Private Equity Is Repeating Enron’s Biggest Mistake

SUMMARY Having witnessed Enron’s collapse firsthand, the author sees striking parallels in private equity today. Continuation funds allow general partners to control both sides of transactions, collect multiple fees and exploit conflicts of interest, echoing Enron’s self-dealing. Oversight is limited, information asymmetry rampant and fiduciary standards ignored, creating a system that benefits insiders while trapping investors, thereby repeating the mistakes that led to one of America’s largest corporate scandals.

I was an employee of and investor in Enron. Not a senior executive or financial analyst, just a salary-man who owned modest company stock. I left before the scandal broke but still held shares when everything collapsed. Watching my investment evaporate gave me a front-row seat to one of the biggest corporate frauds in American history and left me permanently attuned to warning signs of creative accounting and conflicts of interest. Now, more than two decades later, I’m watching private equity firms engage in practices that seem disturbingly familiar.

The House That Fastow Built

At Enron, Chief Financial Officer Andrew Fastow created special purpose entities with names like LJM1 and LJM2. These weren’t independent businesses. They were vehicles Fastow controlled personally while simultaneously serving as Enron’s CFO. The board actually suspended Enron’s conflict of interest policies to allow these arrangements. Fastow would negotiate deals on behalf of Enron, then turn around and negotiate the same deals on behalf of his personal partnerships. He was literally on both sides of the table, determining what Enron would pay and what his own pockets would receive.

The transactions made Enron’s financial statements look healthier than they were. Debt disappeared from the balance sheet. Losses were hidden. And Fastow made tens of millions of dollars personally. The Senate investigation later found that Enron’s board had been informed by Arthur Andersen that the company was using high-risk accounting and extensive off-the-books activity, and the board knowingly permitted it.

The Modern Equivalent: Continuation Funds

Private equity firms today are engaged in a practice called continuation funds, and the parallels to Enron’s self-dealing are striking. Here’s how they work: A private equity general partner (GP) has held an asset in one fund for the contractual limit, typically ten years. Rather than selling that asset to a third party in an arm’s-length transaction, the GP creates a brand new fund and sells the asset to itself.

The GP controls both sides of the transaction. It represents the selling fund, determining what price is acceptable. It simultaneously represents the buying fund, determining what price to pay. The GP collects fees from both funds. And here’s the crucial part: the GP gets to reset the clock on management fees and carry, extracting a fresh round of compensation from the same asset it has already been managing for years.

In 2024 alone, continuation fund transactions reached approximately $63 billion. These deals now represent 14% of all private equity exits and accounted for close to 90% of GP-led secondaries volume. The industry calls these assets “trophy assets” and frames continuation funds as providing “optionality” to investors. But when you strip away the jargon, you’re looking at the same self-dealing structure that destroyed Enron.

Both Sides of Every Table

The conflicts at Enron weren’t subtle. Fastow was negotiating with himself. Arthur Andersen earned $25 million in audit fees from Enron in 2000 but $27 million in consulting fees. The accounting firm was auditing its own work and had every incentive to overlook problems because the consulting fees were so lucrative.

Private equity continuation funds create the same perverse incentives. The GP managing the original fund has every reason to value the asset as highly as possible when selling it to the new continuation fund, because higher valuations justify the performance fees the GP will collect. But the GP managing the continuation fund should be negotiating for the lowest possible price to benefit the new fund’s investors. The GP cannot faithfully serve both masters.

Research shows that despite the industry’s claims about providing optionality, most existing investors in the original funds decline to roll over their stakes into continuation funds, even though these funds are run by the same private equity firm with which they have cultivated relationships for years. Why would sophisticated investors who have worked with a GP for a decade choose to cash out rather than continue with that same GP? Because they understand the conflict. They know the pricing cannot be trusted when the same party controls both sides of the negotiation.

The Fee Machine

At Enron, compensation structures created impossible conflicts. Senior executives held massive stock option positions that would become worthless if Enron’s stock price fell. Everyone had a personal financial interest in maintaining the illusion of success.

Private equity continuation funds operate on a similar principle. When a GP creates a continuation fund, it gets to collect a fresh round of management fees on assets it has already been managing. The traditional private equity model charges around 2% of committed capital annually, plus 20% of profits above a hurdle rate. With a continuation fund, the GP gets another bite at this apple. The management fees reset. The carry resets.

This creates what researchers describe as a situation where “the house always wins.” The GP profits from the original fund’s management fees and carry. The GP then profits again from structuring the continuation fund transaction itself. And the GP profits yet again from the new fund’s management fees and carry on the same underlying asset. At each stage, the GP extracts compensation while investors are told to trust that the pricing is fair.

The Illusion of Oversight

Enron’s board of directors was supposed to provide oversight. The board was composed of sophisticated individuals with extensive business experience. On paper, the governance looked solid. But the board explicitly approved suspending Enron’s conflict of interest policies to allow Fastow’s self-dealing arrangements.

The Senate investigation was blunt: “Much of what was wrong at Enron was not concealed from its Board of Directors. High risk accounting practices, extensive undisclosed off-the-books activity and excessive executive compensation were all known to the Board.”

Private equity funds have similar governance structures. Limited partner advisory committees (LPACs) are supposed to review conflicts of interest. But these committees operate under the same constraints that hampered Enron’s board. They meet infrequently. They rely on information provided by the GP. They face enormous pressure to approve transactions because blocking them could damage their relationship with the GP across multiple funds.

The SEC briefly required third-party valuations or fairness opinions for continuation fund transactions to enhance pricing transparency, but the 5th Circuit Court of Appeals overturned this rule in June 2024. The industry successfully eliminated even this modest safeguard.

The Asymmetry of Information

One of Enron’s most effective tools was the asymmetry of information between insiders and everyone else. Management and Andersen knew the true state of the company’s finances. Investors and most employees only knew what they were told. When whistleblower Sherron Watkins sent her famous memo warning that Enron would “implode in a wave of accounting scandals,” CEO Ken Lay had the company’s law firm investigate. The investigation found no problems. Watkins was ignored.

Private equity investors face an even more severe information asymmetry. The GP controls the portfolio companies. The GP controls the financial reporting. The GP controls the valuation methodologies. The GP controls the timing of transactions. And in a continuation fund, the GP controls both the pricing and the narrative around why that pricing is fair.

Limited partners don’t get to examine the books of the portfolio companies. They don’t get independent valuations unless the GP voluntarily provides them. When a GP proposes a continuation fund transaction, investors must decide whether to accept the offered price without the ability to conduct independent due diligence or negotiate with competing bidders.

The Scale of the Problem

When Enron collapsed in 2001, it was the largest bankruptcy in U.S. history. The company had employed 20,000 people. Shareholders lost billions. The scandal prompted the Sarbanes-Oxley Act, the most substantial reform of corporate governance and financial reporting in generations.

Private equity’s continuation fund problem is orders of magnitude larger. The entire private equity industry now has 29,000 unsold portfolio companies valued at $3.6 trillion globally. Continuation funds reached $63 billion in 2024 alone. And this is happening across the entire industry, not just at one company.

The distributions to limited partners have fallen to just 11% of net asset value in 2024, the lowest level in more than a decade. The capital is trapped. Investors committed money expecting ten-year fund cycles with returns distributed at the end. Instead, many are being offered the choice between accepting whatever price the GP sets for a continuation fund transaction or waiting indefinitely for a genuine third-party sale that may never come.

The Absence of Market Discipline

Enron operated in a deregulated energy market, but it still faced constraints. If Enron tried to sell power at inflated prices, customers could buy from competitors. The company ultimately collapsed because market forces caught up with the accounting fiction.

Continuation funds operate in an environment with even less market discipline. When a GP sells an asset to its own continuation fund, there’s no competitive market setting the price. There’s no process where multiple bidders submit offers and the highest bid wins. There’s no way for investors to know whether the pricing reflects fair value or just the amount the GP calculated it could defend in case of litigation.

Traditional private equity exits involve real market discipline. A strategic buyer evaluates synergies and offers a price. A financial buyer evaluates cash flows and offers a price. The GP can shop the asset to multiple potential buyers and select the best offer. But with continuation funds, the GP simply declares what the price should be and dares investors to dispute it.

What Enron Taught Us

The most important lesson from Enron wasn’t about accounting rules or off-balance-sheet entities or any of the technical mechanics. The lesson was about conflicts of interest and self-dealing. When people have the power to enrich themselves at others’ expense, and when the oversight mechanisms designed to prevent abuse are compromised or absent, human nature takes over.

Enron was named by Fortune as “America’s Most Innovative Company” for six consecutive years. The company had credentialed executives, a board full of experts, prestigious advisors and the admiration of Wall Street. And underneath it all, massive fraud.

The private equity industry tells itself similar stories today. They’re sophisticated financial engineers. They’re creating value. They’re providing liquidity and optionality. But scratch beneath the surface and you find the same fundamental dynamic that doomed Enron: insiders controlling both sides of transactions, profiting from conflicts of interest and operating in an environment where oversight is theatrical rather than meaningful.

The Fiduciary Standard

At its core, a fiduciary relationship requires undivided loyalty. The fiduciary must put the beneficiary’s interests ahead of their own. A basic principle of fiduciary law is that a fiduciary must not profit from the position beyond authorized compensation. The prohibition is strict. It does not turn on whether the beneficiary was harmed or whether the decision seemed efficient. The point is undivided loyalty: judgment must not be influenced by personal advantage.

Enron’s management violated this standard. Fastow’s LJM partnerships were self-dealing. The board’s suspension of conflict of interest policies was an admission that the company could not operate within fiduciary constraints.

Private equity continuation funds violate the same standard. The GP cannot faithfully represent both the selling fund and the buying fund in a transaction. The GP cannot give undivided loyalty to the original investors while simultaneously negotiating against them on behalf of new investors.

An Uncomfortable Truth

Living through the Enron scandal as an employee and small investor gave me a permanent education in how creative accounting and conflicts of interest work. I saw how prestigious credentials and sophisticated structures can mask fundamental problems. I learned that when insiders control both sides of transactions and profit from complexity, the rest of us need to be skeptical no matter how many experts have signed off.

But the evidence suggests something simpler and more troubling: continuation funds exist because they benefit GPs, and they persist because the parties who could stop them have too much invested in the current system to demand real change. This is not a failure of disclosure or governance or incentive design. It’s a failure of will to call self-dealing what it is and to enforce the fiduciary standards that are supposed to protect investors.

Defenders of continuation funds make the same arguments that Enron’s defenders made, that sophisticated parties have approved the transactions, the accounting is technically compliant, and the problems are overstated by critics who don’t understand finance. The same rationalizations, the same claims that this time is different, the same insistence that oversight is working even as the conflicts metastasize.

Enron taught us that when conflicts of interest are this severe and this profitable, voluntary reform doesn’t happen. The system continues until it breaks. I hope the private equity industry proves me wrong. But based on what I learned watching Enron, I’m not optimistic. The house always wins, until suddenly it doesn’t.