What is a Continuation Fund?

For decades, private equity has been one of the most attractive asset classes for investors seeking long-term growth, but it has also come with one significant drawback: illiquidity. Unlike public equities, which can be sold at the click of a button, private equity funds often require investors to commit their capital for 10 years or more, with limited options for early exit. But in recent years, the private equity industry has developed a mechanism to offer flexibility without sacrificing control or long-term value. That mechanism is known as a continuation fund.

At its core, a continuation fund is a new investment vehicle created by a private equity firm – often called the general partner or GP – to take ownership of one or more portfolio companies that are currently held in an older fund nearing the end of its term. Rather than selling those assets on the open market or taking them public, the GP effectively sells them to a new fund that it also manages.

This transaction provides an opportunity for the existing investors in the original fund – known as limited partners or LPs – to choose between two options: they can either sell their stake and take liquidity at a market-based price, or they can “roll over” their investment into the new continuation fund and remain invested in the asset for another several years.

This structure is typically supported by one or more secondary investors who are willing to provide the capital needed to buy out the exiting LPs.

Why Use One?

The motivation for using a continuation fund often comes down to timing. Private equity managers may believe a particular company or portfolio still has substantial upside, but the original fund is running out of time. Rather than force a rushed sale or exit, the GP can use a continuation fund to hold the asset longer, giving it more time to grow, stabilize, or complete a strategic transformation.

From the LP’s perspective, the continuation fund offers a useful option: if they need liquidity for other purposes – such as rebalancing, meeting endowment obligations, or redeploying capital elsewhere – they can cash out. If they remain confident in the company’s prospects, they can stay invested without starting over in a brand-new blind pool.

In this way, continuation funds serve a dual purpose. They provide selective liquidity for investors in an otherwise illiquid space, and they preserve long-term value for those willing to be patient.

The Rise in Popularity

Continuation funds have seen a significant increase in usage over the past few years, particularly in response to changing market dynamics. During periods when mergers and acquisitions slow down or the IPO market becomes less favorable, private equity firms are often left holding assets that are not easily exited through traditional channels. Continuation funds offer an alternative path.

In fact, continuation transactions have grown to represent a meaningful share of private equity secondary deals, signaling that this is more than a niche strategy. The rise in institutional interest – from pension funds to sovereign wealth funds – has further legitimized the structure.

Who Benefits the Most?

Continuation funds are particularly appealing to several classes of investors:

Early LPs looking for liquidity benefit from a controlled, negotiated exit rather than being forced to sell on the open secondary market, where discounts can be steep.
Long-term investors who still believe in the asset’s prospects can hold on without starting fresh in a new fund.
Secondary investors gain access to mature, cash-flowing assets with known management teams and business models, reducing some of the uncertainty that comes with investing in early-stage private equity.
Private equity managers benefit by retaining control of assets they know well, continuing to collect management fees, and potentially earning additional performance incentives if the asset performs strongly in the second phase of ownership.

What Are the Risks?

While continuation funds offer flexibility and efficiency, they are not without controversy. One of the primary concerns is the potential for conflict of interest. Since the GP is effectively both the buyer and the seller in the transaction, there is a risk that the valuation may not be entirely fair to one side or the other.

To mitigate this, many continuation fund transactions now require independent third-party valuations, fairness opinions, and consent from an LP advisory committee. These safeguards are intended to ensure that the process is transparent and that investors on both sides of the transaction are treated equitably.

There is also the question of performance drag. If the GP misjudges the future performance of the asset or the asset becomes overburdened with fresh capital, future returns could suffer. Investors rolling over into the continuation fund should perform their own due diligence to assess whether the investment remains attractive.

Conclusion

Continuation funds are not a loophole or a gimmick. When structured properly, they represent a thoughtful and increasingly popular solution to one of private equity’s longstanding challenges: how to provide liquidity in a market where liquidity is hard to find. By giving existing investors a choice between exiting or continuing, they strike a balance between flexibility and long-term value creation.

For wealth management clients with exposure to private equity – or those considering it – understanding tools like continuation funds is part of staying informed in an evolving investment landscape. As always, the key is not simply knowing that these tools exist, but understanding how they work, who they benefit, and when they might be appropriate.