- Private equity firms are increasingly using continuation vehicles (CV² funds) to exit portfolio companies without taking them public.
- CV² funds allow private equity firms to transfer portfolio companies into newly created funds, keeping capital flowing to investors.
- The use of CV² funds has surged in popularity, reaching $125 billion in 2023, up from less than $10 billion annually before 2020.
- Public market volatility, rising interest rates, and tepid investor demand have made initial public offerings (IPOs) unattractive.
- CV² funds trap companies in private limbo, delaying transparency, public scrutiny, and independent governance that a true public listing would bring.
Why are so many private equity-backed companies never making it to the stock market? Once, the initial public offering was the golden exit strategy for investors who had spent years building up portfolio firms. But with IPO markets subdued since 2022, a new exit path has surged in popularity: continuation vehicles, often called CV² funds. These internal transfers allow private equity firms to sell their stakes in portfolio companies to newly formed funds—often managed by the same firm. While this keeps capital flowing to investors, it also traps companies in private limbo, delaying transparency, public scrutiny, and independent governance that a true public listing would bring.
What Are CV² Funds and Why Are They Surging?
CV², or continuation vehicle funds, allow private equity firms to transfer portfolio companies from older funds into newly created ones, typically backed by the same firm’s investors or new limited partners. This structure enables the original fund to realize gains and distribute capital to investors—mimicking an exit—without actually taking the company public or selling it to a strategic buyer. The practice has grown rapidly: according to PitchBook data, CV² transactions reached $125 billion in 2023, up from less than $10 billion annually before 2020. The driving force is clear—public market volatility, rising interest rates, and tepid investor demand have made IPOs unattractive. CV² funds offer a cleaner, faster alternative, letting PE firms avoid the regulatory burden and pricing risks of going public while maintaining control.
How Data and Industry Reports Confirm the Shift
Recent market analyses underscore the structural shift away from IPOs. A Reuters investigation found that in 2023, more than 70% of private equity exits occurred through secondary transactions like CV² funds, surpassing both IPOs and strategic sales. Firms like KKR, Blackstone, and Apollo have launched multiple such vehicles, often raising billions for single portfolio companies. For example, KKR used a continuation fund to move ForeScout Technologies from its 2013 fund into a new vehicle in 2021, allowing early investors to cash out while KKR retained control. Such deals are increasingly common in tech and healthcare sectors, where companies delay IPOs due to valuation skepticism. According to Preqin, over 40% of continuation fund deals now involve companies more than 10 years old—far beyond typical exit timelines.
What Skeptics Say About the Risks of CV² Funds
Despite their popularity, CV² funds face growing criticism from regulators and investor advocates. Critics argue the practice creates conflicts of interest, as the same firm manages both the seller and buyer funds. The U.S. Securities and Exchange Commission has opened inquiries into valuation transparency and fee structures in such transactions. In a 2023 speech, SEC Chair Gary Gensler warned that continuation funds could allow managers to “mark their own homework,” potentially inflating valuations to justify distributions. Additionally, employees and minority investors within portfolio companies often receive no liquidity event, despite years of growth. Some limited partners also worry about capital recycling—where funds are used to extend holding periods rather than fuel new investments. As the BBC reported, certain pension funds have begun pushing back on opaque CV² deals, demanding clearer governance and independent valuation committees.
What Happens to Companies Stuck in Private Limbo?
For the companies themselves, remaining in private hands via CV² funds can mean prolonged uncertainty. Without the discipline of public markets—quarterly reporting, shareholder scrutiny, and analyst coverage—some firms drift without clear strategic direction. Take the case of Payoneer, a fintech firm held by private equity for over a decade. After multiple fund extensions and a failed 2021 SPAC merger, it was transferred into a continuation vehicle in 2023. While still operational, it lacks the visibility and growth signaling that a public listing would provide. Employees hold stock options with unclear exit paths, and customers may question long-term stability. In sectors like biotech and SaaS, where milestones and transparency matter, indefinite private status can hinder partnerships and talent retention. The pattern is becoming common: strong revenue, extended timelines, and no clear path to IPO—just a quiet transfer between funds.
What This Means For You
If you’re an investor, employee, or customer of a private equity-backed company, the rise of CV² funds means exits are no longer a reliable milestone. Liquidity events are being replaced by internal transfers that benefit fund managers and early investors—but not necessarily the broader stakeholder base. Employees may wait years longer for equity realization, while the public loses access to innovative firms that once would have gone public. For the economy, this trend could reduce market dynamism and weaken the traditional link between company maturity and public listing. It’s a sign of adaptation in tough markets, but also a warning about consolidation of control and transparency erosion.
As CV² funds become the default exit, a critical question remains: if companies never face public markets, who holds them accountable? With fewer IPOs, will innovation be stifled by prolonged private ownership? And how can regulators ensure these internal transfers don’t become tools for self-dealing rather than genuine exits? The answers may shape the future of corporate governance in the private economy.
Source: Financial Times