Venture capital’s great liquidity squeeze: funds stretch to 20 years as secondaries eclipse IPOs

Since the post-ZIRP era, venture capital has grappled with a deepening liquidity crisis marked by prolonged fund lifecycles stretching well beyond the traditional 10-13 years, with some funds lasting up to 20 years as noted by Adam Grosher of the J. Paul Getty Trust. This extension has frustrated limited partners (LPs), who increasingly question the reality behind lofty paper valuations and demand tangible distributions, shifting their focus toward realized returns measured by DPI rather than TVPI. As Lara Banks of Makena Capital highlights, LPs now model fund lives up to 18 years, expecting most capital returns in the later stages, underscoring a fundamental recalibration of liquidity expectations in the industry.

The widening chasm between paper valuations and actual market liquidity has intensified LP skepticism, with secondary market discounts reaching as steep as 90%, exemplified by a portfolio company once valued at 20x revenue being offered just 2x in secondary sales. This disconnect has propelled secondary markets and engineered liquidity solutions, such as continuation funds and secondary sales, into the spotlight as essential tools for managing LP liquidity demands, as emphasized by Matt Hodan of Lexington Partners. However, secondary funds tend to focus on top-tier assets, leaving many funds illiquid and exacerbating frustrations, especially in emerging markets where fund durations are even longer.

By 2026, the industry has seen a pronounced shift in LP performance metrics, with 67% of General Partners prioritizing consistent DPI distributions over unrealized gains, reflecting LPs' growing insistence on realized returns amid sluggish exit environments and slow distributions that fell to just 13% in 2025—less than half the levels seen in 2017-2018. This liquidity squeeze has led to increased use of negotiated solutions like management fee step-downs, incentive resets, and continuation vehicles, which have become normalized liquidity management tools despite mixed LP sentiments on timing and value, as reported by Coller Capital and MSCI surveys.

The liquidity crisis has also strained GP-LP relationships, as LPs grow more selective and demand fund managers who not only source deals but also actively manage exits and liquidity through disciplined sell-downs and secondary transactions. Emerging managers, in particular, face heightened expectations to proactively engineer liquidity and build LP trust by offering co-investment opportunities without signaling strategy drift, a sentiment echoed by Charlotte in recent interviews. This evolution reflects a broader industry reckoning where realized returns and liquidity discipline have become the new currency of trust and performance evaluation.

Since late 2025, fundraising in private capital has tightened considerably, favoring established funds with long track records while emerging managers face prolonged and arduous capital raises often stretching from 18 months to three years. LPs exhibit career risk aversion and structural preferences for later-stage funds (Fund III and beyond), as highlighted in the LP Roundtable with Matt Curtolo and Anurag Chandra, leading to a bifurcation where smaller managers struggle to differentiate themselves amid a crowded field of 'hustle funds' lacking clear GP-thesis fit. This dynamic is compounded by the rise of 'zombie funds' and subdued exit markets, which further incentivize LPs to consolidate relationships and reduce the number of GPs in their portfolios, as noted by Hartley Rogers and corroborated by Coller surveys showing a jump from 16% to 23% of LPs planning to cut GP relationships by 2029.

In response to these fundraising challenges and LP demands, fund managers are evolving their strategies to emphasize disciplined investing, operational value creation, and engineered liquidity solutions. Managers like those at Scout and Makena Capital extend fund lives to 18 years or more, incorporating fee reductions during extensions to align incentives, while proactively selling stable but non-breakout companies between years 5 and 7 to return capital early and alleviate LP concerns over prolonged fund durations. Secondary markets have become a core liquidity mechanism, with Lexington Partners’ Matt Hodan asserting that non-participation equates to self-exclusion from the liquidity paradigm, and firms like BCI launching capital solutions strategies targeting secondaries and continuation vehicles to meet evolving LP expectations.

Fund managers are sharpening their investment discipline by constantly re-underwriting positions with realistic return targets—aiming for 2 to 5x returns over 3 to 7 years—and focusing on companies likely to be 'in the money' within 18 months at reasonable multiples, avoiding speculative premiums. This pragmatic approach extends to secondary market transactions, where venture secondaries differ from private equity by deriving value primarily from portfolio growth rather than discount negotiation, prompting managers to evaluate deals based on expected terminal outcomes rather than NAV discounts. As Mitchell Green emphasizes, selling portions of winning positions to take chips off the table is now integral to portfolio management, reflecting a broader industry shift toward liquidity engineering and operational alpha as key differentiators in a crowded market.

Emerging managers, while challenged by the tightened fundraising environment and LP selectivity, are advised to build trust through consistent strategy execution and avoid drift, offering co-investment opportunities to maintain alignment and demonstrate value creation. Liquidity management strategies once considered taboo, such as seeking secondaries, have become expected, with LPs increasingly favoring funds that provide credible paths to realized returns through distributions, secondaries, or structured liquidity solutions. This nuanced approach also accounts for LP archetypes, with family offices often preferring reinvestment of early returns to capture upside and avoid capital gains, while larger institutions prioritize distributions to de-risk portfolios, underscoring the complex balancing act managers must navigate to meet diverse LP expectations.

By early 2026, secondary markets have undergone a remarkable transformation from niche liquidity outlets to sophisticated, critical tools for managing the extended lifecycles of private companies. The rise of LP-led and GP-led secondaries, including continuation vehicles, has become central to portfolio risk management and liquidity provision, with Partners Group closing a $9 billion secondaries fund amid record global deal volumes and Europe hitting unprecedented transaction levels. As Leah Lazarek Calver observed, GPs now view continuation vehicles as strategic options to retain high-quality assets longer while delivering distributions to investors, reflecting a maturation where secondaries are no longer a reactive crisis play but a proactive portfolio management staple.

The secondary market’s pricing sophistication and investor approach have evolved distinctly across asset classes. In venture capital, for instance, secondaries focus less on discounts to NAV and more on maximizing exposure to top-tier companies, with valuation anchored to last funding rounds and anticipated terminal outcomes rather than arbitrary NAV figures. This contrasts with private equity, where discounts have narrowed from historic lows of 40-50 cents on the dollar, signaling increased market confidence yet persistent skepticism about inflated NAVs. Such nuanced valuation strategies underscore the secondary market’s growing complexity and tailored liquidity solutions, as noted by VenCap and other market participants.

The explosive growth of secondary markets is accompanied by a broadening investor base and structural innovation, yet capital constraints temper its full potential. New entrants have nearly doubled their share of deal volume from 7% in 2023 to 16% in 2024, and permanent capital funds have raised $46 billion with another $25 billion in near-term fundraising, signaling a shift toward evergreen liquidity providers. However, despite record fundraising—$165 billion in 2025—deployment outpaced capital raised, resulting in less than one year of dry powder and highlighting the market’s raise-and-deploy dynamic. This undercapitalization, coupled with a relatively small group of longstanding firms dominating the space, maintains competitive tension but also limits scaling opportunities.

Continuation vehicles and GP-led secondaries have emerged as indispensable mechanisms amid constrained exit environments and longer holding periods, effectively replacing IPOs as primary liquidity windows. With the secondary market surpassing IPO volumes by fivefold in 2025, these structures allow GPs to balance liquidity discipline with value creation, managing portfolio companies through multiple exit routes beyond traditional public markets. Yet LP sentiment remains mixed on timing and strategy, reflecting ongoing debates about whether liquidity arrives too late or if high-potential assets are sold prematurely. This dynamic is especially pronounced in Asia, where increased scrutiny on valuations accompanies the rise of GP-led continuation vehicles, underscoring the secondary market’s evolving role as a strategic liquidity and risk management tool.

European LPs have increasingly prioritized realized returns and liquidity, grappling with longer exit timelines and structural disadvantages compared to the US market. This has driven a growing adoption of secondaries as a vital liquidity tool to bridge the DPI gap, with managers and LPs leveraging these transactions to manage portfolios more dynamically. By early 2026, Europe's secondaries market reached record volumes, fueled by both LP-led and GP-led deals, reflecting a maturing ecosystem where strategic use of continuation vehicles allows GPs to retain high-quality assets longer while providing distributions to investors, as noted by Leah Lazarek Calver.

Despite regulatory complexity and a historically less mature market, Europe now commands roughly 30-40% of the global venture ecosystem, with foundational structures enabling accelerated growth and liquidity solutions. However, fee sensitivity remains a critical challenge, especially in the UK, where LPs such as pension funds scrutinize fees amid underwhelming returns and volatile valuations. This environment has made DPI a central yet under-discussed metric shaping fundraising strategies, forcing funds to balance between artificially generating distributions to attract capital and allowing investments to mature fully over the fund lifecycle.

In Asia-Pacific, the private equity secondaries market is experiencing a surge in institutional participation, exemplified by Partners Group’s $9 billion eighth secondaries fund, which is already 60% deployed and includes bespoke mandates and co-investment vehicles tailored to regional investor needs. This growth reflects a broader maturation of secondaries globally, with deal volumes hitting a record $226 billion in 2025. However, as GP-led continuation vehicles become more prevalent in Asia, LPs are increasingly conducting independent valuation scrutiny rather than relying solely on managers’ narratives, signaling a shift towards more rigorous due diligence amid complex liquidity landscapes.

European secondaries differ notably from the US market, with a more mid-market orientation and evolving seller behavior, particularly among corporate pension plans that have grown more pragmatic about selling despite discounts. This shift has contributed to the liquidity boom, enabling portfolio management flexibility and better pricing dynamics. The nuanced regional market structures and investor behaviors underscore the importance of tailored fund strategies and liquidity solutions that address specific geographic challenges and investor expectations.

The private capital landscape, particularly in deep tech and emerging markets, is witnessing a fundamental shift toward extended fund durations to accommodate longer development and exit timelines. MIT pioneered this approach with 12-year fund lives plus extensions, effectively stretching to 18 years, while some argue that emerging markets require even longer horizons, up to 20 years, to realize returns. This patient capital model is validated by funds achieving exceptional multiples—such as a deep tech fund delivering 11x to 12x returns with unicorns emerging around year 12—underscoring that long-term commitment can unlock outsized value beyond the traditional decade-long fund lifecycle.

Alongside longer horizons, private equity and venture capital firms are embracing a rigorous operational value creation model that moves away from the era of financial engineering and multiple expansions. As Apollo’s Kleinman and industry leaders like KKR’s Pete Stavros emphasize, the new paradigm demands disciplined asset selection, consistent capital deployment, and active operational improvements driving 10–12% EBITDA growth to meet return targets amid higher financing costs. This operational alpha is increasingly professionalized through integrated diligence processes, AI-driven playbooks, and talent investments, exemplified by OneStream Software’s early 2026 take-private deal where commercial and technical diligence were merged to accelerate value creation from day one.

The evolving relationship between General Partners and Limited Partners reflects a growing emphasis on liquidity discipline and credible paths to realized returns rather than paper gains. LPs now demand repeatable models for generating distributions (DPI), showing patience for longer fund durations only when GPs demonstrate consistent capital returns through exits, secondaries, or structured liquidity solutions. This dynamic fosters a partnership ethos, as one GP candidly notes the preference for LPs who understand the long-term nature of private investing over traders seeking quick flips, reinforcing a cultural shift toward sustained operational engagement and away from short-term trading mentalities.

Market conditions in 2026, including stabilizing valuations and improving financing, are sharpening the focus on fundamentals such as asset quality, income resilience, and disciplined capital deployment. Aberdeen’s Nalaka de Silva highlights that returns will increasingly hinge on operational value creation, sector selection, and structural growth themes rather than broad market recoveries or valuation expansions. With intensifying competition for high-quality assets, firms that maintain a measured pace of investment—like those with consistent vintage years and linear capital deployment strategies—are better positioned to navigate performance dispersion and deliver sustainable, long-term value.

The GP-LP relationship is being reshaped by a demand for credible, repeatable paths to realized returns, with operational rigor and sustained engagement now prized over short-term trading gains.