Critics argue CVs entrench managers or delay inevitable exits. However, structured with transparency and fairness, these funds align interests rather than obscure them, writes AEA Investors' and Painswick Capital's John Garcia.

Private markets have rarely been so closely scrutinised. Every week, industry pundits question whether buyouts, private credit or Silicon Valley pose the greater threat to the financial system. Yet much of this commentary, often amplified by academics, misjudges what actually matters to the investors whose capital drives the industry and the risks they face. It may also be slowing the industry’s evolution.

In private equity that perception gap is striking. Commentators worry about headline fund returns, accounting methods, or the frequency of firms selling assets to one another. In practice, limited partners – the pension funds, endowments, sovereign funds and family offices who allocate capital – understand these dynamics far better than they are given credit for.

Much ink has been spilled on performance reporting, as though sophisticated investors cannot distinguish between a firm’s since-inception record, the track record of a single fund and the outcome of a single deal. In my many years of institutional investing, I never encountered an LP who misunderstood this distinction. Their questions are sharper and more immediate. Their diligence is robust. They know that what really matters is not how a firm performed many funds ago, but whether today’s team can reliably repeat strategic and operational value creation. That is a far harder question to answer; returns are only known many years later, and private equity has one of the widest dispersion of returns of any asset class.

This is the reality that makes private equity unique. Unlike liquid markets where investors can exit quickly, private equity commitments require faith in strategies and managers whose true returns may not be visible for many years. When distributions are thin, as they are now, that mismatch between liquidity needs and visibility into outcomes only grows more uncomfortable.

Private equity has, after all, entered one of its periodic slowdowns. Distributions are a fraction of their historic average – a product of the both highly priced and leveraged deals of the early 2020s, as well as today’s downside-skewed macro- and micro-environments. This should surprise no one: private equity is both cyclical and, by now, relatively mature. Average industry returns have settled in the low net double digits, well below the high double digits once common, but in line with what large institutional investors require if paired with an active fee-free co-investment programme.

Another perception gap is the frequent criticism of so-called ‘pass the parcel’ deals where one buyout firm sells a company to another. The phrase suggests frivolity, as if private equity were simply trading toys at a children’s party.

In truth, such transactions often carry less risk than corporate carve-outs or family-owned sales, where companies are typically smaller, more fragile and led by management teams unfamiliar with leveraged ownership or in executing a new owner’s plan. In my experience, good management teams within robust businesses tend to keep performing, sometimes for decades. However, it is always true that the greatest risk for any company is the first year after a change of control to a new owner.

CV options

The recent liquidity drought has forced private markets firms to rethink the current exit cycle. Some of the best risk-adjusted opportunities lie in assets that have already proven themselves under current ownership.

This is the rationale behind continuation funds, particularly single-asset vehicles. Rather than selling a successful investment to a rival, the firm can keep ‘the parcel’, allowing management and sponsor to continue creating value while giving existing investors a genuine choice: take liquidity or roll forward. Unlike an IPO, where investors must ride the market’s whims for years until an exit, continuation structures give them exit agency.

Critics argue these vehicles entrench managers or delay inevitable exits. However, structured with transparency and fairness, they align interests rather than obscure them. Pricing must be clear, the process independent and investors given time to decide. When done well, continuation funds eliminate the riskiest stage of a deal – the handover to a new owner – while preserving upside for those willing to stay the course.

Almost every firm has investments that have already delivered multiples of original capital. Selling them simply to crystallise returns can be value destructive, particularly when reinvestment opportunities are scarce or expensive. Keeping them, by contrast, allows proven winners to keep compounding.

For an industry rightly focused on innovation, the most promising strategy may lie in an overlooked corner of its own backyard. Properly executed, continuation funds could become the most attractive segment of private equity: lower risk, stronger alignment with quality sponsors and the chance to invest in, or continue to own, high-quality companies for longer.

Private equity will continue to face scrutiny, as it should. The industry is larger, more systemically important and more visible than ever. But it should also embrace its own evolution. Rather than reflexively passing the parcel, perhaps the time has come to keep the best parcels.

John Garcia is the chairman and former CEO of AEA Investors, one of the world’s first private equity firms founded in 1968. In 2024, he launched Painswick Capital to invest in the rapidly growing single asset continuation vehicle market.

Published: April 15, 2026

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