Continuation Funds: Why GPs Are Doubling Down on Their Best Bets

Continuation funds have emerged as a key mechanism in private equity, enabling fund managers to extend the life of select assets beyond traditional investment horizons. These vehicles provide an alternative to conventional exit strategies, allowing investors to maintain exposure to high-performing assets while offering liquidity options to others. As the private equity landscape evolves, continuation funds are playing an increasingly important role for GPs and LPs alike.

What Is a Continuation Fund?

A Private Equity Exit Strategy

A continuation fund is a private equity vehicle that allows GPs to extend the holding period of promising portfolio companies from an existing fund that is nearing the end of its lifecycle. Rather than exiting via a traditional sale or IPO, GPs use continuation funds to retain assets with further growth potential while offering liquidity options to LPs who may prefer to exit.

How Continuation Funds Work

Key Mechanics

The continuation fund process typically involves:

• GPs identifying high-potential assets from a maturing fund.
• Establishing a new continuation fund to acquire these assets.
• Conducting an independent valuation to ensure fair pricing.
• Offering existing LPs the choice to cash out, roll over their investment, or a combination of both.
• Bringing in new investors, often secondary funds, to participate in the transaction.

Through this structure, assets are transferred to the continuation vehicle, ensuring continuity under the same GP while providing liquidity solutions to LPs.

Economic Considerations

• Valuation & Pricing: Independent valuations and competitive processes help determine a fair transaction price.
• Fee Structures: Management fees in continuation funds are often lower than traditional funds, with tiered carried interest structures linked to performance.
• GP Commitment: GPs typically roll over a significant portion of their carried interest and commit additional capital to align incentives with investors.

Types of Continuation Funds

Single-Asset Continuation Vehicles (SACVs)

SACVs focus on a single high-quality asset, allowing for deeper due diligence and precise value creation strategies. According to market data, SACVs accounted for 55% of total GP-led fund volume in the first half of 2024, reflecting their growing appeal to investors seeking targeted opportunities.

Source: Evercore, H1 2024 Secondary Market Survey, July 2024. “Other” is comprised of preferred equity which represented 9% of transactions and tender offers which represented 5%.

Multi-Asset Continuation Vehicles (MACVs)

MACVs involve multiple assets from a fund, offering diversification but introducing added complexity. These vehicles represented 31% of transactions in the same period. While they can provide risk mitigation through asset variety, there is a potential concern that weaker-performing companies may be bundled with stronger ones.

Pros and Cons of Continuation Funds

Benefits

• Extended Value Creation: Allows GPs to continue executing growth strategies for high-potential assets.
• Liquidity Solutions: Provides LPs with flexible exit options while attracting new investors.
• Alignment of Interests: Ensures continued GP involvement and accountability through co-investment.
• Portfolio Stability: Maintains continuity for portfolio companies under experienced management.

Challenges

• Potential Conflicts of Interest: As GPs act as both buyers and sellers, strong governance is required.
• Regulatory Scrutiny: Growing oversight on valuation transparency and investor protections.
• Pricing Complexities: Determining a fair valuation can be contentious, requiring independent processes.

Market Trends & Growth Projections

The continuation fund market has expanded significantly, driven by a shift in private equity strategies and increased demand for liquidity solutions.

• Single-Asset Growth: SACVs within GP-led secondaries have surged from under 10% of the market in 2018 to 55% in early 2024.
• Transaction Volume: Between 2021 and 2023, SACV transactions totaled $70 billion—more than triple the volume of the previous three years.
• Market Size: In 2024, a record 65 continuation funds closed, raising an estimated $36 billion, approaching the 2021 high of $38 billion.

Source: Preqin Pro. Data as of December 11, 2024

With exit opportunities remaining limited and fundraising conditions tightening, continuation funds are expected to maintain momentum. These vehicles now account for nearly half of the global secondaries market, signaling their permanence in private equity strategies.

Key Takeaways

Continuation funds have evolved into a vital tool for fund managers and investors seeking flexible solutions in private equity. While they introduce complexities, their ability to extend value creation and provide liquidity makes them an attractive option in today’s market. As demand grows and governance structures continue to mature, continuation funds are set to become a standard feature in sophisticated private equity strategies.