Global private equity (PE) firms are selling assets to their own newly managed funds at an unprecedented rate, as traditional exit channels become increasingly blocked. This strategy, known as using "continuation vehicles," is projected to reach a historic peak in transaction volume, fundamentally altering how the industry returns cash to its investors.

Data from Sunaina Sinha Haldea, Global Head of Private Capital Advisory at Raymond James, indicates such deals are expected to hit $107 billion in 2025, significantly higher than last year's $70 billion. Skip Fahrholz, who oversees these transactions in Europe for investment bank Jefferies, also forecasts that global sales involving continuation funds will approach $100 billion this year. Currently, these deals account for roughly one-fifth of all private equity sales in 2024, a sharp increase from just 12-13% last year.

This surge reflects the struggle buyout firms face in securing desired valuations from public markets or external purchasers. By shifting assets into continuation vehicles, fund managers can return cash to investors in the old fund while retaining ownership of the assets, hoping for higher returns later. However, this "left-hand-to-right-hand" practice, where the same manager acts as both buyer and seller, has sparked significant market concerns about potential conflicts of interest and the fairness of asset valuations.

While fund managers view it as an effective liquidity solution in a challenging environment, limited partners—particularly pension funds—now face new challenges in asset assessment and potential risks under this structure. Some sovereign wealth funds have even initiated lawsuits as a result.

The boom in continuation fund structures is primarily driven by buyout firms' inability to obtain their expected valuations from external buyers or public markets, leading them to hold investments longer in hopes of a future sale at a higher price. Sinha Haldea points out, "This year is destined to break all records." She believes that, with exit values still recovering slowly from 2024 lows, such transactions have become a "popular and effective multi-win liquidity solution."

This structure is highly attractive for private equity firms. It not only solves liquidity issues but also generates additional management fees through the new fund and offers the potential for future performance fees from companies that would have otherwise been in a mature fund. Per Franzén, CEO of Swedish PE giant EQT, recently stated that although his firm hasn't yet sold assets via a continuation vehicle, he hopes to begin such transactions to generate extra fees from certain holdings.

Once considered a last resort for dealing with hard-to-sell "problem assets," this method is now widely used to retain high-performing, quality assets. European private equity firm PAI Partners recently executed its second transaction involving the ice cream group Froneri, owner of the Häagen-Dazs brand, selling a portion of its stake to a continuation fund in a deal that valued Froneri at €15 billion.

Furthermore, several prominent firms, including Vista Equity Partners, New Mountain Capital, and Inflexion, have utilized multi-billion dollar continuation funds to reduce their stakes in some of their largest investments.

Although private equity managers argue that these deals offer original backers a chance to roll their stakes into the new fund and claim that new investors help price the asset transfer, supporters of PE funds, like pension funds, remain wary. The core conflict lies in the fact that the same buyout firm acts as both the seller and the buyer in these transactions.

Some investors worry that firms might undervalue the transferred assets, harming the interests of original fund investors seeking an exit. Additionally, investors accustomed to backing management teams rather than specific assets may lack the skills or capacity to evaluate individual companies. Research from consultancy Bain & Co found that nearly two-thirds of private equity fund investors still prefer exiting their holdings through traditional sales or initial public offerings (IPOs).

These conflicts of interest have already triggered real legal disputes. The sovereign wealth fund Abu Dhabi Investment Council recently sued US private equity firm Energy & Minerals Group (EMG), alleging it attempted to "short-change" investors when selling its stake to a continuation vehicle.

The Abu Dhabi fund claims that EMG undervalued its gas drilling company, Ascent Resources, when planning to sell it to itself. The transaction would have increased EMG's ownership stake and restarted its ability to earn fees from the group. Ultimately, EMG was forced to halt the deal, after which several investment groups expressed interest in acquiring Ascent Resources.