Continuation Funds in Private Equity: Definition, Mechanics, Benefits & Future Outlook

Continuation funds have quickly evolved from a niche secondary strategy into a mainstream tool in private equity.

These specialized investment vehicles allow General Partners (GPs) to extend ownership of top-performing assets, offering flexibility beyond the traditional 10 year fund cycle.

For Limited Partners (LPs), continuation funds create optionality - providing either liquidity or continued exposure to valuable portfolio companies.

In this article, we’ll break down what continuation funds are, how they work, their benefits for both GPs and LPs, governance considerations, and why they are becoming a permanent fixture in private equity.

What Is a Continuation Fund in Private Equity?

A continuation fund is a GP-led secondary vehicle created to acquire one or more portfolio companies from an existing, mature private equity fund. Instead of selling to an external buyer, the GP facilitates an internal sale to this new fund. This allows the GP to:

• Extend ownership beyond the original fund’s term.
• Maintain control of high-performing assets.
• Continue executing value-creation strategies for an additional 3–5 years (or more).

For LPs, continuation funds present a choice: either roll their investment into the new vehicle or cash out at fair market value.

How Continuation Fund Transactions Work

Continuation fund deals follow a structured process designed to ensure fairness and transparency:

1. Asset Selection & Valuation
   • The GP identifies one or more trophy assets nearing the end of the original fund’s life but with significant remaining growth potential.
   • An independent third-party valuation agent determines the fair market value, ensuring governance and fairness for LPs.
2. Creation of the New Vehicle
   • The GP establishes the continuation fund with its own terms, fee structure, and investment horizon.
3. Sale of Assets
   • The original fund sells selected companies to the continuation fund at the independently validated price.
   • The sale proceeds are distributed to the LPs in the original fund.
4. LP Election
   • Roll: LPs can roll their investment into the continuation fund and retain exposure.
   • Cash Out: LPs can exit at fair value, achieving immediate liquidity.
5. New Capital Injection
   • Continuation funds often attract new institutional investors (pension funds, endowments, or secondary buyers).
   • These investors provide liquidity for selling LPs and gain access to mature, high-performing assets.

Benefits of Continuation Funds

For General Partners (GPs)

• Avoid Premature Sales: Continue value creation without being forced to exit due to fund expiration.
• Enhanced Returns: Hold assets longer and potentially exit later at a higher valuation.
• Maintained Control: Retain influence over key portfolio companies without disruption.

For Limited Partners (LPs)

• Liquidity Flexibility: Cash out early if desired, outside traditional fund timelines.
• Continued Exposure: Roll over into the continuation fund and benefit from future growth.
• Fresh Terms: Rolling LPs participate under a new investment horizon and fee structure.

Governance & Investor Protections

Because GPs manage both the selling and buying vehicles, conflicts of interest are closely monitored. Best practices include:

• Independent Valuation: Ensures fair pricing for selling LPs.
• LP Advisory Committee Approval: Provides oversight and protects existing investors.
• Transparency: Clear disclosure of fees, valuation methods, and terms builds trust with stakeholders.

The Future of Continuation Funds in Private Equity

Continuation funds have become the third pillar of private equity exits, alongside trade sales and IPOs.

Their growth reflects a shift toward more flexible, asset-centric investing. As private equity funds mature and hold assets longer, continuation funds are expected to expand as a mainstream liquidity solution.

For investors, this means greater choice: stay invested in proven companies or realize gains early. For GPs, continuation funds strengthen track records and allow deeper value creation.

Frequently Asked Questions (FAQs)

Q: Are continuation funds risky?
A: Like all private equity strategies, risks exist - mainly around valuation fairness and potential conflicts of interest. Strong governance and third-party valuations mitigate these risks.

Q: How do continuation funds differ from secondary sales?
A: Traditional secondary sales involve LPs selling fund stakes to new investors. Continuation funds, by contrast, involve selling underlying portfolio companies into a new GP-led vehicle.

Q: Who invests in continuation funds?
A: Institutional investors such as pension funds, endowments, sovereign wealth funds, and secondary specialists often participate, attracted by the chance to back seasoned assets.

Q: How big is the continuation fund market?
A: Industry reports suggest continuation funds represent one of the fastest-growing segments of the private equity secondary market, with deal volumes increasing significantly in recent years.

Key Takeaway

Continuation funds are reshaping private equity by aligning GP and LP interests, unlocking liquidity, and extending value creation.

With their rising prominence, they are no longer a niche tactic but a core strategy in modern private equity portfolio management.