Private equity’s recent trend of selling assets to itself – through continuation vehicles – isn’t a fleeting anomaly. It’s a complex response to a shifting market landscape, and signals a potential long-term evolution in how PE firms manage their portfolios. While concerns around conflicts of interest are valid, the practice is likely to become more sophisticated and, potentially, more commonplace.

The Exit Environment: Why Sell to Yourself?

The core driver behind this trend is a challenging exit environment. Initial Public Offerings (IPOs) have been sluggish, and strategic buyers are often hesitant, demanding lower valuations than PE firms are willing to accept. As Raymond James’ Sinha Haldea points out, the $107 billion projected for intra-firm sales in 2025 is a record, directly correlated to difficulties finding external buyers. This isn’t simply a 2025 phenomenon; the trend accelerated in the latter half of 2023 and continued throughout 2024, suggesting a structural shift.

Consider the case of Vista Equity Partners. Their use of continuation vehicles allowed them to extend the life of successful portfolio companies, capitalizing on continued growth opportunities without forcing a premature exit. This strategy isn’t about dumping underperforming assets; it’s about maximizing value from strong performers in a constrained market.

The Appeal of Continuation Vehicles

Continuation vehicles offer several benefits. They allow General Partners (GPs) to return capital to Limited Partners (LPs) in older funds, satisfying investor demands for liquidity. Crucially, they also allow GPs to retain upside potential in high-performing assets, generating additional management and performance fees. This fee structure is a key incentive, but also a source of scrutiny.

Pro Tip: LPs should carefully scrutinize the terms of continuation vehicle offerings, paying close attention to valuation methodologies and potential conflicts of interest. Independent valuation assessments are crucial.

The Conflict of Interest Debate

The most significant criticism of these deals centers on potential conflicts of interest. Critics argue that GPs, acting as both seller and buyer, may be incentivized to undervalue assets in the initial sale to the continuation vehicle, benefiting the new fund at the expense of original investors. This concern is particularly acute for LPs who lack the internal expertise to independently assess the value of private companies.

However, proponents argue that the introduction of new investors into the continuation vehicle provides a market-based check on valuation. Furthermore, GPs have a fiduciary duty to act in the best interests of all investors, and reputational risk is a powerful deterrent against blatant self-dealing.

Did you know? Regulatory bodies, including the SEC in the US and equivalent organizations in Europe, are increasingly focused on the governance and transparency of continuation vehicle transactions. Expect increased scrutiny and potential regulatory changes in the coming years.

Future Trends: Evolution, Not Revolution

The intra-firm PE deal isn’t likely to disappear, but it will evolve. Here’s what to expect:

• Increased Transparency: Expect greater disclosure requirements regarding valuation methodologies, fees, and potential conflicts of interest.
• Independent Valuation: The use of independent valuation firms will become standard practice, providing LPs with greater confidence in the fairness of transactions.
• Specialized Continuation Vehicle Funds: We may see the emergence of funds specifically dedicated to acquiring assets from PE firms, creating a more liquid secondary market for these deals.
• LP Pushback: Savvy LPs will demand greater control over the terms of continuation vehicle offerings, including the right to participate in the new fund or receive a cash-out option.
• Focus on High-Quality Assets: Continuation vehicles will increasingly focus on acquiring truly exceptional assets with strong growth potential, justifying the premium valuations.

The recent activity from firms like PAI Partners and Inflexion demonstrates a willingness to utilize these structures for established, successful businesses. This suggests a move towards using continuation vehicles not just as a solution for difficult exits, but as a strategic tool for portfolio management.

The Role of Technology and Data Analytics

Advanced data analytics and AI-powered valuation tools will play a crucial role in enhancing transparency and mitigating conflicts of interest. These technologies can provide more objective assessments of asset value, reducing reliance on subjective judgment. Furthermore, blockchain technology could potentially be used to create a more secure and transparent record of transactions.

FAQ: Intra-Firm PE Deals Explained

What is a continuation vehicle?

A new fund raised by a PE firm to acquire assets from an existing fund, allowing the firm to extend its ownership and potentially capture further value.

Why are PE firms selling to themselves?

Due to a challenging exit environment with limited IPO activity and hesitant strategic buyers.

Are these deals a conflict of interest?

Potentially, as the PE firm acts as both seller and buyer. However, the introduction of new investors and regulatory scrutiny aim to mitigate this risk.

What does this mean for investors?

Investors need to carefully review the terms of continuation vehicle offerings and ensure independent valuation assessments are conducted.

The rise of intra-firm PE deals is a complex phenomenon with far-reaching implications. While concerns about conflicts of interest are legitimate, the practice is likely to become a more established part of the private equity landscape, driven by market conditions and the need for innovative portfolio management strategies. The key will be increased transparency, robust governance, and a commitment to acting in the best interests of all investors.