In recent years, private equity has seen a significant transformation in its exit strategies, and one of the most noteworthy innovations reshaping the industry is the rise of continuation funds. Traditionally, private equity firms have exited investments through IPOs, secondary sales, or trade sales. However, as the market matures and holding periods stretch, continuation funds are emerging as a flexible, value-maximizing alternative.
Continuation funds offer general partners (GPs) a strategic tool to hold onto high-performing assets beyond the lifespan of a traditional fund. For limited partners (LPs), they provide liquidity options or continued exposure, depending on their investment outlook. This shift is not just a trend it’s a structural evolution in the way private equity firms manage assets and deliver returns.
What Are Continuation Funds in Private Equity?
A continuation fund is a new vehicle created by a private equity firm to acquire one or more assets from an existing fund that is nearing the end of its term. Essentially, it allows GPs to “continue” owning a prized portfolio company by transferring it to a new fund with a new group of investors or a combination of existing and new LPs.
These vehicles provide a solution when the investment thesis remains strong, the asset is still performing well, and the GP sees further upside. Rather than selling the company prematurely due to fund lifecycle constraints, the GP can roll it over into a continuation fund and maintain operational control while offering LPs the option to cash out or roll over their investment.
Why Continuation Funds Are Gaining Momentum
The demand for continuation funds in private equity has surged due to several macro and market-driven factors. First, the typical investment horizon in private equity usually around 5 to 7 years has proven insufficient for realizing full value in certain complex or growth-stage investments. GPs are increasingly seeking more time to complete transformations, execute growth strategies, or wait for better market conditions.
Second, the fundraising environment has become more competitive, making it harder to generate quick exits without compromising value. Continuation funds allow GPs to avoid rushed sales and extend the holding period under a new fund structure with renewed capital support.
Third, LPs themselves are more open to flexible liquidity options. Rather than being forced into a sale, they can choose whether to exit or continue participating in the asset’s upside. This optionality has made continuation funds a compelling proposition for both sides of the private equity equation.
How Continuation Funds Work in Practice
In a typical continuation fund transaction, the GP identifies one or more assets from an older fund that still have significant growth potential. The GP then creates a new fund often referred to as a “continuation vehicle” to acquire those assets. This process includes revaluing the assets, securing commitments from new LPs, and presenting the terms to existing investors.
LPs from the original fund are offered two main options:
- Liquidity: They can sell their stake at the agreed-upon valuation and exit the investment.
- Roll-Over: They can reinvest their stake into the continuation fund, maintaining exposure to the asset for a longer term.
A fairness opinion is usually obtained to ensure transparency and protect the interests of existing LPs. Often, a lead investor or secondary buyer helps anchor the continuation vehicle, providing credibility and assurance for the transaction.
Benefits of Continuation Funds for GPs
From a GP’s perspective, continuation funds unlock several strategic advantages. They allow for:
- Retention of High-Performing Assets: GPs can continue managing and growing assets that have strong future potential.
- Fee Continuity: Management fees and potential carried interest can be extended or even reset, aligning incentives for longer-term value creation.
- Stronger Track Record: Holding onto a successful asset longer can boost overall fund performance and make future fundraising efforts more compelling.
In the competitive world of private equity, maintaining control over high-performing companies allows GPs to build a stronger narrative for investors and demonstrate deep operational expertise.
Benefits for LPs: Flexibility and Optionality
For LPs, continuation funds offer a rare combination of flexibility and choice two factors not commonly associated with traditional private equity fund structures. LPs who are looking for liquidity can exit without waiting for a broader exit event. Those with a longer investment horizon can stay in the game and potentially capture further upside.
Moreover, continuation funds often come with re-underwritten valuations and due diligence, giving LPs added transparency. This ensures that investors aren’t simply “rolling the dice” by holding assets longer, but making informed decisions based on refreshed data and market conditions.
The Role of Secondary Markets in Driving Continuation Fund Growth
The rise of the secondary private equity market has been instrumental in the growth of continuation funds. As secondary buyers become more sophisticated and capital-rich, they’re playing a crucial role in anchoring and facilitating these transactions. These secondary investors can bring pricing discipline, validation, and liquidity, making continuation fund structures more feasible and attractive.
In some cases, specialized secondary investors are even creating co-investment opportunities within continuation fund structures, allowing smaller LPs to gain more exposure to premium assets with reduced risk.
Continuation Funds Are Redefining Exits
In traditional private equity, exits have always been seen as binary events: a company is either sold or taken public. Continuation funds add a third, more nuanced path one that enables asset continuity while respecting LP liquidity preferences.
This model is particularly effective in sectors where value creation takes longer, such as healthcare, infrastructure, or technology. Rather than exiting prematurely, GPs can stay the course and allow assets to mature fully. In doing so, they preserve value for all stakeholders and build a more resilient investment strategy.
Regulatory and Transparency Considerations
As continuation funds become more common, regulators and industry bodies are keeping a close eye on governance practices. Transparency, conflict management, and valuation fairness are critical concerns.
Industry best practices now include third-party fairness opinions, robust LP communications, and enhanced disclosures around fees and performance expectations. The evolution of continuation funds in private equity is likely to prompt updates in LP-GP agreements and standard fund terms to accommodate these increasingly complex transactions.
Future Outlook: Continuation Funds as a Mainstay Strategy
While once considered an exit alternative, continuation funds are quickly becoming a mainstream strategic tool within private equity. They offer a bridge between long-term value creation and short-term liquidity needs, satisfying the evolving demands of both GPs and LPs.
As more GPs build dedicated continuation fund capabilities and secondary capital becomes more accessible, the role of these funds will only grow. They reflect the industry’s shift toward more customized, investor-friendly structures and indicate a more sophisticated approach to private market investing.
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