New investors become "straw buyers," continuously earning "management fees" – the "Ponzi scheme" of American private equity giants

According to ZeroHedge, in the most blatant act of self-interest since the last crisis, American private equity giants are selling assets to themselves at a record pace.

To support their crumbling empires, these firms are adopting a strategy criticized by outsiders as desperate and reminiscent of a Ponzi scheme: not only making new investors "the bag holders," but also locking in management fee income indefinitely.

Data from Raymond James indicates that by 2025, transactions involving private equity firms raising funds from new investors to purchase their own old fund portfolios are expected to reach an astonishing $107 billion, far exceeding last year's $70 billion. These tools, known as "continuation vehicles," allow private equity giants to return funds to limited partners of old funds in desperate need of cash while maintaining control over the assets. More critically, this resets the timer on management fees and carried interest.

This operational model has sparked strong concerns in the market about conflicts of interest. Private equity firms act as both buyers and sellers in these transactions, effectively controlling the pricing power of assets as they shift from one "pocket" to another. Limited partners, such as pension funds, worry that managers may intentionally undervalue assets to harm the interests of exiting investors, paving the way for high returns for new funds.

Despite institutions like Jefferies predicting that global related transaction volumes will approach $100 billion, and the industry internally beautifying it as a "win-win liquidity solution," a Bain & Company survey shows that nearly two-thirds of limited partners still prefer traditional exit methods—namely, selling to external parties or IPOs. As this "recycling of funds game" becomes the new normal, the market questions whether this is merely a means to prolong the private equity bubble until the music finally stops.

Surge in Continuation Funds: The "Hot Potato" of Internal Digestion

Against the backdrop of genuine market exit channels remaining frozen, private equity firms are using "continuation funds" as their preferred tool. According to the Financial Times, about one-fifth of private equity exit cases this year involved such operations, a significant increase from the 12-13% in previous years. Sunaina Sinha Haldea of Raymond James predicts that transaction volumes will exceed $100 billion by 2025.

The core of this mechanism is that when private equity giants cannot find external buyers, they establish new funds and pass the "hot potato" internally. Sunaina Sinha Haldea describes it as a "popular and effective multi-win liquidity solution" in the current environment. However, critics point out that this is essentially the ultimate "want it both ways" scheme: cashing out old funds, locking in new funds, and indefinitely extracting management fees from the same assets.

Giants Entering the Scene: From Last Resort to Preferred Tool

The Financial Times notes that the list of participants in such operations reads like a "who's who" of the private equity industry. PAI Partners transferred part of its stake in the ice cream giant Froneri (a Häagen-Dazs affiliate) back into a continuation fund, with a transaction valuation of €15 billion In addition, companies such as Vista Equity, New Mountain Capital, and Inflexion have deployed billions of dollars in follow-on funds to retain their core assets, rather than pushing them to the public market or seeking genuine third-party buyers.

Even EQT CEO Per Franzén, who has not yet ventured into this field, recently acknowledged the intention to join, with motives that are obvious—generating additional fees on existing holdings. What was once seen as a "last resort" for dealing with neglected assets has now transformed into a preferred tool for hoarding quality assets.

Conflicts of Interest and Legal Risks: The Pricing Power of Mutual Struggle

This self-dealing model hides significant conflicts of interest. Since private equity firms sit on both sides of the transaction table, they determine the price of asset transfers. This has led to lawsuits from institutional investors such as the Abu Dhabi Investment Authority.

The Abu Dhabi Investment Authority has sued the U.S. company Energy & Minerals Group (EMG), accusing it of attempting to undervalue the natural gas driller Ascent Resources in a self-sale.

The lawsuit claims that EMG attempted to increase its ownership by underpricing and restarting fee collection. The deal ultimately fell apart due to the lawsuit, and external bidders are now intervening. Such cases highlight the anger of limited partners: they are concerned that managers are using valuation manipulation to "harvest" exiting investors while paving the way for the returns of new funds