Continuation Funds: A New Approach to Private Equity Exits

Introduction

Private equity (PE) has always been at the forefront of financial innovation. From leveraged buyouts in the 1980s to the rise of specialized investment vehicles, the industry continuously evolves to optimize returns. One such recent innovation is continuation funds—a relatively new and increasingly popular mechanism that allows PE firms to hold onto assets beyond the traditional fund lifecycle. While these funds present unique opportunities, they also raise concerns regarding transparency, fiduciary responsibilities, and potential conflicts of interest.

In a recent paper, I explore the structure of continuation funds, their benefits, emerging trends, and potential risks to investors. Here are some of the key takeaways.

What Are Continuation Funds?

Traditionally, PE funds operate on a fixed-term model. At the end of this period, typically ten years, assets are sold through a sale or an initial public offering (IPO). A continuation fund, however, allows the General Partner (GP) to transfer select assets from an existing fund (the ‘legacy fund’) to a newly created continuation fund. Limited Partners (LPs) in the legacy fund can choose to cash out or roll their investments into the new fund.

The primary motivation behind continuation funds is to extend the lifecycle of high-performing assets that require additional time for value creation. Instead of selling to a third party, the GP retains control, ostensibly to maximize returns.

Why Are Continuation Funds Gaining Popularity?

For starters, continuation funds extend the fund’s investment horizon. High-performing assets that need more time to mature can remain under GP management, potentially delivering higher returns. Given the long lock-up periods in PE, continuation funds also provide alternative liquidity solutions to LPs seeking early liquidity, without requiring a full portfolio exit. Investors seeking an exit can cash out, while those with a longer-term outlook can reinvest. Finally, the GP can recycle capital by raising additional capital from new investors to facilitate future growth without losing control of valuable assets. Rather than selling assets prematurely, GPs continue managing their most promising investments under more favorable terms. Many of these advantages are difficult to attain with traditional exit strategies like a sale or IPO.

Continuation funds have risen in prominence due to a number of external factors as well. Economic uncertainty and market fluctuations, including the post-pandemic market slowdown and rising interest rates, have made traditional exits like IPOs less attractive. Secondly, with more institutional investors seeking exposure to private markets, continuation funds offer an appealing entry point into mature, high-quality assets.

Emerging Trends

The landscape of continuation funds is evolving rapidly, with several notable trends. Firstly, continuation funds are rising in volume and market share. They now account for a significant share of secondary transactions. In 2021 and 2022, they comprised over 80% of all GP-led secondaries, with total deal value exceeding $50 billion in 2023. Secondly, there has been a shift toward single-asset funds. While earlier continuation funds focused on multiple assets, single-asset continuation funds have been gaining traction. In 2023, they constituted over 50% of GP-led secondaries. This shift allows GPs to focus on high-potential assets, offering investors a more tailored exposure. Thirdly, continuation funds are emerging beyond the PE space—for example, in private credit. BlackRock, for example, has reportedly set up a private credit loan fund that will allow it to raise as much as $1.3 billion, which will be distributed to existing investors. Finally, continuation funds are now being formed earlier in fund lifecycles. While they were traditionally deployed at the end of a fund’s term, some funds are now being formed within the first few years of operation, which shows increased confidence in their strategic value.

Conflicts and Other Risks

Despite their appeal, continuation funds are not without risks. The primary concerns revolve around conflicts of interest, transparency and investor protection.

GP Conflicts of Interest

One of the biggest criticisms of continuation funds is the potential for self-dealing by GPs. Because the GP represents both the sellers (the legacy fund) and the buyers (the continuation fund), there is a risk of price manipulation to favor one set of investors over another. For example, the GP may overvalue assets to maximize carried interest from the legacy fund. Or conversely, the GP may undervalue assets to create more favorable terms for the continuation fund, which would be disadvantageous to existing LPs.

Lack of Investor Control

LPs often have limited influence over continuation fund transactions. While GPs typically seek approval from the LP Advisory Committee (LPAC), the broader LP base has little say in the terms of the Limited Partnership Agreement (LPA). Additionally, LPs often have limited time and information when deciding whether to cash out or roll over their investment.

Increased Fees and Expenses

Continuation funds often introduce a new set of fees, including management fees on the new fund (typically 1.5% vs. the traditional 2%) and reset carried interest, where the GP earns performance fees based on the continuation fund’s new net asset value (NAV), rather than the original investment price. These fees can dilute overall returns, particularly for investors who roll over their interest.

Regulatory Scrutiny

Regulators, including the Securities and Exchange Commission (SEC), may increase oversight of continuation funds. The SEC has raised concerns about transparency, price fairness and disclosure practices of private funds generally, indicating potential future regulations that could reshape the continuation funds market as well.

The Way Forward

Given the relative novelty of the market and the above risks and challenges, GPs and LPs may benefit from establishing some best practices that seem reasonable to both sides. LPs may want to seek detailed disclosures regarding asset valuation, GP incentives and deal structuring. Independent valuations may help as third-party assessments can mitigate conflicts of interest in pricing decisions. LPs may also benefit from more empowered terms in the LPA, for example earlier notice of the GP’s intention to form a continuation fund. Further, the LPAC may want to play a more proactive role in reviewing and approving continuation fund transactions.

For GPs, it is essential to maintain credibility in the continuation fund market as PE is a highly reputation-driven industry. This requires clear and open communication with investors, fair valuation practices and competitive bidding processes, as well as strong governance structures to mitigate potential conflicts.

Conclusion

Continuation funds represent a significant evolution in private equity and offer an exciting alternative to traditional exits that creates new opportunities for both GPs and LPs. However, their rapid rise also brings with it a new set of risks. While these funds can be a valuable tool when structured correctly, following best practices will ensure fair and equitable outcomes on both sides and avoid future conflict. With looming uncertainties around market conditions and regulatory scrutiny, the future of continuation funds will likely depend on how well the industry addresses these concerns at the very outset.

The author’s complete paper can be found here.

Devyani Aggarwal is a student of law at the UC Berkeley School of Law.