Dequity funds are proliferating especially in the United States, where the macroeconomic environment has led to a much more strained yield curve than in Europe. The combination of high interest rates and the pressure to return capital to investors in private markets has driven innovation and the adoption of hybrid solutions such as dequity funds in the U.S. market.
In the current context, private equity funds face a challenge: generating liquidity without selling off assets at a loss. This is where dequity funds emerge—a hybrid solution that is gaining prominence in the financial industry.
They are vehicles that combine debt and equity in a single structure.
For example, a fund may provide 75–85% of the capital as debt (with interest rates of 10–12%) and the remainder in instruments that are either convertible into shares or include participation in future profits. This way, investors receive fixed income and the option to benefit from the company’s growth.
It is legitimate to wonder whether the dequity funds boom could resemble the dynamics of the subprime mortgage crisis that triggered the 2008 financial meltdown. However, there are key differences:
Risk and Transparency:
Subprime mortgages were characterized by excessive risk-taking and opacity in the securitization and distribution of that risk. In contrast, dequity funds are bilateral operations, with individualized analysis and hybrid structures designed to balance risk and return in companies already backed by private equity.
Purpose:
While subprime loans fueled artificial credit growth for high-risk profiles, dequity funds have emerged as a response to a liquidity drought in private equity, facilitating orderly exits and avoiding forced sales in adverse market conditions.
