Private Equity, Lack of Exit Opportunity, and Why You Should Care
Ask anyone in the M&A industry and they will tell you that the last couple of years have been relatively slow. There are a slew of reasons for the lack of activity, chief among them are high interest rates and economic uncertainty. For privately held, family-owned businesses, these economic factors have less impact on overall decision making and good, middle market businesses are still getting sold. For private equity (PE), however, it is difficult to unload businesses bought during the “go-go” days of high valuations and low interest rates in a market that could result in a reduced valuation or low return to investors.
What is Exit Overhang?
Let’s review a simplified version of the private equity playbook. First, you raise capital. Traditionally, this has been from large institutional investors. Secondly, you buy companies with the capital. While you own these companies, you attempt to grow revenue and streamline operations. Lastly, you sell the companies, usually within 3-7 years. After private equity sells the companies, it can return capital to its investors.
Exit overhang happens when private equity is unable to sell the portfolio companies within the traditional 3-7-year timeline. Bain & Company found that global buyout funds have 29,000 unsold portfolio companies worth an estimated $3.6 trillion. With today’s slowed exit pace, measured in number of transactions, it is estimated that it would take close to 20 years to dispose of all 29,000 of those companies.
And if PE isn’t exiting their portfolio companies, that means they aren’t returning cash back to their investors or limited partners (LPs). That same Bain & Company report found that distributions to LPs fell to just 11% of net asset value (NAV) in 2024, the lowest level in more than a decade.
The coffers of LPs remain depleted. Overallocation to private equity, starting in 2022 with the denominator effect, continues to be a major variable, impacting many of the asset class’s most reliable investors. (Buyouts, March 2025)
When LPs aren’t getting distributions from their old investments, that means they can’t use the money to make new investments or rebalance their portfolios, which they may want to do in the face of economic uncertainty. At the end of 2024, almost 50% of LPs reported an overweighted portfolio exposure to PE.
How Did We Get Here?
If we think back to the golden days of deal making in 2021 and 2022, we saw that valuations were extremely high for sellers, primarily fueled by low interest rates. 2021, as an example, saw a surge in valuation multiples of over 30%. Starting in 2022, however, the Federal Reserve began raising interest rates to combat inflation. This transition away from a “zero-interest-rate policy” increased the cost of borrowing for new acquirers – driving down valuations.
Today, a private equity seller is trying to unload those highly valued businesses into an economy that has higher interest rates and significantly more economic uncertainty. Both of these factors lead to lower valuations (to be fair – valuations are still relatively high for sellers, just not 2021-2022 high). If they can’t sell something for more than they bought it, PE firms are reluctant to exit the business.
The Rise of Continuation Vehicles
Historically, exit strategies from port cos provide the liquidity that PE funds need to make distributions to LPs. After the US exit value reached a high of $828 billion in 2021, the total value of all exits in both 2022 and 2023 reached only about 70% of that total. (Deloitte, December 2024)
There are a few ways that private equity groups can exit from their portfolio companies. either to a strategic or another PE buyer, or they can go public via an initial public offering (IPO). Lately, they are frequently using another instrument called a continuation vehicle (CV). The aforementioned valuation gap makes selling the businesses difficult and IPOs are a type of sale that also suffer from low valuations and uncertainty.
We have seen private equity exits via IPOs drop from 21% between 2008 and 2021to just 2-3% in 2022 and 2023 (Deloitte). These factors have made CVs more popular in recent years. In the last five years, continuation funds have tripled in value, increasing to an estimated $63 billion in transaction value in 2024. (Jefferies).
To use this instrument, a PE fund takes an asset (or a few assets) that it does not want to sell at a market valuation and instead sells it into a new fund that the PE group also runs. The old fund oversees managing the new fund, which effectively increases the timeline that the PE firm must wait for valuations to improve, continue to collect management fees, reset any onerous economic terms, and make improvements to the company’s operating efficiency. When the asset is sold to the new fund, current LPs are asked if they’d like to cash out or move to the new fund. Most LPs, who are desperate for liquidity, choose to cash out and new investors are brought into the CV. The continuation vehicle can be made up of a single asset/company, or several.
What Are the Benefits of a Continuation Vehicle to a Private Equity Group?
Benefits
Cons
Allows the PE firm to continue to manage an asset through a difficult exit economy. CVs typically have a life of 3-5 years, with two, one-year extensions.
Extended life isn’t always the reason that a CV is created. Many CVs are created when an asset still has years to go in its prior fund.
The PE firm can “crystalize their carry” (take their fees from selling the business) from the LPs that cash out.
Often, new investors require that the PE firm invest its carry earned from the sale.
It is a way to have more capital available to the portfolio company. Funds near the end of their investing period may run out of capital to grow and invest in portfolio assets.
Investing in a CV (especially one created for a single portfolio company) doesn’t give an investor the diversity that investing in a traditional PE fund has. A single asset CV is, by definition, very concentrated exposure. In addition, initial investors did not invest with a PE group with the expectation that they would have to make (and underwrite) investment decisions about single portfolio assets (usually they are given 20 days to decide if they want to join the CV) and this results in them feeling like they have to sell their interest.
The PE group gets to reset some investment terms:
- Carry
- Hurdle Rate
- Management Fees
There is an inherent conflict of interest when a PE firm is managing both the selling investors and the buyers of the asset. Because a PE group has its own financial interests in this transaction, a PE group is often required to get a conflict-of-interest waiver from selling shareholders. They may also be required to provide an independent valuation or fairness opinion.
Allows a PE group to preserve upside that they would lose if forced to exit through a traditional sale
There is often language in the sale process that rewards the selling LPs with the proceeds of a sale that occurs within 12 months of the establishment of the CV. This protects the selling investors from the PE group making a quick gain immediately following its transfer to the CV.
A CV can be used if an M&A process does not yield an expected sale price. According to Lazard (2025), in 2024, 56% of single-asset continuation vehicles were priced at or above net asset value.
Deals cannot get done if the asset is overvalued on the books of the PE firm. If a PE group does not want to write down an asset to its current market value, it is unlikely that they will find new investors at an inflated price.
Continuation Vehicles and Retail Investors
This article has thus far thrown out a lot of jargon and high finance concepts. Continuation vehicles have historically been the purview of institutional investors – who are more financially sophisticated, have lower needs for liquidity, and higher tolerance for risk.
Since the signing of President Trump’s executive order on August 7, 2025, allowing for individual/retail investors to access alternative assets for their 401(k) plans, the PE asset class is no longer the only playground for institutional investors. The question is, are retail investors ready for these types of investment decisions?
The very creation of continuation funds highlights the challenges of investing in private equity. A CV is often used to provide investors with liquidity. Retail investors who can have everyday emergencies or ever-changing liquidity needs will not be able to withstand investments with this lack of marketability. In addition, the information available to retail investors on assets in this class will have to be limited. Many PE groups will withhold complete transparency into assets for fear of giving away proprietary information to competitors.
As the expected M&A market continues to underwhelm for private equity exits, the need for creative answers for investor liquidity will continue. Continuation vehicles are evolving every day as they become more commonplace. The potential of adding retail investors to the mix will drive even more change and evolution of these assets.