The PE industry is caught between a proverbial rock and a hard place as to liquidity. There have been a dearth of asset realizations lately due to soaring interest rates, decades-high inflation, pressure on valuations and major slowdowns in the M&A and IPO markets. That lack of realizations has limited fund distributions to LPs, making it difficult for them to participate in PE sponsors’ persistent fundraising efforts. To cure the problem, some PE sponsors have begun issuing “synthetic” distributions to LPs which, functionally, are distributions generated from the proceeds of net asset value (NAV) facilities that are collateralized by PE funds’ portfolios of investments. Although LPs generally favor the use of NAV facilities, they have concerns about sponsors using them to issue synthetic distributions due to a perceived lack of transparency, the relative cost of those distributions and the impact on certain fund performance metrics. This two-part article series holistically examines sponsors’ uses of synthetic distributions and LPs’ rising concerns about that tactic. This first article explains why and how synthetic distributions have become more popular, along with detailing LP concerns about them and some typical misconceptions in the industry. The second article will consider how PE sponsors can respond to and work to alleviate LPs concerns about synthetic distributions in a constructive manner. See “What Does It Take to Get Across the Finish Line in the Current Fundraising Environment?” (Mar. 7, 2024).