Exit Equity; Enter 'Dequity' on the Global Stage

The curtain rises on ‘Dequity,’ the newest actor in the global capital play: How Private Credit is Rescuing Stranded Private Equity Firms.

By Karan Bir Singh Sidhu
Retired IAS Officer, Punjab Cadre | Former Special Chief Secretary, Punjab
Former Principal Secretary, Finance, Government of Punjab
MA (Economics), University of Manchester (UK)
Board-level experience across Central and State PSUs, with deep insight into regulatory design and institutional governance
Strategic commentator on public finance, private capital, regulatory failure, and institutional reform.

Dequity: New Star of the Show or Just a Stand-In?

Private equity (PE) firms, once the juggernauts of high-stakes buyouts and rapid capital recycling, are today entangled in a crisis of liquidity. Holding periods have stretched beyond norms, exits have become elusive, and traditional funding pathways have narrowed. Into this vacuum has stepped a new class of financing: dequity—a hybrid marvel that fuses the certainty of debt with the upside of equity. And it’s changing the rules of private markets finance.

Dequity Defined: Where Debt Meets Equity

Dequity—a blend of "debt" and "equity"—represents an evolutionary leap in deal structuring. These instruments straddle the spectrum between senior debt and common equity, offering:

• Liquidity without immediate exits

• Risk-sharing without loss of control

• Flexibility in covenant design and repayment schedules

For sponsors, dequity delivers capital while preserving the core investment thesis. For lenders, it’s an invitation to the upside—previously reserved for equity holders—without fully abandoning creditor protections.

A $30 Billion Market: Rapid Ascension of a Financial Phenomenon

Since 2023, the dequity space has ballooned to nearly $30 billion in launches. Institutions like Ares Management, Neuberger Berman, and KKR are at the forefront, pioneering bespoke instruments that inject lifeblood into aging portfolio companies while shielding against fire-sale exits.

Dequity is no longer a side bet. It’s rapidly becoming a mainstay of private capital strategy—an acknowledgement that traditional financing has reached its limits in the face of macroeconomic shifts.

The Private Equity Conundrum: Delayed Exits, Frozen Capital

PE’s classic 4-to-6-year investment cycle is breaking down. The median holding period has climbed to 5.8 years, with many firms crossing the 6-year mark. As of 2024, nearly 61% of portfolio companies have remained unsold for more than four years.

Limited Partners (LPs), starved for distributions, are showing reluctance to re-up. GPs, in turn, are scrambling to bridge the gap between needing liquidity and preserving long-term value. Dequity arrives as an elegant detour around this gridlock.

Why Now? Market Dynamics Driving Dequity’s Emergence

1. Interest Rate Spikes

Higher Fed rates have increased the cost of capital and subdued leveraged buyouts. Refinancing is pricier, and exit valuations are underwhelming.

2. IPO and M&A Slowdown

Public markets are volatile. IPO windows have shut. Strategic buyers are cautious. Exit options have narrowed considerably.

3. Global Uncertainty

Trade wars, geopolitical standoffs, and supply chain vulnerabilities add another layer of deal risk. Buyers hesitate; sellers stall. Enter creative liquidity.

How Dequity Works: Anatomy of a Hybrid Instrument

- Flexible Repayment

Dequity avoids rigid amortisation. Timing aligns with real exit prospects.

- Equity Participation

Lenders often earn warrants, options, or profit-sharing rights. It’s debt with upside.

- Subordinated Structure

Dequity typically sits below senior debt (secured loans) but ahead of equity, balancing risk and reward.

- Light Covenants

Fewer tripwires. Borrowers get breathing room in tight markets.

Alternatives in Play: A Wider Liquidity Toolkit

Dequity is part of a broader innovation wave reshaping PE liquidity:

• NAV-Based Lending: Loans against portfolio Net Asset Value allow GPs to access capital without new equity.

• GP-Led Secondaries: Continuation funds help GPs retain crown-jewel assets while offering partial liquidity to LPs.

Together with dequity, these tools are transforming illiquidity from an obstacle into an opportunity.

A Boon for Direct Lenders

Direct lenders—non-bank firms targeting middle-market credit—are thriving in this new ecosystem. With yields averaging over 10%, and a premium of more than 200 basis points over public markets, dequity offers unmatched upside for those willing to underwrite complexity.

Bilateral structuring and covenant negotiation further empower these lenders to manage risk while extracting value.

Challenges: Not All That Glitters…

Dequity's rise isn’t risk-free:

• Valuation Ambiguity: Pricing hybrids isn’t straightforward. Illiquidity premiums and contingent upside muddy the waters.

• Regulatory Uncertainty: As the space grows, expect scrutiny around capital adequacy, disclosures, and investor protections.

• Limited Partner Pushback: While some LPs welcome liquidity, others fear long-term dilution and reduced transparency.

• Market Concentration: A few giants dominate the space. Their retreat—or missteps—could send ripples through the ecosystem.

The Road Ahead: Dequity’s Future in Global Capital Markets

As exit timelines remain extended and macroeconomic pressures linger, dequity is not merely a patch. It is a permanent innovation in financial engineering.

Expect:

• More bespoke structuring for industry-specific risks

• Regulatory harmonisation across geographies

• Greater LP involvement in hybrid strategy decision-making

• Wider adoption beyond private equity, including infrastructure, energy, and real assets

Summing Up: A Financial Phoenix Rising—Or Convertible Debentures in a New Avatar?

“Exit equity; enter dequity.” That’s not just a clever turn of phrase—it marks a deeper pivot in the architecture of global finance.

What began as a reactive solution to private equity’s liquidity crunch has quickly matured into a strategic and scalable financial instrument. Dequity aligns the incentives of lenders and sponsors, circumvents forced exits, and reintroduces flexibility into capital structures that had grown rigid and risk-averse.

Far from being a temporary patch, dequity signals the emergence of a new financial ethos—defined by innovation, hybridisation, and structural adaptability.

Whether it ultimately ascends as a financial phoenix—reshaping how value is unlocked in private markets—or merely reinvents the familiar convertible debenture in a new avatar, is a question we may explore in a subsequent article.

For now, the curtain has risen. And dequity is taking the stage.