The Private Equity Paradox: Why The Industry’s Big Comeback Is An Inside Job

The Roaring Silence: A Private Equity Rebound with a Catch

In the high-stakes world of finance, the dealmaking engines of private equity (PE) are whirring back to life. After a period of slumber induced by soaring interest rates and economic jitters, headlines are hinting at a resurgence. Billions are changing hands, and assets are on the move. But if you listen closely, you’ll notice something unusual about this comeback: the sound is echoing. The applause is coming from inside the house.

The vast majority of this renewed activity isn’t the traditional story of a PE firm nurturing a company and selling it to a large corporation for a strategic premium. Instead, the industry is increasingly engaged in a complex dance with itself. We’re witnessing a boom in “sponsor-to-sponsor” (S2S) deals, where one private equity firm sells a portfolio company to another. While this practice, colloquially known as PE “eating its own cooking,” has always been part of the menu, it’s now become the main course.

This trend raises a critical question for anyone involved in investing, from seasoned LPs to retail investors watching the stock market: Is this a sign of a healthy, adaptable market, or is it a symptom of a deeper malaise, a high-stakes game of pass-the-parcel fueled by pressure and a lack of better options?

A Market of Mirrors: The Dominance of Sponsor-to-Sponsor Deals

The numbers paint a stark picture of this internal circulation. In 2023, sponsor-to-sponsor transactions accounted for a staggering 45% of all private equity exits in the United States. The trend is even more pronounced across the Atlantic, where they represented over half of the exit volume in Europe. Globally, these deals reached a record 51% of total exit value, a clear indicator of a fundamental shift in the PE playbook.

This isn’t a comeback; it’s a recalibration. PE firms, or General Partners (GPs), are under immense pressure from their own investors, the Limited Partners (LPs) like pension funds and endowments, to return capital. After years of deploying funds, the clock is ticking to generate returns and prove their model works. With the two primary exit ramps—Initial Public Offerings (IPOs) and strategic corporate acquisitions—largely blocked, GPs have turned to the most available buyer: each other.

Below is a snapshot of the current landscape for PE exit strategies, highlighting why S2S has become the default option.

The corporate M&A market, traditionally the most lucrative exit path, has been hamstrung by a macroeconomic environment defined by caution. The aggressive interest rate hikes by central banks to combat inflation have made the debt-fueled acquisitions that corporations favor prohibitively expensive. This has left a void in the market that other PE firms, flush with committed capital they need to deploy, are only too happy to fill.

The Good, The Bad, and The Circular

It would be a mistake to dismiss all sponsor-to-sponsor deals as financial engineering. There are compelling, value-creating arguments for this type of transaction. A large, generalist PE fund might sell a specialized healthcare tech company to a smaller, sector-focused fund that has the deep operational expertise to guide the company through its next phase of growth. In this scenario, the asset moves to a “better owner” who can unlock new value, benefiting the company, its employees, and ultimately, the LPs of both funds.

A prime example is the recent acquisition of medical manufacturer Miller by a consortium including Cinven and GIC. Miller was sold by another PE firm, EQT, in a deal that demonstrates how a new set of owners can bring a fresh perspective and strategy to a well-performing asset. This is the idealized version of the S2S deal—a logical handover that extends the runway for private ownership to maximize an asset’s potential before its eventual sale to a corporate buyer or public listing.

However, a more cynical view is gaining traction. Critics worry that the S2S boom is less about strategic value creation and more about financial maneuvering. In some cases, these deals can be used to generate quick paper returns for the selling fund and deployment opportunities for the buying fund, all while collecting handsome transaction fees for the banking and advisory firms involved. The risk is that value isn’t truly being created, but rather that valuations are simply being inflated with each pass. The most complex examples, such as KKR’s move to buy an Italian telecoms network from a company it already controls, blur the lines and invite scrutiny over potential conflicts of interest.

The Missing Ingredient: Why Corporate Buyers Are Crucial

The ultimate health of the private equity ecosystem—and a key barometer for the wider economy—depends on the return of the corporate or “strategic” buyer. Strategics are the lifeblood of PE exits for one simple reason: they can often pay more.

Unlike a financial buyer (another PE firm), a corporate acquirer can justify a higher price tag because of synergies. These can include:

• Cost Synergies: Eliminating redundant corporate overhead, combining sales forces, or gaining greater purchasing power.
• Revenue Synergies: Cross-selling products to a new customer base or integrating technology to enhance an existing product line.
• Market Power: Removing a competitor and consolidating market share.

These synergies create tangible economic value that a standalone financial sponsor simply cannot replicate. A successful sale to a strategic buyer represents the final validation of a PE firm’s investment thesis—that they have built a company so valuable that it becomes an essential asset for a major industry player. This process injects fresh, external capital into the PE ecosystem and fuels healthy economic activity through integration and growth.

Without this crucial exit ramp, the private equity model becomes a closed system. Capital is recycled, but the net inflow of external validation and premium valuations from the corporate world is missing. It’s like a powerful engine running on recirculated air—it can keep going for a while, but it’s not sustainable for peak performance.

Patience is a Virtue: The Path Back to Normalcy

So, what will it take to reopen the floodgates for corporate M&A? The answer lies in the broader field of economics. A stable, predictable environment is key. Corporations need to see a clearer path forward with stabilizing interest rates, easing inflation, and a resilient consumer before they are willing to make big-ticket acquisitions.

There are faint but hopeful signs on the horizon. The global M&A market has seen a modest uptick in early 2024, driven by a handful of mega-deals. If central banks begin to signal a pivot towards lower rates and the threat of a deep recession recedes, corporate confidence will slowly return. CEOs and boards will shift their focus from cost-cutting and defense to strategic growth and acquisitions.

For now, the private equity world will continue its intricate, internal waltz. It’s a pragmatic response to a challenging market, showcasing the industry’s adaptability. But for the comeback to be complete, the doors must be thrown open, and the strategic buyers, the true arbiters of value, must be invited back to the dance floor. Only then will the silence be broken by the sound of genuine, sustainable growth that resonates across the entire financial landscape.