Private Equity Funds' "Continuous Trading": Selling and Buying, Recording $100 Billion in "Paper Profits"
The volume of "paper profit transactions," where private equity funds sell and buy back their own assets, has surged to $100 billion this year.
A New York Times private equity reporter reported on the 24th that private equity firms are using continuation trading as a short-term solution, allowing M&A companies to sell and buy back themselves, recording "paper profits" and then waiting for interest rates to improve. This volume is expected to reach $100 billion by the end of this year.
Private equity has rapidly grown into one of the largest sectors of the global economy, attracting over $7 trillion in investor funds. Some investors are increasingly concerned that new strategies, such as continuation trading, are delaying a painful reckoning, the NYT reported.
Private equity firms are increasingly leveraging this "sequential transaction" strategy, and according to investment bank Evercore, the dollar value of continuous vehicles across the industry will reach more than $100 billion by the end of 2025, a threefold increase from approximately $35 billion in 2019.
In May 2022, private equity firm Clearlake Capital was selling companies it owned from one investment fund to another, called "continuation vehicles," despite one fund generating an average annual return of 50%.
Private equity firms have grown rapidly with their core business model of assuming debt and buying companies for profit, but years of high interest rates have made debt-laden companies too expensive for many potential buyers, and private equity firms are facing a backlog of more than 31,000 unsold companies, a record number.
The New York Times reported that "dealing activity picked up slightly late this year, but not enough to significantly clear the backlog of deals." Investors said the closed nature of these sales, with private equity firms acting as both buyers and sellers, has led to questionable valuations and unrealistic projections, leaving investors vulnerable to painful surprises.
At a 2022 event for pension plan administrators and other Clearlake clients at the Monarch Hotel, Clearlake Capital touted the success of automotive accessories retailer Wheel Pros, advertising its sale to one of its affiliated funds.
Wheel Pros sold colorful hubcaps and other accessories during the pandemic, when consumers had ample stimulus checks and more time to work on their cars.
Two years after that event, in September 2024, Wheel Pros declared bankruptcy due to slowing sales following the pandemic, unable to service its mounting debt.
The bankruptcy wiped out all of its investors, including public employee pension funds in New York, Connecticut, and Nevada. The Connecticut and Nevada public employee pension funds sold some of their WheelPro stakes before the bankruptcy, reaping small sums.
“The continuation of the process shows the corruption of private equity,” Marcus Frampton, chief investment officer of the Alaska Perm Fund Corporation, told the New York Times.
The company manages $83 billion in state funds derived from oil revenues and distributes them annually to Alaskans.
He said the increased use of private equity is one reason the Alaska Fund has scaled back its investments in private equity, saying companies are avoiding its original purpose of creating value by buying and selling companies.
In 2021, the Alaska Fund held 22% of its assets in private equity. It now holds about 17%. Scott Ramsower, who oversees private equity investments for the Texas Teachers' Retirement System, the state's public pension fund, told the Times that "there's an inherent conflict of interest in these types of funds, as private equity firms are often involved on both sides of the deal." He added that "it would be better for private equity firms to never do these things."
The Abu Dhabi sovereign wealth fund filed a lawsuit in Delaware court on Thursday (C.A. No. 2025-1389-NAC), alleging that the private equity firm Energy & Minerals Group is "seeking to make a significant profit" by selling the company as a continuation vehicle at the expense of investors.
In its lawsuit, the Saudi fund alleged that the firm "tried to force the fund and other investors to vote on the sale within a short period of time, provided different investors with different information, and did not allow investors to consult with each other about the transaction."
Private equity firm Clearlake has been one of the most frequent users, with six consecutive funds since 2020. Founded in 2006 by billionaires Feliciano and Behdad Eghbali, Clearlake initially managed $182 million. Twenty years later, it now manages approximately $90 billion in investor funds, and in November announced plans to double that amount with the purchase of another fund, Petway.
The Pathway fund announced in a November press release that Clearlake Capital Group, L.P., a global investment firm managing an integrated platform of private equity, liquidity, private credit, and other related strategies, today announced that it has entered into a definitive agreement to acquire Pathway Capital Management ("Pathway"), a global provider of private markets solutions for institutional and wealth markets.
Terms of the transaction were not disclosed and are expected to close in the first quarter of 2026, subject to necessary regulatory approvals and other customary closing conditions. The press release continued, "This acquisition significantly expands Clearlake's private markets platform, adding complementary capabilities and strengthening its position as a leading diversified alternative asset manager with $185 billion in assets under management."
Founded in 1991, Pathway currently manages over $95 billion in assets and has a proven track record and expertise in tailored private equity, private equity funds, infrastructure, secondary investments, and co-investments. This is provided through a tailored private market strategy or multi-investor fund.”
This article is based on a New York Times report covering the M&A process and bankruptcy of private equity firm Clearlake.
Clearlake initially acquired WheelPros in 2018 for about $420 million. As the new owner, the private equity firm pressured executives to acquire nearly every competitor that makes car and truck wheel accessories, dramatically reducing the company's profits from about $50 million in 2018 to over $200 million in 2021.
Despite a strong IPO market in 2021, private equity firms are often forced to wait several years after a company goes public to recoup all their profits. Clearlake added WheelPros to its $2.3 billion series investment vehicle, attempting to capture a return more than four times the price it initially paid for the company three years ago.
As is common with successive funds, Clearlake offered existing investors the opportunity to cash out or roll their investments into the new fund.
The Pennsylvania State Employees' Retirement System was one of the sellers, while state pensions in Connecticut and Nevada sent some of their commitments to the new fund, and the New York pension included the entire investment.
Clearlake attracted new investors, including Blackstone, Pantheon, and ICG, a large private equity firm with ties to Korea.
WheelPros' senior management invested approximately $100 million worth of its own stock options into the new fund, and the private equity firm Clearlake, the owner, also invested approximately $50 million of its partners' profits.
The New York Times concluded, based on a review of internal documents, that "after Clearlake moved Wheel Pross into a continuous operation and recorded a profit, Wheel Cross took on significant debt, putting it under increasing financial strain." "This action (suddenly adding debt to the sale) occurred just before the Federal Reserve began raising interest rates, and Wheel Pross held debt with interest rates tied to government bond yields, causing the company's debt cost to soar."
In 2023, Wheel Pross' sales weakened as the pandemic-era boom faded. The following year, the company was unable to make its interest payments and filed for bankruptcy.
Clearlake's continuation funds, Icon Partners I and II, delivered strong annualized returns, averaging 49% and 56%, respectively, from their inceptions in 2020 and 2021 through March 2025. However, Icon Partners III, which owns WheelPros, reported a complete loss, while Icon Partners IV and V reported average annual returns of 2.7% and 10.1% from their founding in 2021 through the end of March.
The New York Times reported, "Clearlake has yet to sell or list the companies in its continuous funds, making it difficult to determine their true returns."
Yaron Neely, a professor of corporate law at Duke Law School and author of the paper "Continuous Funds," told the Times, "Private equity is too often in the shadows. Because so many transactions involve private equity firms buying from each other or themselves, it will be difficult to distinguish between value-creating activities and simply collecting and collecting fees."
Some private equity firms are further delaying sales schedules.
This year, private equity firms, including technology-focused Accel-KKR, have begun selling their companies from one extension vehicle to another.
The private equity industry calls these new funds "CV-squared." Private equity firm Accel-KKR announced in a press release on August 8 that it had closed a $1.9 billion sequential fund to support isolved's further growth, and that the fund included a $350 million fresh capital commitment to accelerate isolved's growth through organic initiatives and incremental acquisitions.
The press release continued, "Accel-KKR, a global technology-focused investment firm, today announced the completion of AKKR Isosceles CV LP, a approximately $1.9 billion single-asset sequential fund that will extend its partnership with isolved®, a leading provider of human capital management (HCM) software and solutions that support the entire employee lifecycle." "This transaction provides liquidity to Accel-KKR's existing investors and enables the firm to commit $350 million of fresh capital to accelerate growth through organic initiatives and acquisitions."
The Lee Jae-myung administration, which is pushing for an economic stimulus focused on AI and the defense industry through investment with Blackrock, a large private equity fund, is experiencing a dollar shortage. Saudi Arabia, which is pursuing a similar stimulus program, is experiencing a "drying out of investment funds."
The Lee Jae-myung administration, built on private equity funds, has signed a joint investment agreement for a $100 billion "cooperative project" in the UAE through a deal between chiefs of staff, excluding the Ministry of Foreign Affairs, Ministry of Strategy and Finance, and Ministry of Trade, Industry and Energy.
See <Saudi Investment Fund 'Fund Depleted', Koo Yoon-cheol 'Dollar Shortage', Lee Jae-myung's 'Joint Investment' in UAE, November 20, 2025>
<Trump UAE Saudi Arabia Excludes Korea as 'AI Powerhouse', Hundreds of Thousands of AI Chips Worth Hundreds of Billions, May 13, 2025>