Introduction
Private equity (PE) has long relied on traditional exit routes—IPOs, trade sales, and secondary buyouts—to return capital to investors. But in recent years, these paths have become increasingly congested. Market volatility, rising interest rates, and a slowdown in M&A activity have created a liquidity crunch, leaving general partners (GPs) and limited partners (LPs) searching for alternatives. Enter continuation funds—a once-niche tool that has now become a mainstream liquidity solution.
What Are Continuation Funds?
Continuation funds are GP-led secondary vehicles that allow GPs to transfer one or more portfolio companies from an existing fund into a new vehicle. This structure gives:
- LPs the option to cash out early or roll their investment into the new fund.
- GPs more time to manage high-performing assets and maximize value creation.
In essence, continuation funds provide a middle ground between a full exit and a long-term lock-up, offering flexibility for both sides.
Why Are They Rising Now?
The surge in continuation funds is a direct response to market headwinds:
- Liquidity Crunch: Since 2022, higher interest rates and muted IPO markets have slowed exits, straining GP-LP relationships.
- Demand for Distributions: LPs need liquidity to meet commitments to other funds, while GPs want to maintain DPI (Distributed to Paid-In Capital) ratios.
- Asset Quality: Many GPs hold “trophy assets” they believe can deliver more upside if given additional time.
In 2024 alone, 65 continuation funds closed, raising $36bn, nearly matching the 2021 record of $38bn. This marks a sharp increase from 57 funds in 2023. Notably, single-asset continuation funds have overtaken multi-asset vehicles, signaling a shift toward focusing on high-quality individual assets rather than “zombie portfolios.”
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Benefits for GPs and LPs
- For GPs:
- Extend the holding period for top-performing assets.
- Crystallize carried interest through a deemed exit.
- Maintain AUM and investor relationships.
- For LPs:
- Immediate liquidity without waiting for a full fund exit.
- Option to roll over into the new vehicle for continued exposure.
Challenges and Considerations
Despite their popularity, continuation funds are not without controversy:
- Conflict of Interest: GPs effectively “sell to themselves,” raising concerns about valuation fairness.
- LP Skepticism: Some LPs question why a GP needs more time if the asset is truly high quality.
- Regulatory Scrutiny: Increased oversight means fairness opinions and third-party valuations are becoming standard practice.
The Future of Continuation Funds
With interest rates expected to ease and liquidity gradually returning, will continuation funds remain relevant? Most experts believe yes. These vehicles have proven their value as a flexible, strategic tool—not just a stopgap measure. In fact, they may become a permanent fixture in the PE playbook, especially for unicorn assets that need more time to realize full potential.
Disclaimer:
For informational purposes only. This material does not constitute investment, financial, legal, or tax advice of any kind. Always conduct your own independent due diligence and consult a relevant qualified professional to discuss your situation before undertaking investment decisions.
Key Takeaways
- Continuation funds have evolved from a niche solution to a mainstream liquidity strategy.
- They offer optional liquidity for LPs and extended value creation for GPs.
- Expect continued growth in single-asset continuation funds and increased regulatory oversight.
