Continuation funds in private equity
A continuation fund is a new private equity fund that a PE firm raises specifically to buy one or more portfolio companies from an older fund it already manages. The old fund gets to exit. The companies move into the new fund. The PE firm keeps managing them for another 5-10 years, with a fresh fee stream and a new carry opportunity. Limited Partners in the original fund can choose to cash out or roll their investment into the continuation vehicle. Continuation funds were a backwater of the secondaries market until 2020. They are now one of the fastest-growing parts of the PE industry, accounting for roughly a third of all secondaries volume and a meaningful share of all PE exits. They are also one of the most controversial structures in PE, sitting in a conflict-of-interest minefield that the industry has not fully cleaned up.
That is the textbook answer. Here is what actually happens.
Why continuation funds exist
Traditional PE funds have a 10-12 year life. They raise capital in years 1-5, deploy it, improve the companies, and return capital by exiting deals through sale to strategic buyers, sale to other PE firms, or IPOs. By year 10, most deals should have exited. By year 12, the fund is supposed to wind down.
Two things went wrong with this picture.
First, exit markets seized up in 2022-2024. Strategic M&A slowed. IPO windows stayed mostly closed. Secondary buyouts (PE-to-PE sales) became harder because buyer firms could not get financing at the leverage multiples they wanted.
Second, many older funds had great assets that had grown substantially in value but had not yet reached their full potential. Selling them at a soft-market discount would leave value on the table. Forcing a fire sale to meet fund-life deadlines would hurt LP returns.
The continuation fund solves both problems. The old fund gets to exit at a fair price (set by an arm's-length valuation). The company keeps its existing management and strategy. The PE firm gets more time to realise the value they believe is still there.
That is the official story. The unofficial story is more complicated.
The mechanics
A typical continuation fund transaction has five steps.
Step one: the GP identifies the asset. Usually one or two portfolio companies that the GP thinks still have significant upside, where traditional exit options are not producing acceptable bids.
Step two: a secondaries firm anchors the deal. Big secondaries investors (Ardian, Lexington, Strategic Partners at Blackstone, HarbourVest, AlpInvest, Goldman Sachs AIMS, etc.) agree to be the lead buyer. They bring in co-investors.
Step three: the valuation gets set. An independent process, usually run by an investment bank, produces a valuation "at market". LPs in the old fund are given the option to either cash out at that valuation or roll their investment into the new fund. This is where conflicts of interest live.
Step four: the new fund closes. The new continuation fund buys the asset from the old fund at the agreed valuation. The old fund distributes the proceeds to LPs who chose to cash out. Rolling LPs keep their pro-rata exposure in the new fund. The secondaries buyer and co-investors fund the rest.
Step five: the GP keeps managing. Same team, same thesis, new fund terms. Fresh management fees, fresh carry.
Why LPs both love and hate continuation funds
LPs love continuation funds when: - The asset is genuinely great and has meaningful runway - The valuation is fair and arm's length - Their original fund is past its optimal exit window and this is the best way to realise value - They have the option to roll and keep exposure to something they believe in
LPs hate continuation funds when: - The GP is using the structure to delay a bad outcome on a struggling asset - The valuation is pushed higher than an external buyer would pay - Roll-vs-cash-out timelines are too short to do proper diligence - The GP is essentially earning double fees on the same asset across two funds
The real tension sits in the valuation question. The PE firm sets the valuation, with help from an investment bank that the PE firm hires. The PE firm's carry in the new fund depends on buying at a lower valuation. The PE firm's carry in the old fund depends on selling at a higher valuation. These are opposing incentives, sitting inside the same firm.
LPs are meant to have a "Limited Partner Advisory Committee" (LPAC) that reviews the transaction for fairness. In practice, LPACs are often resource-constrained and under time pressure, and the transactions are highly technical.
The fee double-count
Here is the quiet part nobody loves talking about.
The old fund already earned management fees on the asset for 5-7 years. If the fund also earned carry on the sale to the continuation vehicle, that carry was paid on a valuation the GP partially controlled.
The new continuation fund then charges management fees again (usually 1-1.5% on committed capital, lower than a normal PE fund but not zero). And it has fresh carry, typically 10-15% (lower than a normal 20%).
For the GP, this is elegant. They have turned one hold period into two, with two fee streams and two carry opportunities.
For LPs who rolled over, they are now paying a second layer of fees and giving up a second layer of carry on the same asset they would have owned through the first fund's natural life. Whether that is reasonable depends on whether the continuation vehicle actually generates additional returns.
Which sometimes it does. And sometimes it does not.
The 2025/2026 picture
Continuation fund volume has grown from roughly $10 billion in 2018 to over $100 billion annually now, and it is still growing. Roughly a third of all "secondaries" volume is now continuation funds, and they are an increasingly large share of all PE exits.
The reasons are structural. Holding periods are stretching. Traditional exit paths (strategic M&A, IPOs, PE-to-PE) are congested. LP allocations to PE are mature, so the marginal LP dollar increasingly wants to know when it comes back.
Regulatory scrutiny is starting. The SEC's Private Fund Adviser Rules (adopted 2023, partially vacated 2024 on appeal) attempted to require independent fairness opinions and LPAC consent for adviser-led secondaries, which most continuation funds are. Enforcement is ongoing. Expect more regulation, not less.
There is also a question of whether the structure is truly arms-length or whether it is being systematically abused to extend holds on assets that should exit. The honest answer is that the variation is enormous. Some continuation funds are excellent. Some are repackaging jobs on struggling assets.
How to read a continuation fund in the news
When you see a PE firm announce a continuation fund, the quick questions to ask.
How long has the GP held the asset? 5-7 years is reasonable. 8+ years starts to look like a GP delaying an unfavourable outcome.
What is the implied valuation vs the entry price? If the GP paid 10x EBITDA and is "selling" to its own new fund at 15x, the valuation is aggressive. At 11-12x, more reasonable.
How many LPs rolled vs cashed out? A high roll rate (70%+) signals LP confidence. Low roll rates (under 40%) often signal LPs believe the valuation is aggressive.
Who is the lead secondaries buyer? Blue-chip secondaries firms (Ardian, Lexington, HarbourVest) signal a more arms-length process. Less reputable buyers or heavy GP-friends participation signal potential issues.
What are the new fund terms? 10-15% carry and 1-1.5% management fee are the current market. Higher than that, on an already-owned asset, is aggressive.
What is the exit path from here? If the GP has a clear three-year path to strategic M&A or IPO, the continuation fund is a bridge. If they do not, it is parking.
When continuation funds work well
There are cases where continuation funds are obviously good. Consider a founder-built business the GP has owned for five years. The company has grown 3x, is still growing fast, and has genuinely new adjacencies to expand into. The natural buyer universe is limited because the company is large, still founder-led, and requires a specialist owner. A strategic acquirer would restructure it, cutting off the growth. An IPO is possible but would value it as a mature business rather than a growing one.
In that scenario, a continuation fund is the right vehicle. The GP team knows the company, has relationships with management, and has specific investment plans for the next five years. LPs who want liquidity get it. LPs who want to stay keep exposure. The company does not get disrupted.
This is the steel-man case. It is a real case, and it happens.
When they do not
There are also cases where continuation funds are a way to extend the clock on a deal that should exit.
A portfolio company hit its growth plan in years 2-3, stalled in years 4-5, and is now below the GP's underwriting case. Exit bids are coming in at 9x EBITDA when the GP modelled a 12x exit. Rather than accept the market price, the GP raises a continuation fund at 11x, with some creative EBITDA add-backs pushing the headline multiple optics. The old fund reports a "successful exit", the new fund owns the same problem, and the GP earns another round of fees on the way to figuring out what to actually do.
This happens. More than people discuss.
The closing take
Continuation funds are a legitimate mechanism that has been over-used by a subset of the industry and under-scrutinised by most LPs. They solve a real problem for assets that are too good to fire-sale and too mature to IPO, but they also create obvious conflicts of interest that the industry has not fully resolved.
Done well, they extend the right holds and produce additional LP returns. Done badly, they become a mechanism to avoid accepting market verdicts on marginal deals.
When you see the phrase "continuation fund" in a press release, read it carefully. The structure tells you less than the details do.
For the broader picture, see what is private equity. For the other financial engineering tools PE firms use, see the toolkit, including dividend recapitalisation and PIK financing.
