Private equity self dealings and new debt tricks raise regulatory alarm

The private equity industry, famed for deft dealmaking and distributing handsomely to its investors, is deploying increasingly complex methods to return cash as traditional exit routes seize up. The spotlight now falls on so-called continuation funds and net asset value NAV loans—clever mechanisms, but ones that are inviting closer scrutiny from regulators.

When Inflexion, a London private equity house, completed a £2.3 billion transaction in May involving Rosemont Pharmaceuticals and three other businesses, it was essentially selling the companies to itself. This was made possible by a continuation vehicle—a fund that enables existing investors to cash out and new investors to join, as the assets are transferred from one fund to a new one managed by the same general partner. Inflexion’s transaction, Europe’s largest multi asset continuation fund so far, delivered £1.5 billion to backers wishing to exit, all without selling the assets on the open market.

Such strategies are proving vital amid a market where rising interest rates and economic uncertainty have pushed company valuations down and IPOs have grown scarcer. Buyout funds, traditionally aiming to hold investments for five to seven years before exiting at a profit, now find themselves sitting on assets for longer. As a result, distributions to limited partners are under pressure, and many are opting for liquidity when offered the chance via continuation vehicles.

General partners benefit handsomely—they maintain fee streams while stretching the period of ownership and can realise windfalls from internal sales. However, selling to oneself raises inevitable conflicts of interest for fund managers who are, in effect, on both sides of the deal. The Institutional Limited Partners Association ILPA has underscored the need for greater transparency, warning that many investors are increasingly frustrated by opaque internal transactions.

NAV loans offer a different kind of solution—or complication. These involve borrowing against the value of portfolio companies, layering further debt atop businesses already financed with borrowed money. While this can provide support for portfolio companies or fund distributions, it introduces fresh risks. Questions swirl over asset valuations, the accuracy of loan to value calculations, and how much exposure lenders truly face.

Regulatory bodies are already raising concerns. The Financial Conduct Authority found that conflicts of interest around internal fund transactions and NAV lending are not always fully acknowledged or managed. Likewise, the Bank of England has warned that lenders might be exposing themselves to undetected risks, given the proliferation of complex financial products in this space. The fundamental challenge remains unsolved: these innovations may provide liquidity, but the ultimate need to sell the underlying businesses has simply been postponed.