Have you ever wondered what happens when the usual ways to cash out big investments just… stop working? In the world of high finance, something fascinating—and a bit troubling—is unfolding right now.
Big investment firms that buy and manage companies are facing a tough reality: traditional exits like selling to outsiders or going public have slowed to a crawl. So they’ve come up with a clever workaround that’s raising eyebrows across the industry.
The Rise of Internal Deals in Private Equity
Picture this: a firm owns a successful company in one of its older funds. Investors in that fund are getting restless—they want their money back plus profits. Normally, the firm would sell the company to an outside buyer. But what if there are no buyers willing to pay a good price?
Enter a relatively new tool that’s quickly becoming popular. These firms are raising fresh money from investors and using it to buy the company from their own older fund. It’s like moving an asset from your left pocket to your right pocket, but with billions of dollars on the line.
This year, about one in five of all exits in the private equity space happened this way. That’s a noticeable jump from previous years, where it hovered around one in eight or so. Experts are predicting even bigger numbers next year—potentially over $100 billion in these kinds of transactions.
How These Internal Transactions Actually Work
The mechanics are pretty straightforward, at least on the surface. The firm creates a new investment vehicle—often called a continuation fund. New investors put in money, and that cash is used to purchase selected companies from an existing fund that’s reaching the end of its life.
For the old fund’s investors, this means liquidity. They get cash distributions sooner than they might otherwise. For the firm itself, it means keeping control of assets they believe still have plenty of upside. And importantly, it restarts the clock on management fees.
I’ve always found it interesting how financial innovation often emerges during tough times. When markets are booming, everyone sticks to the classics. But when things get tight, creativity kicks in—sometimes for better, sometimes for worse.
This approach has become a popular way to provide liquidity in a challenging environment.
– Industry analyst
That’s the polite way to describe it. Others see it differently.
Why Some Call It Self-Dealing
Here’s where things get controversial. The same management team is on both sides of the deal. They decide which assets move over, and crucially, they help determine the price.
Think about that for a second. If you’re selling something to yourself, what’s stopping you from setting a price that benefits one side more than the other? Investors leaving the old fund might worry they’re getting shortchanged on valuation. Meanwhile, the firm sets itself up for potentially bigger future profits in the new fund.
There have already been legal battles over this exact issue. Some large institutional investors have pushed back hard when they felt valuations were too low, arguing it unfairly enriched managers at their expense.
- The firm gets to keep managing promising assets
- Management fees continue flowing
- Potential carried interest gets reset
- Old investors get some liquidity
- New investors buy into established companies
On paper, it sounds like everyone benefits. But in practice, those benefits might not be evenly distributed.
The Numbers Tell an Interesting Story
Let’s look at some figures that highlight how fast this trend is growing. Last year saw around $70 billion in these internal moves. Projections for next year are pushing toward $107 billion according to some estimates, while others say close to $100 billion globally.
That’s not pocket change. We’re talking about a significant portion of total private equity exits happening through this channel. In a market where traditional sales and public offerings have slowed dramatically, these internal transactions are filling the gap.
What strikes me is how quickly this has gone from niche strategy to mainstream tool. Just a few years ago, these deals were mostly used for problematic assets that couldn’t find outside buyers. Now they’re increasingly deployed for some of the best-performing companies in portfolios.
The Conflict of Interest Dilemma
At the heart of the debate is a fundamental conflict. Private equity firms have a duty to maximize returns for their investors. But they also have strong incentives to keep assets under management—because that’s how they earn fees.
When a fund approaches the end of its term, pressure builds to return capital. Selling to an outsider means losing those management fees forever. Moving the asset to a new fund? The fee stream continues, and the potential for future performance bonuses restarts.
It’s not hard to see why managers might prefer this path, especially for their strongest holdings. But is it always in the best interest of the original investors?
Many investors still prefer traditional exits to independent third parties.
– Recent industry survey
Surveys show that a majority of limited partners would rather see real external sales or IPOs. Yet with those options limited, they’re increasingly accepting these internal solutions.
Real-World Examples (Without Naming Names)
Several major players have executed large-scale versions of these deals recently. One European firm moved part of its stake in a well-known consumer brand to a new vehicle—remarkably, for the second time. Others have transferred billions worth of technology and capital assets this way.
Even firms that haven’t heavily used this tool yet are publicly expressing interest in doing so. The appeal is clear: generate additional fees on assets you already know well, while providing some liquidity to restless investors.
These aren’t small experiments. We’re talking about transactions valued in the billions, involving household-name companies that most people would recognize.
Is This Sustainable Long-Term?
That’s the million-dollar question—or rather, the hundred-billion-dollar question. In the short term, these internal deals are keeping money moving and distributions flowing. Firms stay in business, investors get some cash, and strong companies remain under experienced management.
But over time, what happens when assets keep getting rolled from fund to fund without ever facing real market pricing? Does it create a bubble of inflated valuations supported only by internal transactions?
Some worry this could delay true reckoning with underperforming assets. Others argue it’s simply adapting to a new reality where public markets are less welcoming to certain types of companies.
In my view, the truth probably lies somewhere in between. These tools can be legitimate solutions when used transparently and fairly. But without strong governance and independent valuation processes, the risks of abuse are real.
What Investors Should Watch For
If you’re invested in private equity—or considering it—here are some key things to pay attention to:
- How frequently your manager uses internal transactions
- The process for determining transfer prices
- Whether independent advisors are involved in valuations
- The performance track record of continued assets versus sold ones
- Transparency around fees in the new vehicle
Good managers will welcome questions about these deals. The best ones have robust processes to ensure fairness for both continuing and exiting investors.
The Bigger Picture for Private Markets
Stepping back, this trend reveals something important about where private equity stands today. The industry has grown enormously over the past decade, managing trillions in assets. But that growth came during a period of easy money and abundant exit opportunities.
Now, with higher interest rates and more cautious public markets, the old playbook isn’t working as well. Firms are having to find new ways to deliver returns and liquidity.
Perhaps the most interesting aspect is how this highlights the maturing of private equity as an asset class. What started as an alternative investment vehicle has become a massive, sophisticated industry with its own internal dynamics and challenges.
These internal transactions might be just one chapter in that evolution. Or they could signal deeper structural issues that need addressing. Only time will tell.
Either way, it’s a reminder that even in the world of high finance, when traditional paths close, people find new ones—even if those paths lead through somewhat murky territory.
The debate over these practices will likely continue for years. But one thing seems certain: internal deals are now a permanent part of the private equity landscape. Understanding them isn’t just useful—it’s essential for anyone involved in these markets.
What do you think—is this smart financial engineering or something more concerning? The line between innovation and conflict isn’t always clear in private markets.
One thing I’ve learned watching these markets over the years: when everyone starts doing the same thing at once, it’s worth taking a closer look. Sometimes it’s genuine progress. Sometimes it’s the prelude to bigger problems.
In this case, the jury is still out. But the stakes—for investors, managers, and the broader financial system—are undeniably high.
