Driving Value Creation and Unlocking Liquidity Through Private Equity and Secondaries

At a Glance

• Private equity is growing more selective as LPs and GPs place greater emphasis on liquidity, portfolio construction, and go-forward returns.
• Operational value creation and active business building are essential drivers of performance.
• Private equity and secondaries can work together to extend ownership of high-conviction assets while creating liquidity options for investors.

After years of strong performance driven by low interest rates, rising multiples, and generally benign macroeconomic conditions, the private equity industry is entering a new phase defined by tighter liquidity, higher interest rates, and a renewed focus on operational value creation as a primary driver of return generation. “Many LPs are looking to recalibrate their exposure to private equity as concerns about go-forward returns and macroeconomic pressures continue to grow,” said Matt Cwiertnia, Head of Ares Private Equity Group.

These pressures, including muted GDP growth worldwide, government debt concerns, and structural constraints on growth that contribute to inflation, are making returns harder to achieve than they were over much of the past two decades. In this environment, generating liquidity for LPs has become an important priority across the industry. “If you simplify the formula, you want to make sure you’re annually, or over a three-year period, returning more capital than you’re putting to work,” Cwiertnia said.

Business Building Takes Center Stage

Following the Global Financial Crisis and through 2022, markets were generally strong and leverage was readily available. Over the last several years, however, the backdrop has changed. “Private equity has evolved from a stock-picking (i.e., Beta) business into a business-builder’s (i.e., Alpha) market,” Cwiertnia explained. Success now requires generating returns above the underlying industry growth rate through a repeatable system for building businesses. Talent remains a critical driver of value creation, augmented by AI and technology and continual leadership evaluation.

That view aligns with the growth-oriented approach that Ares Private Equity has employed for many years. On average, target portfolio companies are expected to grow 20% or more annually. Ares typically invests in industries growing around 5% a year, which means the value creation plan is designed to bridge that gap by generating roughly 15 percentage points of incremental growth or alpha above the underlying market.

Where Private Equity and Secondaries Create Synergies

The relationship between private equity and secondaries is becoming increasingly complementary. GP-led transactions and continuation vehicles (CVs) are expanding the liquidity toolkit by allowing existing LPs to realize value while giving new investors the opportunity to underwrite mature, high-quality assets. When structured well, CVs can align interests across stakeholders by pairing interim liquidity with additional time and capital to support the next phase of growth.

“For a long time, people thought about the secondary market solely as a liquidity mechanism,” said Nate Walton, Head of Ares Private Equity Secondaries. “However, today, a GP can view it not only as a liquidity mechanism, but also as a growth opportunity, because a GP can raise additional capital, grow AUM and retain exposure to strong companies for a longer period of time.”

That is where the synergies between secondaries and private equity become more tangible. These partnerships provide benefits to the various parties at multiple phases of the investment. Beyond liquidity, secondaries can offer LPs structural portfolio benefits, including diversification, J-curve mitigation, and reduced blind-pool risks, as well as a more efficient path to crystallize gains and accelerate distributions. For GPs, they can create more time, capital, and flexibility to continue executing against a value creation plan in high-conviction assets.

Preparing for Liquidity and Exit Readiness

Selling assets today can be challenging, so preparation is a critical tool. Beyond supporting companies as they evolve and grow, Ares Private Equity has also built a systematic framework to support liquidity and exit readiness. Three pillars underpin that effort: structured exit preparation, a dedicated exit committee, and AI-enabled exit planning.

Prior to a monetization event, a formalized preparation process takes place, led by a specially formed exit committee. Similar to an investment committee that would analyze decision-making prior to making an investment, the exit committee is intended to oversee exit strategy and ensure best practices are adopted across the portfolio. The focus is on maximizing proceeds and delivering strong outcomes for investors.

Looking Ahead

Delivering consistent returns through operational value creation is increasingly a benchmark for leading private equity firms. As liquidity becomes more important to LPs and the private markets ecosystem evolves, the relationship between private equity and secondaries is becoming more strategic. Together, they expand the set of options available to investors—enhancing portfolio construction, extending ownership of high-conviction assets, and enabling more flexible paths to liquidity. Firms that combine disciplined value creation with innovative liquidity solutions will be better positioned to pursue opportunities in this environment.

Read More from Ares Management

After years of strong performance driven by low interest rates, rising multiples, and generally benign macroeconomic conditions, the private equity industry is entering a new phase defined by tighter liquidity, higher interest rates, and a renewed focus on operational value creation as a primary driver of return generation. “Many LPs are looking to recalibrate their exposure to private equity as concerns about go-forward returns and macroeconomic pressures continue to grow,” said Matt Cwiertnia, Head of Ares Private Equity Group.