This year, private equity firms have been offloading companies to themselves at a record-breaking pace. This controversial practice has become a method for fund managers to hold onto assets as they struggle to find external buyers or execute public listings for a successful exit.

Sunaina Sinha Haldea, Global Head of Private Capital Advisory at Raymond James, indicated that approximately one-fifth of all deals in the private equity sector this year involve fund managers raising capital from new investors to acquire companies from their older funds, a significant increase from just 12% to 13% last year.

These transactions involve selling assets already held by a private equity firm to a so-called continuation vehicle—a new fund also managed by the same firm. While this maneuver can help return cash to investors in the older fund, it has sparked market concerns over potential conflicts of interest.

Haldea added, "The volume of such deals this year is set to break all historical records." She projects the final total value of these transactions will reach $107 billion in 2025, far surpassing last year's $70 billion.

Skip Fahlholz, Head of European Continuation Vehicle Transactions at Jefferies, concurred with this assessment, estimating the global volume of such deals will approach $100 billion this year.

In recent years, the use of these deal structures has surged dramatically as buyout firms find it difficult to secure desired valuations from external purchasers or public markets. Consequently, private equity firms are opting to retain ownership of assets, hoping to sell them at higher prices in the future.

European private equity firm PAI Partners adopted this model, selling a portion of its stake in ice cream group Froneri to one of its continuation vehicles for the second time, a deal that valued Froneri at €15 billion. Froneri owns well-known ice cream brands such as Häagen-Dazs in the US.

Beyond PAI, other firms including Vista Equity Partners, New Mountain Capital, and Inflexion Private Equity have also reduced their stakes in some core portfolio companies through multi-billion dollar continuation funds.

Haldea pointed out that, against a backdrop of a challenging exit environment where valuations are still gradually recovering from 2024 lows, these transactions have become a "popular and efficient liquidity solution that benefits all three parties involved."

This deal structure is particularly attractive to buyout firms because it generates additional management fee income and offers the potential for substantial future performance fees from the companies held within the older funds.

Per Franzén, Chief Executive of Swedish private equity group EQT, recently expressed a desire to engage in such transactions to earn extra fees from some of the group's holdings. EQT has not yet utilized a continuation vehicle.

However, some limited partners in private equity funds, such as pension funds, have voiced concerns. They argue that in these deals, the same buyout firm effectively acts as both the seller and the buyer.

Some investors worry that private equity firms might intentionally undervalue the assets being transferred, thereby harming the interests of investors in the older fund who are seeking an exit.

Private equity fund managers have responded by stating that they offer investors in the older fund the option to roll their stakes into the new fund, and that the transfer price of the assets is determined with the participation of new investors.

The problem, however, is that some investors, who typically invest based on trust in the fund manager rather than conducting independent analysis of the underlying assets, often lack the specialized expertise and resources to evaluate the value of a single company.

The Abu Dhabi Investment Authority, a sovereign wealth fund, recently filed a lawsuit against US private equity firm Energy & Minerals Group (EMG). The fund alleges that EMG shortchanged investors while planning to sell its stake in a company to one of its own continuation vehicles.

The Abu Dhabi Investment Authority claims that EMG intentionally undervalued natural gas drilling company Ascent Resources while preparing for its "self-sale." This transaction would have increased EMG's ownership stake in Ascent Resources while allowing EMG to resume collecting management fees from the company.