Key Takeaways
- • Private equity firms face a record backlog of more than 31,000 unsold companies, driven by elevated interest rates that have made debt-financed acquisitions prohibitively expensive for potential buyers and disrupted the traditional exit strategy model.
- • Continuation vehicles—funds structured to allow PE firms to sell portfolio companies from one fund to another fund under the same management—are increasingly used to defer liquidity problems by booking paper gains while waiting for market conditions to improve.
- • Clearlake Capital demonstrated the scale of this strategy, generating average annual returns of 50 percent partly through circular sales of portfolio companies between its own investment vehicles, according to documents presented to investors at a May 2022 gathering.
- • Investors are expressing concern about the structural integrity of these transactions, citing risks inherent in the "insular nature" of sales where private equity firms act simultaneously as both buyer and seller, raising questions about valuation discipline and fiduciary responsibility.
- • Deal activity has picked up toward the end of 2025, but momentum remains insufficient to meaningfully reduce the accumulated backlog of unsold companies.
Summary
The private equity industry faces a structural liquidity crisis as firms contend with unprecedented challenges to their core business model. With more than 31,000 companies sitting unsold—a record amount—PE firms are struggling to execute traditional exit strategies. The primary culprit is a prolonged high interest rate environment that has made debt-financed acquisitions uneconomical for most potential buyers, effectively freezing the market for secondary and tertiary sales.
In response, private equity firms have increasingly turned to continuation vehicles as a workaround. These funds allow managers to sell portfolio companies from one investment vehicle to another vehicle they also control, effectively transferring assets within their own ecosystem. The transaction creates a "paper gain" that can be reported to investors while deferring the actual exit until market conditions—particularly interest rates—improve. This circular structure allows firms to manage performance metrics and investor distributions without achieving genuine third-party sales.
Clearlake Capital exemplified this strategy at scale. In May 2022, the firm presented investors at the Monarch Beach Resort & Club in California with evidence that continuation vehicle sales were central to generating exceptional returns—one Clearlake fund posted average annual returns of 50 percent. While the firm's overall performance was strong, the reliance on circular transactions between its own funds raised questions about the sustainability and true economic merit of those returns.
Sophisticated investors and fiduciaries have begun to voice alarm about the implications. The risk, according to investor complaints, stems from the structural conflict of interest inherent in these sales: when a single PE firm acts as both buyer and seller, the normal market discipline that typically forces price discovery and rigorous valuation disappears. Without independent external buyers setting prices, questions emerge about whether asset values reflect genuine economic worth or are inflated to support paper returns and fee collection.
While deal activity accelerated toward the end of 2025, the improvement remains insufficient to make meaningful progress against the backlog. The continuation vehicle model, though providing short-term relief for capital deployment and performance reporting, represents a symptom of deeper dysfunction in the private equity market structure—one that depends fundamentally on the ability to execute profitable exits in robust deal environments.
In response, private equity firms have increasingly turned to continuation vehicles as a workaround. These funds allow managers to sell portfolio companies from one investment vehicle to another vehicle they also control, effectively transferring assets within their own ecosystem. The transaction creates a "paper gain" that can be reported to investors while deferring the actual exit until market conditions—particularly interest rates—improve. This circular structure allows firms to manage performance metrics and investor distributions without achieving genuine third-party sales.
Clearlake Capital exemplified this strategy at scale. In May 2022, the firm presented investors at the Monarch Beach Resort & Club in California with evidence that continuation vehicle sales were central to generating exceptional returns—one Clearlake fund posted average annual returns of 50 percent. While the firm's overall performance was strong, the reliance on circular transactions between its own funds raised questions about the sustainability and true economic merit of those returns.
Sophisticated investors and fiduciaries have begun to voice alarm about the implications. The risk, according to investor complaints, stems from the structural conflict of interest inherent in these sales: when a single PE firm acts as both buyer and seller, the normal market discipline that typically forces price discovery and rigorous valuation disappears. Without independent external buyers setting prices, questions emerge about whether asset values reflect genuine economic worth or are inflated to support paper returns and fee collection.
While deal activity accelerated toward the end of 2025, the improvement remains insufficient to make meaningful progress against the backlog. The continuation vehicle model, though providing short-term relief for capital deployment and performance reporting, represents a symptom of deeper dysfunction in the private equity market structure—one that depends fundamentally on the ability to execute profitable exits in robust deal environments.
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