Private Equity Investors Are Taking Losses to Cash Out of Investments in Aging Companies

Evidence of a slowdown in private equity fundraising continues to accumulate as concerns about lack of liquidity remain top of mind for institutional investors. Last year, global private equity fundraising across private equity strategies fell 12.7 percent to $480.29 billion, according to data from S&P Global Market Intelligence. This was the third consecutive year that global fundraising declined. The slowdown is confirmed in data from Pitchbook, a data analytics firm. Using somewhat different definitions of PE strategies and data, its Global PE First Look report found that funds raised $407.5 billion globally across 2025, down from $611.6 billion raised in 2024.

In a recent paper, I flagged the slowdown in exits from investments in portfolio companies since mid-2022 as a major contributor to the liquidity crunch facing PE investors. The pick-up in exits in 2025 compared with 2024 did little to reduce the massive overhang of companies lingering in PE portfolios for more than 10 years. When institutional investors face a liquidity crunch due to inability of PE funds to exit investments, they may choose to sell their stake in the fund with aging assets to a secondary fund. Another option is for the general partner of the fund moving the aging companies into a continuation vehicle.

Secondary Markets

Private equity firms have established what are called secondary funds to buy the stakes of institutional investors who want to cash out of their private equity investments. Secondary funds started as a niche market but have expanded to a multi-billion dollar segment of the private equity industry. With private funds facing difficulty selling older companies or listing them on stock exchanges, investors have turned to secondary funds to address their need for cash and their lack of confidence that aging companies can be sold at the prices GPs report in their communications with investors.

Private capital investors — who are willing to sell their stakes at a steep discount to what PE fund managers guesstimate is the value of their portfolio companies in order to raise cash — sold a record amount of stakes to secondary funds in the past two years. About $110 billion is estimated to have changed hands in secondary transactions globally in 2025, up from $89 billion in 2024.

 Continuation Vehicles

Continuation vehicles require a bit more explanation. Unlike the secondary market — where the decision to cash out at a discount is made by limited partner (LP) investors — continuation vehicles are initiated by the GP of the fund with aging assets. Here’s how it works: When a private equity fund (Fund A) has an aging company in its portfolio, it can sell the company to a new fund (Fund B) known as a continuation vehicle. In these transactions, Fund A sells assets in a fund owned by a PE firm to another fund that is also owned by the same PE firm. The sale is funded by new investors and by limited partners in Fund A who want to roll over their investment in the asset into Fund B.

At this point the limited partner in Fund A can decide to cash out and take its pro rata share of the price at which Fund B acquires the company, or to roll over their investment into Fund B. The LP has 20 business days to decide what to do. This is a difficult decision for several reasons. The cash received by an LP in Fund A is net of transaction fees and also the GP collects its full 20 percent carried interest on the deal, a problem for investors since the company has not really been sold.

A bigger concern, however, is that the sale price of the company is set by the GP – a committee consisting of partners and principles of the PE firm that sponsored the fund with loyalties to the PE firm. The problem is that the GP is on both sides of the transaction. As the GP of Fund A, it wants the highest price for the company. As the GP of Fund B, it wants to pay the lowest possible price so there is an upside opportunity for investors in the continuation vehicle. This is a main way the GP attracts new investors – promising them a good deal with upside opportunity because they underpaid for the asset.

This, of course, is not what they tell the LPs in Fund A. They assure these investors that they are getting top dollar for the company. The LPs in Fund A do not have enough time in 20 days to ascertain whether the asset being sold into the continuation vehicle is a valuable company that will yield a much larger return if it remains private for several more years or if it is a dog that should have been liquidated at a loss years earlier. They are often concerned that it is a dog and that the PE firm wants to milk it for management fees for a few years longer before finally selling it at a loss — or worse case, the company declares bankruptcy.

If the GP sells the company from Fund A to Fund B at a discount, LPs who cash out will receive less than the company is worth (taking a haircut) and will also receive less cash than a simple pro rata share of the proceeds of the sale because their share of any transaction fees and of the GP’s carried interest will be deducted from the payment.

If the LP from Fund A rolls over their investment in the company to Fund B, the carried interest is not deducted and the GP invests the carry in the continuation vehicle. On the other hand, management fees at an older fund typically decline. Moving the company to Fund B starts the clock over again, and the LP is back to paying 1.5 to 2 percent a year on their share of the value of the company to the GP for “managing” the investment, even though the only thing the GP is doing is waiting for an opportune time to sell. Despite their concerns about the true quality of the portfolio company acquired by Fund B and the valuation placed on it by the GP, a majority of LPs roll over their investment in the company to the continuation vehicle.

It’s a good deal for the GP and the PE firm. They get to collect the carried interest from the sale of the portfolio company from Fund A to Fund B even though the company has not actually been sold and may, in the end, be sold at a steep loss or not sold at all. It’s more questionable for LPs in Fund A who are not able to ascertain whether they received fair market value for the company and who are obligated to start over again paying management fees to the GP of Fund B. Investors may wonder if their best interests are being served.

Delaying the Inevitable? 

Some investors — the Alaska Permanent Fund Corporation and the Teacher Retirement System of Texas among them — are concerned that this is just delaying the day of reckoning. They fear that these deals may lead to unrealistic valuations for the companies and unrealistic projections of what the companies will ultimately be sold for. Their concerns about these circular deals have intensified following bankruptcies of companies such as Wheel Pro and United Site Services after their sales to continuation vehicles. The Abu Dhabi sovereign wealth fund ADIF is suing private equity firm EMG for breach of fiduciary duty to investors in the original fund when selling U.S. natural-gas company Ascent Resources to a continuation vehicle. ADIF is arguing that EMG was not looking out for the interests of limited partners in the original fund and ignored offers for Ascent at higher prices than the price at which it was acquired by the continuation

The combination of secondary fund transactions and continuation vehicle transactions to cash out investments in aging portfolio companies has reached record highs; PE investors carried out more than $200 billion of these transactions in 2025. It is reasonable to expect more questions being raised about this kind of financial engineering.

This first appeared on CEPR.

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