Private Equity Firms Turn to Continuation Funds, 60% Increase in Self-Sell, Self-Buy Strategy

In the first half of 2025, the private equity industry faced significant challenges in exiting investments, leading to a record-high use of a controversial strategy known as "self-sell, self-buy" through continuation funds. This strategy involves private equity firms selling assets from one of their funds to another fund managed by the same firm, allowing investors to either continue holding their investments or cash out. The total amount of capital returned to investors through this method reached 410 billion dollars, marking a 60% increase from the previous year and accounting for 19% of the industry's total exit volume.

The surge in continuation fund usage reflects the industry's struggles with traditional exit channels. The IPO market has been sluggish, and merger and acquisition activities have been weak, resulting in insufficient cash returns. Private equity firms are currently holding over 3 trillion dollars in unsold assets, and the cash returned to investors over the past four years has been only half of the traditional expectations.

Leading firms such as Vista Equity Partners, New Mountain Capital, and Inflexion have all engaged in significant continuation fund transactions. Vista, for instance, raised a record 56 billion dollars through a continuation fund, selling a substantial portion of its stake in the IT company Cloud Software Group to a new fund it manages. Inflexion, on the other hand, sold stakes in four investments, including industrial company Aspen Pumps and pharmaceutical firm Rosemont Pharmaceuticals, through a 23 billion pound transaction.

The use of continuation funds has become a prevalent strategy among private equity firms as they navigate the challenging exit environment. However, this approach has raised concerns among some investors, who view it as a means of recycling capital rather than achieving genuine exits. A recent report indicated that while a significant portion of investors still prefer traditional exit methods such as selling to companies or through IPOs, a growing number are becoming more open to continuation funds as a viable exit option.

The increasing popularity of continuation funds highlights the industry's need for alternative exit strategies in the face of a challenging market environment. As traditional exit channels remain constrained, private equity firms are likely to continue leveraging continuation funds to manage their portfolios and meet investor expectations. This trend underscores the evolving nature of the private equity landscape, where firms are adapting to market conditions by exploring innovative solutions to liquidity challenges.