With traditional private equity investment exits facing difficulty over the past few years — albeit improving somewhat recently — private equity sponsors have increasingly relied on the use of continuation funds. Once a niche tool, continuation funds have become mainstream and investors should learn to understand how they work, why they exist, and what risks they carry.

 

What Is a Continuation Fund?

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A continuation fund is a new vehicle created by a private equity manager to hold onto one or more portfolio companies beyond the typical ~10 years of an original fund. Rather than selling an asset outright at the end of a fund's life, the general partner (GP) transfers the underlying investment into a new, separate fund. This provides existing limited partners (LPs) with a choice — either cash out now or roll their existing investment into the new vehicle and maintain exposure to the existing portfolio company. New investors, often large secondary market buyers, come in to provide liquidity for those who do not wish to invest in the continuation fund. The GP is assuming that the company still has meaningful upside and that additional time will produce a more attractive outcome.

 

Why Do Managers Use Them?

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The appeal for general partners is straightforward. Selling a high-conviction portfolio company in a weak market can reduce or leave additional value on the table. Continuation funds allow managers to maintain ownership, avoid a fire sale, and/or keep collecting management fees. For the GP, it also means retaining a flagship asset that supports their track record and next fundraise. For LPs who roll over, they maintain exposure to a company they are already familiar with. For those who want out, the structure offers liquidity without waiting for an uncertain initial public offering (IPO) or sale.

 

Impact on Public Markets

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Continuation funds have a meaningful indirect effect on public equity markets. By allowing GPs to defer exits, they reduce the pipeline of IPOs that would otherwise enter public markets. When large, mature private companies stay private longer, they end up representing a growing part of the economy that public market investors cannot access.

 

This dynamic has contributed to the well-documented decline in the number of public equity firms. Fewer companies going public means less opportunity for traditional fund managers. It also means that some of the most compelling growth stories play out entirely in private ownership, with public market participants left holding the slower-growth, post-peak version of a company if and when it finally lists.

 

Controversies and Conflicts of Interest

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With this growth, there has also been significant criticism. The main problem is a conflict of interest inherent to the structure itself. The GP simultaneously represents the seller (the original fund), the buyer (the new continuation vehicle), and sets the valuation at which the transfer occurs. Critics argue that GPs are incentivized to only choose their best assets for continuation funds, in turn, leaving weaker companies in the original fund to wind down.

 

Key Risks for Investors

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For LPs considering rolling into a continuation fund, several risks deserve attention. Valuation opacity remains the central challenge, as private assets are difficult to price independently, and the GP's mark may not reflect what an arm's-length buyer would pay. There is also concentration risk, as continuation funds are often single-asset or two-asset vehicles, meaning there is no portfolio diversification to cushion against a bad outcome. Liquidity extension is another concern. Rolling over means recommitting capital for an uncertain additional period, often another three to five years, with no guarantee of an exit at the end. And fee structures can reset, meaning investors who roll may find themselves paying full management fees again on assets they have already held for a decade.

 

LPL Research Takeaway

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Continuation funds are neither inherently good nor bad, rather, they are a tool whose value depends on their proper use. When deployed to preserve genuine value in a difficult exit environment, they may serve investors well. When used to extend GP fee income or obscure underperformance, they do not. As an investor, the right question to ask is not whether a continuation fund exists, but why and whether the GP's interests truly align with yours.

 

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