Dequity Funds: A Rising Hybrid Solution

Dequity funds are increasingly prevalent in the United States, where macroeconomic conditions have created a steeper interest rate environment than Europe. High rates and pressure to return capital in private markets have driven adoption of hybrid solutions like dequity funds.

Private equity funds face a liquidity challenge: generating returns without distressed asset sales. Dequity funds address this need as an innovative hybrid financial vehicle.

Definition

These instruments blend debt and equity within a single structure. A typical fund might provide 75-85% of capital as debt (earning 10-12% interest) with remaining portions as convertible instruments or profit participation rights, allowing investors fixed income plus growth upside.

Mechanics

• Duration: 3-5 year bridge financing arrangements
• Interest rates: SOFR plus 600-800 basis points (10-12% annually)
• Equity participation: Via warrants, options, or future EBITDA percentages

Recent Market Examples

Ares Management deployed 75% debt at 12% plus 25% convertible warrants for a European logistics recapitalization. KKR structured 80% debt (SOFR + 650 basis points) with 20% preferred share options for AI startups. Neuberger Berman offered 9% mezzanine debt plus 10% future EBITDA participation in emerging market infrastructure companies.

Risk Assessment: Bubble or Evolution?

While comparisons to subprime mortgages are understandable, key differences exist. Unlike subprime’s opaque securitization, dequity funds operate as bilateral transactions with individualized analysis balancing risk and returns. Rather than artificially expanding credit to high-risk profiles, these funds address private equity liquidity constraints, facilitating orderly exits and avoiding forced sales.