NEW YORK (Diya TV) — Private equity firms are turning to a controversial strategy to deal with a growing problem: they cannot sell thousands of companies they already own. The strategy, known as continuation vehicles, now sits at the center of a heated debate between investment firms and the pension funds and institutions that back them.
Private equity firms make money by buying companies with borrowed funds, improving them, and selling them for a profit. That model has stalled. High interest rates have made debt costly. Buyers have pulled back. As a result, firms now hold more than 31,000 unsold companies, the largest backlog on record. Deal activity increased late last year. Still, it did little to ease the pressure. Firms face deadlines to return money to investors. Many have turned to continuation vehicles as a workaround.
A continuation vehicle allows a private equity firm to sell a company from one of its funds into another fund that it also manages. The firm records a gain on paper. Investors can cash out or roll their money into the new fund. The firm keeps control of the company and waits for market conditions to improve.
The use of continuation vehicles has surged. Evercore estimates the market could exceed $100 billion by the end of 2025. That is up from about $35 billion in 2019. Private equity firms say the strategy helps everyone. They argue that they place only strong companies into continuation funds. They say the extra time creates value and leads to higher future returns.
Many investors remain unconvinced. They worry about conflicts of interest. In these deals, the firm acts as both buyer and seller. That structure raises questions about pricing and forecasts.
“Continuation vehicles are indicative of rot in private equity,” said Marcus Frampton, chief investment officer of the Alaska Permanent Fund Corporation to the New York Times. The fund manages $83 billion. It has reduced its private equity exposure from 22 percent in 2021 to about 17 percent today. Other large investors share those concerns. Scott Ramsower of the Teacher Retirement System of Texas said he would prefer firms never use continuation funds. The Texas fund oversees about $229 billion.
Some continuation vehicle deals have ended badly. Clearlake Capital highlighted its sale of Wheel Pros to a continuation fund during a 2022 client gathering in California. The auto accessories company had benefited from strong pandemic demand. That demand faded. In September 2024, Wheel Pros filed for bankruptcy. Heavy debt crushed the business. Investors, including public pension funds from New York, Connecticut, and Nevada, lost their entire investment.
Clearlake declined interview requests. In a prior podcast, co-founder José E. Feliciano described continuation vehicles as a way to hold “A-plus assets” for the long term. Another firm, Platinum Equity, used a continuation vehicle for United Site Services, a portable toilet company. Executives called the deal a “win-win” in 2021. The company now plans to hand control to lenders. Investors expect total losses.
Concerns have moved beyond performance. This month, Abu Dhabi’s sovereign wealth fund filed a lawsuit in Delaware against Energy & Minerals Group. The suit claims the firm pushed a continuation deal that favored managers over investors. The lawsuit alleges rushed voting, uneven data sharing, and limits on investor communication. Energy & Minerals Group did not respond to requests for comment.
The private equity industry says safeguards exist. Firms say large investors must approve deals. They say independent reviews test valuations. Investors can decline to participate if they dislike the terms. Some investors say the process lacks transparency. They argue that time pressure and uneven information weaken true consent.
Private equity controls more than $7 trillion globally. The growing reliance on continuation vehicles highlights deeper stress in the industry. Bankruptcies remain lower than in traditional buyout funds, according to Evercore. Still, the recent failures have shaken confidence.
For now, continuation vehicles offer breathing room. They do not solve the core problem. Firms still need buyers willing to pay strong prices in a high-rate world. As interest rates stay uncertain, investors may demand tougher terms. Some may step back altogether. The next few years will test whether continuation vehicles deliver long-term value or simply delay losses in private equity.
