Investors Sound Alarm Over “Rot in Private Equity” Amid Rising Circular Deal Practices

Buyout firms grapple with a stalled exit market

In recent months, many buyout firms have found it increasingly difficult to off‑load the companies they own. Traditional exit routes—such as public listings, strategic sales, or secondary buyouts—have dried up, leaving firms with limited avenues to return capital to limited partners.

A controversial workaround: selling assets back to the same sponsor

To address the cash‑flow crunch, some private‑equity houses have turned to a practice that critics describe as “selling the companies to themselves.” In these transactions, a portfolio company is transferred from one fund managed by the sponsor to another fund under the same management umbrella, often at a price that closely mirrors its book value.

Key characteristics of the maneuver include:

• Self‑dealing structure: The buyer and seller are separate legal entities, yet both are controlled by the same private‑equity firm.
• Limited price discovery: Valuations are frequently based on internal models rather than an open market.
• Cash recycling: The proceeds from the “sale” are funneled back to the original fund, providing a veneer of liquidity for investors.

Investor backlash and the “rot” narrative

Limited partners—ranging from pension funds to sovereign wealth entities—have begun to label this trend as a symptom of “rot in private equity.” They argue that such circular deals mask underlying performance issues and erode transparency.

“We are seeing a growing reliance on intra‑firm transactions that do little to create real value,” said Maria Delgado, a senior analyst at Global Capital Advisors. “When exits are scarce, the temptation to recycle capital within the same firm can lead to inflated asset values and, ultimately, a loss of trust.”

Regulatory scrutiny intensifies

Regulators in the United States and Europe have taken note. The U.S. Securities and Exchange Commission (SEC) has reportedly opened preliminary inquiries into whether these self‑dealing sales comply with disclosure requirements and fiduciary duties. Meanwhile, the European Securities and Markets Authority (ESMA) has issued a warning to investors to scrutinize the pricing methodology of intra‑firm transactions.

Potential long‑term consequences

If the practice continues unchecked, several risks may emerge:

1. Valuation distortion: Repeatedly moving assets at similar prices can create a false sense of portfolio health.
2. Liquidity illusion: Limited partners might believe they are receiving cash returns when, in reality, the money is simply being shuffled between funds.
3. Reputational damage: Persistent use of such deals could diminish confidence in private‑equity as an asset class, making fundraising more challenging.

What investors can do

Limited partners are advised to:

• Demand greater transparency on the pricing methodology of any intra‑firm sale.
• Require independent third‑party valuations for transactions involving related parties.
• Monitor the frequency of circular deals across a sponsor’s portfolio.

Looking ahead

While the exit environment may gradually improve as macroeconomic conditions stabilize, the current reliance on self‑dealing deals highlights a deeper structural issue within the private‑equity industry. Stakeholders across the board will need to balance short‑term liquidity needs with the long‑term integrity of the market.