Private Equity Faces Scrutiny Over Continuation Funds
Major institutional investors are criticizing private equity firms for their increasing use of continuation vehicles to sell portfolio companies to themselves. This practice, driven by a record backlog of over 31,000 unsold companies, raises concerns about valuations and conflicts of interest. The value of continuation vehicles is expected to grow from $35 billion in 2019 to over $100 billion by 2025. Prominent investors, including Alaska Permanent Fund Corporation and Teacher Retirement System of Texas, have expressed strong objections. Recent high-profile bankruptcies, such as Wheel Pros and United Site Services, have intensified scrutiny. Legal challenges are emerging, with Abu Dhabi's sovereign wealth fund filing a lawsuit against Energy & Minerals Group over continuation fund practices.
*this image is generated using AI for illustrative purposes only.
Private equity firms are facing mounting criticism from major institutional investors over their increasing reliance on continuation vehicles, with some describing the practice as indicative of fundamental problems within the industry. The controversy centers on firms selling portfolio companies to themselves rather than external buyers, raising questions about valuations and conflicts of interest.
Industry Grapples with Record Backlog
The private equity sector, managing over $7 trillion in investor capital, is contending with a record backlog of more than 31,000 unsold companies. High interest rates have made debt-financed acquisitions prohibitively expensive for potential buyers, forcing firms to seek alternative exit strategies. Continuation vehicles have emerged as a popular solution, allowing firms to transfer companies between their own funds while booking paper gains.
The scale of this trend is significant:
| Metric | 2019 | 2025 (Expected) | Growth |
|---|---|---|---|
| Continuation Vehicle Value | $35.00 billion | $100.00+ billion | ~185% |
Major Investors Express Concerns
Several prominent institutional investors have voiced strong objections to continuation fund practices:
Marcus Frampton, chief investment officer of Alaska Permanent Fund Corporation (managing $83.00 billion in state oil revenues), described continuation vehicles as "indicative of rot in private equity." The Alaska fund has reduced its private equity allocation from 22% in 2021 to approximately 17% currently.
Scott Ramsower, overseeing private equity investments for the Teacher Retirement System of Texas (managing roughly $229.00 billion), highlighted inherent conflicts in continuation funds. "We'd be happier if a private equity firm never did any of these," Ramsower stated, emphasizing the problematic nature of firms being involved on both sides of transactions.
High-Profile Failures Intensify Scrutiny
Recent bankruptcies have validated investor concerns about continuation fund practices:
Wheel Pros, an auto accessories retailer showcased by Clearlake Capital as a success story in May 2022, declared bankruptcy in September 2024. All investors, including pension funds from New York, Connecticut, and Nevada, lost their investments entirely.
Platinum Equity's United Site Services, a portable toilet manufacturer sold to a continuation fund in 2021 as a "win-win" transaction, is now being turned over to lenders with investors expected to lose all their money.
Legal Challenges and Transparency Issues
The industry faces increasing legal scrutiny over continuation fund practices. Abu Dhabi's sovereign wealth fund filed a lawsuit in Delaware Court of Chancery against Energy & Minerals Group, alleging:
- The firm sought to "reap a massive benefit for themselves" at investors' expense.
- Attempted to force investors to vote on short notice.
- Provided inconsistent data to different parties.
- Prevented investor collaboration on deal evaluation.
Industry Defense and Market Outlook
Private equity firms maintain that continuation vehicles:
- Involve only their best-performing assets.
- Undergo independent vetting processes.
- Require major investor consent for transfers.
- Allow both existing and new investors to scrutinize financials before committing.
Nigel Dawn, global head of private capital advisory at Evercore, noted that continuation fund bankruptcy rates remain below traditional buyout fund rates of 5% to 10%.
Despite some deal activity pickup toward the end of the year, the fundamental challenges facing private equity exits remain largely unresolved, suggesting continued reliance on continuation vehicles as firms navigate the current market environment.
Investors are raising concerns about private equity firms using continuation vehicles to sell companies to themselves, citing conflicts of interest and questionable valuations amid a record backlog of unsold companies. This practice has come under increased scrutiny as it potentially represents a significant shift in how private equity firms manage their portfolios and exit strategies.
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