Once reserved for distress, preferred equity has become an “acceptable liquidity solution” for a market struggling with exits, Paul Hastings’ global finance partner Jennifer Passagne told 9fin.
And it seems that dealmakers agree. They’ve seen the number of deals featuring pref equity at least double over the past 12 months, according to 9fin sources.
Behind that boom sits a sluggish exit market, caused by a gap between the valuations sponsors believe their assets should fetch and the prices buyers will actually pay. And with investors itchy to realise returns, that gap can get uncomfortable.
Jefferies counted $9bn of “alternative”, pref-style transactions on private equity fund stakes in 2025, up from $6bn in 2024. That’s a 33% increase. But even that jump undersells the amount of preferred equity currently underway, according to Passagne.
Talking about pref equity deals she’s seen in the last 12 months, Passagne said the figure is a lot more than $9bn, “because many of these transactions are private and are therefore not visible.”
Injecting pref equity is the latest trick to get cash today for the promise of a sale tomorrow. But it’s not without its pitfalls. Exits are still fundamental and without them, it can begin to eat into the junior equity’s value.
But with NAV and other solutions available, why the boom in pref equity specifically?
Because private credit loves nothing more than cash that behaves suspiciously like debt, according to the fund managers.
Debt by another name
Mechanically, preferred equity sits between debt and common equity. It is senior to the sponsor’s stake, junior to the lenders, with a fixed return that mostly accrues rather than pays.
“The interest is largely classified as payment-in-kind, so it’s not cash paid, it’s deferred over time, and that gives the borrowing entity flexibility,” Passagne said. A fund can draw down, pay a distribution to restless LPs, and spend the rest on bolt-ons, all without touching operating cashflow.
Pref equity is therefore debt-like, but using it may also allow private credit firms to get around certain restrictions placed on their capital. Limited partnership agreements govern private credit funds’ lifecycles, establish fee structures, set investment mandates, and codify distribution waterfalls.
“You often bypass the restrictions in a limited partnership agreement, because the equity is not considered debt,” Passagne said. Circumventing them by investing in preferred equity allows managers to behave “more flexibly and creatively,” according to the UK fund manager.
Both flexibility and creativity are at a premium when the market feels stuck.
Passagne sees the pref equity use case concentrated where marks are most contested. Software and tech funds facing AI disruption are raising pref equity to steady the ship.
“They might use some to distribute cash to LPs who might be anxious around the scenario, and then use the remaining amount to do bolt-on M&A, so they can move their way out of a downturn without diluting the common equity, and while preserving what they view as the valuations of the underlying assets,” she said.
Synthetic material
Preferred equity is can look a lot like kicking the can down the road. Far from diminishing, funds’ problems may be compounding.
“The interest will PIK, get added to the principal, and compound,” according to Passagne. “For there to be a payment of the interest, you need to sell an asset.”
The problem with preferred equity is that its repayment mechanism is, inevitably, an exit. The longer the sale is delayed, the more the accruing pref eats through the common equity beneath it.
Eventually, this can become a problem for the pref holders too.
“You’re using this money to make a dividend payment, but you haven’t actually proved those assets,” Passagne said. “It’s the same question with NAVs. You have to ask: are you artificially engineering IRRs?”
NAV financing and preferred equity being used to fund dividends is rarely taken as a good sign by LPs. In certain cases, it is even prohibited in LPAs.
And longer lifecycles aren’t just a problem for funds now, but future vehicles too. “If you’ve held too long it becomes harder to roll out your next vintage because your LPs are mad,” one UK fund manager told 9fin.
“The payday has to come eventually,” a second fund manager said. “You can’t keep running forever, even if you keep getting little boosts.”
But there’s no reason to be too gloomy about preferred equity, at least according to Passagne. “These products are designed to support funds through economic circumstances that are not within their control,” she said. “I don’t think we need to be as cynical. When these exits happen, a lot of these funds are very reliable GPs.”
A good asset with an unlucky timeline deserves a bridge. But no amount of structuring rescues a genuinely overvalued portfolio.
Stuck in the middle
Global private equity buyout holding periods now hover around seven years, up from five to six across 2010-2021, with almost 40% of portfolio companies held for more than five years, according to research by Bain at the beginning of 2026.
The same research found a backlog of roughly 32,000 unsold companies, collectively worth $3.8trn.
Zoom in on Europe, and the problem is particularly acute. In Q2 26, just 22 mega-exits accounted for 65.8% of the €157.6bn of exit value, suggesting that everything but the upper market is struggling for buyers.
For private credit funds, stuck assets mean extended lifecycles. The usual 10 years for a fund is now extending to 12 or 13 years before they can be liquidated, according to Passagne.
The same Bain research found that PE IRRs begin stagnating after an asset is held for seven years, declining after that.
We’re seeing evidence of this in the use of private equity continuation vehicles, where assets are held beyond their intended maturity.
Right now, sponsors would rather find solutions that don’t involve realising a discount on their investments, Passagne said. Refusing to exit can risk LPs’ investments not being realised on the schedule they were supposed to. In this case, fund managers have to find cash now to keep their investors happy.
Ask Passagne where this ends and the answer is… nowhere. Pref equity is not going back in the box. “The increase is in many ways cyclical, but it’s also structural,” she said. “These deals are part of the toolkit now. They’ve been tested, they allow flexibility; they’ve been proven to work.”
Craving some data?
Aside from the meteoric rise of preferred equity, 9fin’s latest European private credit data review 2026, due to be published next week, shows some key trends emerging over the last quarter.
Chief among them is the long-predicted cooling of tech lending that is finally showing up in the numbers. IT and communications topped the sector rankings in every quarter over the past year, but surrendered its crown in Q2 26, sliding down the table as consumer deals surged into first.
Even as sectors shift, geographies are moving too. France stormed to its highest market share in over a year of 9fin data. And, for the first time in that period, the country edged out the UK and Ireland as Europe’s busiest jurisdiction for private credit dealmaking.
There have also been significant swings in deal sizes and a shift in what borrowers are raising money for.
Which sectors picked up tech’s slack, which other countries fell as France advanced, and what could our data tell you about the state of private credit? You’ll have to read the full report to find out.
And for the cherry on top, check out our new European private credit league tables for Q2 26. A challenger has knocked Ares off of their quarterly deal count top spot, the first time that’s happened in our data.
European private credit pipeline
As if the insights and the data weren’t enough, 9fin just keeps giving. Deals have slowed as temperatures rise and the whole world eyes the Fifa World Cup final, but there’s still activity out there.
Triton is exiting OCU Group, with the sale advancing to the first stage.
Banks including BNP Paribas have wallcrossed some lenders on a term loan B deal for ophthalmology business Sanoptis as the company looks to shed its private credit debt.
Apollo, CVC, and Goldman Sachs Asset Management are financing Bridgepoint’s LBO of German laboratory testing specialist GBA Group.
And Seven2 is seeking refinancing and dividend recapitalisation of French Autodesk reseller Graitec.
You can read our weekly updated pipeline of new and in-market deals here.
