The Secret Behind Private Equity's 'Buy Low, Sell to Yourself' Strategy: How Fund Managers Profit from Continuation Funds

In the world of private equity, fund managers often follow a simple mantra: buy low, sell high. But what happens when they sell to themselves? This practice, known as continuation funds, is reshaping how profits are made and fees are collected.

Private equity funds typically buy companies, improve them, and sell them for a profit. For example, if a fund buys a company for $2 billion and sells it for $3 billion, the fund manager earns a performance fee (or "carry") of 20% on the gain. In this case, that's $200 million from the $1 billion increase in value, while the investors (limited partners) take the rest.

However, if the sale results in a loss—say, selling for $1 billion after buying for $2 billion—the fund manager usually gets no carry from that deal. They might still earn other fees, but the performance-based reward disappears. This system incentivizes managers to focus on profitable exits.

Continuation funds add a twist: fund managers sell assets from an old fund to a new fund they control, effectively "selling to themselves." This can allow them to extend holding periods and potentially earn more fees, even if the asset hasn't been sold to an external buyer. It's a strategy that blurs lines between fund cycles and raises questions about alignment with investor interests.

While this article touches on broader topics like Amazon drivers and crypto gambling, the core insight is how fee structures in private equity drive behavior. Understanding these mechanics is crucial for anyone involved in investment funds or curious about financial strategies.