M59 - Capital Intelligence Agency

The stress in private markets is not just about marks. It’s about the fragile plumbing built to delay those marks. When the funding channels seize, the valuation debate ends, and the repricing begins.The Shift: A Funding Model in Reverse.
Historically, pensions, endowments, and insurers locked up capital for a decade or more. Their long horizons aligned with private-market mandates, and they earned the illiquidity premium, higher returns for giving up flexibility.Today, those same allocators are over-exposed and can’t recycle capital. Instead, the funding model has flipped:
GPs now court individual investors to replace shrinking institutional allocations.
Retail capital wants liquidity far more frequently than traditional LPs, but it’s being deployed into assets that can’t deliver it without a discount.The Illusion of Liquidity.Continuation vehicles and the secondaries market have become the circuit breakers of private equity, the backstop for liquidity. But they also flash the warning lights.They work by deferring the need for a mark, not by solving it. They rely on NAV loans and leverage against appraised values that haven’t been tested in a cash sale. Liquidity promises can clash with reality: a redemption schedule doesn’t care that selling a private loan or an office building takes months.What Happens When the Model Breaks.If the liquidity machinery falters, the consequences cascade:
NAV advance-rate cuts shrink borrowing bases, forcing cash calls or asset sales. Semi-liquid fund redemptions spike in a public-market drawdown, triggering tenders at discounts. Mid-market GPs, already facing valuation compression and limited exits, are pushed into distressed continuation funds or the secondary market at unfavorable prices.When liquidity relief is exhausted, the mark becomes unavoidable, at scale, across multiple vintages and strategies.Convergence: Private Starts Trading Like Public.As liquidity requirements rise and illiquidity premiums shrink, private assets begin to behave like public ones. The traditional lines between the two markets are blurring:Broader mandates and easier access mean capital flows seamlessly between asset classes.
Pricing will converge and capital will demand real-time price discovery.
The secondaries market is where this tension is most visible. It’s the pressure valve and the scoreboard, showing in real time what investors will actually pay for aging assets.Liquidity has a price, and right now that price is rising.The Opportunity.
The heart of private equity — the mid-market — is flashing red. Firms that thrived on easy leverage and buoyant investor demand are now missing fundraising targets by wide margins. Investors lack distributions to recycle; exits are scarce; and the funding model is shifting underfoot.This is where the opportunity sits: where liquidity relief masks valuation decay. The convergence of public and private markets is creating investible dislocations.The fault line: liquidity promises v. valuation lag.Cash outflow reality vs. paper-value optics.
Distributions from older buyout vintages (2011–2013) are scraping multi-decade lows, yet reported NAVs are still near highs. This is the heart of the contradiction, on paper, LPs are “rich”; in cash terms, they’re starved.Avoidance tools, continuation funds and NAV loans, allow GPs to push the recognition of lower marks down the road. But these are leverage trades: you’re swapping a realized-loss moment for more debt against the asset.Retail semi-liquid vehicles as accelerants.
These funds take full commitments up front and promise quarterly liquidity.
Liquidity is sourced from NAV lines and cash flow, not fresh inflows, making them reliant on steady marks and steady exits.
A valuation shock would trigger an exponential hit: markdowns shrink borrowing base. Margin calls or covenant breaches tighten credit lines.The “credits-for-marks” carry trade.
Leverage (NAV loans, continuation funds) props up valuations that haven’t been tested by cash exits. This is the same dynamic as a repo market reliant on collateral values that aren’t marked to market daily, stable until a single reprice event forces everything through the pipe at once.Why something has to “give”.
Refinancing wall (2026–2027)
Mid-market LBOs done at 6–7× EBITDA in the zero-rate era will be rolling into 10–12% coupons. Sponsors either:
Inject new equity (dilution),
Mark down and restructure, or
Hand over to lenders.NAV-loan advance-rate compression.
Most covenants are based on independent third-party marks.
A 15–20% haircut can shrink advance rates by 5–10 points, creating sudden liquidity needs that must be met with cash or asset sales.Retail redemption dynamics.
Semi-liquid funds have yet to see “true” stress, 2022–23 redemptions were mild.
In a broader equity drawdown, LPs will sell what’s priced daily, and these funds may be forced into tender offers or gating precisely when secondary prices are weakest.Regulatory tightening.
SEC & ILPA initiatives mean less GP discretion to smooth valuations and more explicit reporting on leverage against NAV — a direct challenge to the “delay and pray” model.Marks are sticky because managers have discretion, valuation committees are peer-referenced, and secondary transactions are selectively disclosed. Once an IPO/M&A window cracks open, latent markdowns surface quickly and unevenly.