Firms increasingly rely on continuation funds to sell assets to themselves amid tough market conditions.

Private equity firms have set a new record in deploying a controversial financial maneuver known as continuation funds, using the strategy to exit $41 billion worth of investments in the first half of the year, according to a recent report by Jefferies. The tactic, while legal and increasingly widespread, has drawn scrutiny from regulators and limited partners for its potential conflicts of interest.

Continuation funds allow private equity firms to sell assets from one of their funds to a newly created fund that they also manage. This effectively allows the firms to cash out clients while retaining ownership and control of the same assets, bypassing traditional exit routes such as public listings or third-party sales.

With difficult market conditions and a lack of viable external buyers, many firms are turning to continuation funds as an alternative exit strategy. The practice has soared in popularity as firms look to unlock liquidity and extend investment timelines amid volatile public markets and rising interest rates.

Jefferies’ data revealed a stark increase in the volume of such deals, surpassing previous highs and highlighting the growing dependence on this tactic. The investment bank noted that the surge reflects the current challenges in monetizing portfolio companies through standard exit channels.

“This is a sign of how frozen the traditional exit environment has become,” said Daniel Connors, a senior analyst at Jefferies. “Continuation funds are offering a temporary solution, but they also raise questions about transparency, fairness, and long-term risk.”

Critics argue that selling assets to oneself presents inherent conflicts, especially if valuations are not objectively established. Limited partners—such as pension funds and endowments—have expressed concern over how such deals are priced and the potential for managers to favor their own interests.

In response, some private equity firms have implemented independent valuation committees and third-party assessments to provide more transparency. Still, skepticism remains high.

Despite the controversy, supporters of continuation funds claim they offer flexibility and protect investors from being forced into exits at inopportune times. These funds also allow sponsors to continue managing high-performing assets, particularly when market conditions do not support profitable sales.

Industry insiders expect the trend to continue as firms struggle with weak IPO markets and tight acquisition financing. According to Jefferies, nearly 30% of private equity exits this year have involved continuation funds—a dramatic rise from just a few years ago.

Regulators are beginning to take note. The U.S. Securities and Exchange Commission has proposed new rules to enhance disclosure requirements and limit potential conflicts in continuation fund transactions. If implemented, these rules could reshape how such deals are structured and approved in the future.

As private equity continues to navigate a challenging environment, the use of continuation funds will likely remain a hot topic, balancing short-term liquidity needs with long-term accountability. Whether the practice becomes a mainstay or faces greater regulatory pushback remains to be seen—but for now, it is redefining how firms exit their investments in an evolving financial landscape.