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Writing in the Harvard Business Review in 1989, Harvard Professor Michael C. Jensen predicted the "eclipse of the public corporation" by private equity.1 The article remains valuable reading today. Professor Jensen's insights continue to provide context for the evolving relationship between private equity and public markets. His insights rebut contemporary critics of private equity's growing use of continuation vehicles. They also highlight why regulators must do more to provide access to private equity investment for retail investors.
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"Improbable Acrobatics": A Recent Critique of Continuation Vehicles
It was recently argued in the Financial Times,2 a leading international financial newspaper, that the "strains on the private equity model are showing." The author has two principal complaints. First, private equity's increased use of continuation vehicles to extend investment lifecycles. Second, the decreased regularity of private equity using initial public offerings (IPO) to exit investments. The author's conclusion is that private equity should accept lower returns in the IPO market out of a sense of "fairness."
The backdrop is the sale of a UK health and wellness company. The transaction involved a continuation vehicle: the company's private equity owner had the company sold by one of the fund's arms to another one of its arms.
The author describes continuation vehicles as a "perplexing strategy" that requires "improbable acrobatics." Comparisons are drawn with the classic 1970 American film Catch-22 and military man Milo Mindbender's ability to buy back eggs he had previously sold, only to make a profit. The implication is the absence of a sound commercial rationale.
The author's critique shifts to the current state of the public markets, including the prolonged weakness in IPOs volumes and the continued privatization of existing public companies. The author lays blame for the former in large part on the increasing popularity of continuation vehicles in private equity. The author questions why, with most significant stock markets globally having strong a year, IPOs have yet to rebound. The author laments that, when IPOs are occurring, the companies are "getting older and older."
For the author, these trends mean that private equity is deliberately holding on to prized assets for longer, "squeezing more of the juice out of them, and leaving little for public market investors." The author proposes that private equity is obligated to "accept lower prices" in the IPO market. In the author's words, it "only feels fair."
Our Rebuttal: Continuation Vehicles Exemplify Innovation and Evolution
Three interrelated points must be made in rebuttal, and it is here that Professor Jensen's insights from 1989 remain apt.
The first is that the fundamental basis of Professor Jensen's confidence in predicting the eclipse of the public company by private equity continues to stand. This is that private equity solves the problems flowing from the public company's separation of ownership and management. He also explained that private equity is able to do so "without eliminating the vital functions of risk diversification and liquidity once performed exclusively by the public equity markets." Whatever challenges private equity may face, they will not erode its structural advantages. For this reason alone, the heyday of IPOs is likely behind us.
The second is that continuation vehicles evidence resiliency, not strain. True to Professor Jensen's foresight, private equity has proven a fantastic generator of efficiency, optimization, and wealth. As he expected, it has also proven adaptive and innovative. Continuation vehicles exemplify this. They facilitate continued investment activity amid undesirable market conditions. Current limited partners can cash out or remain invested. New limited partners can replace those that leave. The general partner can continue pursuing additional upside potential. Simply put, they solve for a disconnect between price and value.
Third, private equity does not celebrate the difficulties faced by global stock markets. A stronger IPO exit market is in private equity's interests. Private equity would rather exit investments without the use of a continuation vehicle, and private equity would prefer that IPOs were a more attractive exit option. Regulators should unwind many of the overburdensome regulations that have significantly contributed to startups increasingly choosing to stay private or existing public companies choosing to go private. Professor Jensen predicted 36 years ago that onerous securities regulations would contribute to private equity's competitive advantage. He was, unfortunately, correct again.
Concluding Comments: Regulator Must Improve Access to Private Equity for Retail Investors
All told, many of Professor Jensen's predictions have come to pass. None of them relied on the arrival of continuation vehicles three decades later. They are a symptom of the current state of the IPO market, not one of its causes. Continuation vehicles also represent a natural evolution in private equity as its model diversifies to accommodate more varied investment timelines. Nor can vague references to fairness oblige private equity to try to resuscitate the IPO markets by foregoing maximizing returns. The responsibility falls on regulators to do more to level the playing field between public and private equity. Regulators should also work harder to improve access to private equity investment for retail investors. Stronger public markets are highly desirable, but private equity's advantages will not dissipate, and we are unlikely to return to the frothy IPO volumes of earlier decades. It's therefore important that smaller investors are better able to directly benefit from private equity growth.
Footnotes
1 Michael C. Jensen, "Eclipse of the Public Corporation", Harvard Business Review (September-October 1989) pgs. 61-73.
2 The strains on the private equity model are showing", Financial Times (September 12, 2025). Learn more
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