Many LPs in private equity right now are sitting on the same frustration: their fund statements still look healthy on paper, their marked IRRs continue to land roughly where the original pitch decks promised, but the actual distributions have largely stopped arriving in the timeframe originally targeted. And after a couple of years of that, the timing-issue explanation starts to wear pretty thin.
Distributions as a share of NAV fell to their lowest level in more than a decade in 2024, with average buyout holding periods stretching to 6.4 years and more than $3 trillion of unrealized value now sitting in global buyout portfolios while LPs wait for some kind of resolution. By the first half of 2025, roughly one in five PE exits was running through a continuation vehicle rather than a true exit, up from around 5% just a few years earlier. All of which adds up to a market where the paper marks still look healthy and the cash flow back to LPs has largely stalled out.
That's what people in the industry have started calling the DPI problem. DPI just means distributions to paid-in capital… the ratio of how much money a fund has actually paid back to LPs versus how much they originally committed. It's the most literal measure of whether a fund is doing the thing a fund is supposed to do (return capital). A fund can post impressive paper returns for years while its DPI sits near zero, and right now a lot of funds are doing exactly that (which understates how much harder the math of being an LP has actually gotten over the last few years).
And when distributions stall industry-wide, the industry doesn't sit still… it builds new structures to manage around the problem instead. Continuation vehicles accounted for 13% of all PE exit activity in 2024 (up from 5% in 2020 and 2021), and GP-led liquidity solutions have more than tripled in value over the last five years. Both can be useful tools in the right context, but the sheer volume of them right now reads less like a market working smoothly and more like an industry inventing workarounds because the cash isn't coming back through the normal channels on its own.
So at what point does the industry's collective hand-waving about marks and IRRs run out of road with LPs? I don't precisely know, but it's the backdrop I keep at the top of my head when I think about how we run City Different Acquisitions (our small-business acquisition strategy here at CDI). The whole thing is built around the assumption that distributions are the actual point.
Permanent Equity, one of my favorite small-business acquisition shops, has a concept they've written about a lot called "Beer Money." The idea is simple: the profitability metric that actually matters is the cash an owner can pull out of the business and spend. Yes, net income, EBITDA, adjusted EBITDA, or a marked-up NAV on a quarterly statement tells some kind of story about the business, but none of them is something an LP can take to the grocery store and actually spend.
We think about our strategy the same way. IRR is a useful modeling tool and marked-up valuations are useful for reporting, but neither one of them, on its own, puts actual cash in an LP's pocket… which is why the primary annual return metric I focus on with City Different Acquisitions is cash-on-cash. The two questions that actually matter to me, year in and year out, are how much cash the underlying business produced and how much of that came back to investors as an actual distribution. Those are the numbers I hold our team accountable to.
The strategy at City Different Acquisitions is built around something pretty simple at the core of it. We focus on buying small businesses that are already throwing off operating cash, and we strive to return that cash to investors on a quarterly schedule, paid out of the underlying businesses while we own them (rather than from a terminal liquidity event five or seven years down the line).
Not every deal looks identical, but the aim is to start distributing capital back inside the first three months of an investment. That’s a structural choice we made deliberately rather than something we're working toward as a future goal. The thinking behind it is pretty straightforward: an investor should be able to see, in cash, that the strategy is working… and they should be able to see it early.
There's a second reason I like this model, separate from the DPI problem, and it has to do with information. With a traditional PE or venture fund, it can take seven to ten years to know whether a particular investment is actually working (and there's often a pretty consistent gap between what the marks on the fund's NAV are telling the LP and what the actual cash returns end up showing). For a long stretch of that holding period, the LP is essentially living on the first story while waiting for the second to show up; sometimes it does, sometimes it doesn't.
When a business is distributing operating cash from quarter one, the question of whether the underwriting was right gets answered much faster. We know inside three months whether a business is performing at the level we modeled; if it is, we've got early evidence the thesis is holding. If it isn't, we know in time to actually do something about it… which is an advantage that longer-duration fund structures typically can't replicate.
We invest deal by deal, without a pooled fund or a fixed life cycle where everything has to wind up by year ten. Each investment is meant to stand on its own, and each dollar that comes back to an investor is a real dollar from an underlying business rather than a projected one on a fund statement.
When a traditional fund holds capital for ten years and returns it as one terminal distribution, the GP has made a lot of decisions on behalf of the LP about when their capital comes back and what they're locked out of doing with it in the meantime. We'd rather hand those decisions back as quickly as we can. With quarterly distributions, the cash and the decision both stay with the LP… redeploy with us, take it elsewhere, or whatever the rest of the portfolio calls for at that moment. That call is the LP's to make.
None of this works if the underlying businesses aren't already throwing off cash, which is a constraint that ends up shaping every single acquisition decision we make. The mandate is narrow on purpose: we're underwriting businesses that already produce dependable operating cash, or have a clear near-term path to it.
We're not the right buyer for a turnaround story, which involves a different set of underwriting questions and a different risk profile than what our model is built around. And the businesses we end up acquiring almost always come with ownership groups or management teams I genuinely trust to keep operating well after the deal closes.
It's a narrower mandate than a traditional PE fund would carry, and I think it's the right mandate for this moment in particular (and especially for the LPs who've been patient long enough waiting on distributions that don't seem to be coming… a category of LP that, by the numbers, is growing every quarter).
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