. This ensures you can still drive the exit strategy for the remaining 90%. And so where you want to come in is you want to look for high quality buyout strips, and those typically trade at 90 to 95% of NAV. So that's about the pricing side of things. When you with if this is the area that you dive into, and so the impact here would be a 10% strip sale results in an immediate 0.10x, DPI increase. 

Ryan Miller  

Hey, thanks for listening to Making Billions. If you liked this episode, could you do me a huge favor and go leave a review? This helps us to get the podcast to more ears, to help people raise capital, learn fund management strategies and serve our mission to help fund managers and deal syndicators to gain greater hope and focus as they build their empire. All right, let's get back to the show. 

Ryan Miller   

And so what you want to look for here in your legal docs, and you ask your lawyer to look for this, is you want to look for change of control clauses. So you must verify the 10% sale at the fund level doesn't trigger a change of control in the portfolio company's debt agreements. So you want to look out for that. So another area to look for are tag along rights. So under tag along rights, you just want to ensure the company's founders don't have the right to tag along and force a larger sale that you intended. So you don't want to be forced to do that. The other one is confidentiality. See, secondary buyers will require a look through to the company's books, and so you want to ensure your NDAs are bulletproof in that scenario, and all your legal docs and your lawyers are up to speed on what you're trying to do. 

Ryan Miller  

So how you pull this off is one that you can cover with your counsel, but places and people that you can contact, well, AlpInvest partners. I mentioned them before. You can call their GP led Solutions team. The other one for strip sales is HarborVest, they're the largest independent secondary buyer in the world. And then, of course, the famous Lazard, they're specialized advisors in strip sale pricing. So working with them and really understanding a strip sale, those are some people that you can start doing research to see if it's a good fit for you. 

Ryan Miller    

And that brings me to the fourth which is the preferred equity gap, it's sometimes called the flexible injection. So another scenario here is, let's say one of your companies has a chance to acquire its biggest competitor, but it needs $50 million and you've already tapped out the senior debt. So you don't want to do an equity down round, because that would crush your IRR and send a bad signal to the market. But you need capital that is cheaper than the equity but more flexible than debt. That sounds pretty cool. So if that sounds familiar, let's talk about it.

Ryan Miller   

So preferred equity, it sits between debt and common equity, and it has a liquidation preference, meaning. And it gets paid before the common LP shareholders, but it doesn't have the rigid default triggers of senior debt, so it's the perfect way to fund an acquisition or a bridge to an IPO without diluting your common ownership. And I'll give you a story where this was observed. So with Sixth Street Partners and Apollo, they've pioneered this hybrid value space. So in 2024 they provided billions in preferred equity to companies that were winners but were temporarily blocked from the equity markets. They provided the fuel for the fire when the equity markets went cold, allowing those companies to grow into their valuations rather than being forced into a down round. So if you're in venture capital, you know down rounds can suck. And so really, the entry move here to cover with your professional team is standard, participating preferred. It's a clause where a 10% coupon plus a one and a half x liquidation preference. You want to look into that. And the pro move is the PIK only capped return and so you negotiate a deal where no cash interest is paid. That's your PIK, your perform, your payment in kind, and the investors total return is capped at 18% as an example. So this means that if the company becomes a 10x home run, the preferred investor doesn't eat your upside, they get their 18% and go home, and you keep the alpha for your LPs. And so the benchmark that you want to look for is the cost is typically around 12 to 20% of IRR targets. 

Ryan Miller  

And so when you're talking with your lawyer and bringing them up to speed on this as a potential option for liquidity, is you want to look for waterfall seniority and really make sure that you guys are clear on that. So question you ask is, does the preferred get paid before the LPs get their principal. And you want to also look for governance vetoes, so you any limits to the preferred investor's ability to block a future sale or an IPO. So you want to make sure that that's covered and also conversion rights. And you want to look under what circumstances can preferred convert to common. And so an area that you can start to look to due diligence, if this is something that you think is a good fit, is, like we said, Sixth Street Partners you want to ask for the growth credit team, and also the the wild, sorry, and also the world famous Apollo Global Management through their hybrid value fund. And also Oaktree, Oaktree Capital, the kings of opportunistic structure. So love those guys, those are great ones as well. 

Ryan Miller  

That brings me to the fifth area of liquidity that we can turn around, which is the dividend recap, where cash flow is king. So another hypothetical situation. So let's say you own a cash cow company with 30 million in EBITDA, and I don't know, zero debt. You've held it for four years, you want to return the initial cost basis to your LPs, so they're playing with house money. It's a noble move, but you want to hold the company for another three years to maximize the exit. So what do you do? Well, a thing to look for is you want to replace expensive equity with cheaper debt. So if you've been through finance, you know, on average, equity is a more expensive way to finance deals than debt. So if you're trying to lower your weighted average cost of capital, we want to get the cheapest, most affordable capital that we can. It's obviously more complicated than that, so that's why you check with other professionals if you're not one yourself. But this is a strategy where this might be a tool in the toolbox to do that. 

Ryan Miller    

And so in this scenario, you use the company's cash flow to borrow money from a private credit lender and pay yourself a dividend, you are essentially exiting the cost basis while keeping the upside. And a story where this plays out is Orlando Bravo at Thoma Bravo, and they are the master of this move. So Orlando, he buys software companies, optimizes them, and then recaps them on assets like sale point, he returned a significant capital to LPS through dividends years before the final sale. So in early 2025 dividend recap volume surged 60% year over year as managers fought through the exit stalemate. You see what I'm talking about, it is rough. So out there, it can be rough when you're trying to exit and liquidate a lot of your portfolio. So if you have a closed ended fund, and it's not a great time to sell at least, that's what the markets are suggesting. There's other ways that you can explore, and hopefully we can do that. And so the entry level move here is a senior bank loan at three times EBITDA, and you pay out the dividend and keep the growth going. And the pro move that you can explore is the unitranche recap with a PIK toggle that we mentioned before. 

Ryan Miller    

So what that looks like, and how it'll likely play out is you go to a private credit lender like, say, Blue Owl. Take 5x leverage, negotiate a PIK toggle so if the economy slows, you don't have to pay cash interest. You want to maximize the dividend today and protect the cash flow for tomorrow. And so where you want to come in at is the target leverage is, like we said, around 3 1/2 to 5x EBITDA. And so you want to keep the interest coverage above two times just to be safe, and a place you want to explore with your legal and the rest of your professional team is what. We call the solvency test. So you must sign an affidavit stating that the company is still solvent after the dividend to prevent fraudulent conveyance claims. So you want to make sure you're clear there. Another area covers restricted payments. So you want to know is the company actually allowed to wire money to the GPs so you check the existing intercompany agreements. The other one is any covenant breaches, by doing this, you want to explore that as well. So you want to ensure new debt doesn't violate negative covenants of your existing operating revolving lines. And so a place that you can go and check is the first one I mentioned, Blue Owl, they're the powerhouse of private credit, and a unitranche recap is what they can do all day long. And another one is Ares Management, A, R, E, S, they specialize in large cap dividend recaps. And a third one is Lincoln International, they're the leading mid market debt advisor for those recaps. 

Ryan Miller  

And that brings me to the sixth area, the collateralized fund obligation, or CFO securitization play. So let's talk about another hypothetical situation, just to see if this fits. So let's say you're managing multiple funds. You have 15 assets, and you want to create a permanent capital vehicle or pay off a legacy group of LPs once and for all. You need hundreds of millions of dollars of liquidity, and you want the lowest cost of capital possible, noble pursuit. And so what this is, is the securitization and so you bundle your PE interests and sell them as bonds. You create different tranches, senior mezzanine and equity. You sell the bonds to insurance companies and keep the equity or the upside for yourself. And so you are turning illiquid private assets into tradable, rated debt. And the story where this was observed is Schroeder's Capital in Azalea where they have turned this into an absolute art form. So they've taken portfolios of private assets and turned them into rated debt securities. See, this move allows them to access massive pools of capital held by insurance companies that are legally restricted from buying equity, but can buy investment grade debt. And so the entry level move that you want to cover with your legal team and your professionals is a private CFO placement with one large insurance company. Nothing wrong with that. You go for it. And the pro move, if you're really going for it, is a rated publicly traded CFO. So you get a credit rating from the S&P, and this allows you to access the cheapest capital in the world, you move from being a manager to a capital solution architect. And so where you want to look is usually around 50% debt and 50% equity. Maybe that is a good place to do your capital stack. So obviously, funds vary widely, so whatever ratio of debt to equity is right for you, that's the one that you go with, and whatever you and your legal team do, but as far as the 50th percentile, maybe a half 50/50, capital stack is the one that you look into. 

Ryan Miller  

And remember diversification it requires at least 15 plus uncorrelated assets to get an investment grade rating. So that's kind of the thing you want to look for. And so which you want to discuss with your attorney is a true sale opinion. And so the assets must be legally sold from the fund into the CFO vehicle. The other one is risk retention. See under Dodd-Frank, the GP usually has to retain 5% of the risk. The other one is rating agency forensic audit. You're going to have to go through it if you're doing the pro move, the S&P will perform a deep dive into every single portfolio company before they can give you that the information you need to get the investment grade rating. And so areas that you can look at in making that happen, the first one and the second one are Azalea Investment Management. Second one is Schroeder's Capital, we've mentioned those. And the third is Goldman Sachs, their asset backed finance group. You can talk to them. 

Ryan Miller  

And so that brings me to the next one is the closing architecting of your legacy. See the area of the lucky picker, I think that's over the next decade belongs to the capital solution architects. See, you have the tools, you have the benchmarks, and now you have the roadmap. And as I promised at the start, the DPI Liquidity Execution Pack is available right now. This is the Rolodex of lenders that we discussed, like 17Capital, Blue Owl and Crestline and the LPAC negotiation scripts to help you sell these maneuvers to your board after you review it with your attorney. So stop managing paper and start distributing cash. Your LPs are waiting. Your next fund is waiting. You do these things, and you too will be well on your way in your pursuit of Making Billions.

Ryan Miller  

Wow, what a show. I hope you enjoyed this episode as much as I did. Now, if you haven't done so already, be sure to leave a comment and review on new ideas and guests you want me to bring on for future episodes. Plus, why don't you head over to YouTube and see extra takes while you get to know our guests even better, and make sure to come back for our next episode, where we dive even deeper into the people, the process and the perspectives of both investors and founders. Until then, my friends, stay hungry, focus on your goals and keep grinding towards your dream of Making Billions.