Continuation funds give GPs the ability to retain high-performing assets longer, while offering LPs the option to exit or reinvest—making strong governance essential.
Key Elements
- These structures offer flexible liquidity and are becoming increasingly popular.
- Transparency around pricing and evolving terms is critical.
- Governance must remain aligned with LP expectations to maintain trust and accountability.
If you’re familiar with private equity vocabulary, you’ve probably already heard about continuation funds. This trendy PE word isn’t all new, but has certainly gained traction in recent years. These vehicles have surged as a strategic tool for general partners (GPs) to extend the holding period of high-performing assets, going well beyond the classic lifespan.
While offering liquidity solutions and potential value creation, these funds also introduce complex legal considerations that firms must navigate carefully. In this article we’ll provide insights on what continuation funds are, why they have become so popular. By the end, private equity organizations will have the information they need to know before incorporating continuation funds as a key part of their strategy.
Key number: According to a survey by Adams Street, the global secondary deal volume reached an estimated $162 billion in 2024, up 45% from the prior year.
Definition of a Continuation Fund
A continuation fund is an investment vehicle established by a General Partner to acquire one or more assets from an existing fund nearing the end of its term. General Partners can then keep certain control over valuable assets, while providing existing LPw with options to either cash out or roll over their investment into the new fund. Continuation funds have become more and more common, perhaps due to challenging exit environments, or the desire to maximize asset value over extended periods.
These transactions often involve a third-party secondary buyer. This individual purchases the assets and enables General Partners to set up the fund. The typical investment period of a continuation fund is somewhere between 3-5 years, very different than the classic 10 year durations. Investors usually look at more mature assets rather than new and risky ones.
Sounds like a compelling liquidity option right? As much as continuation funds sound exciting, they also require careful structuring. This goes to say, alignment of interests between GPs, existing limited partners, and new investors must be cristal clear to be successful.
Legal and Regulatory Considerations
As the definition explains, continuation funds are a great option to maximize value when reaching a breaking point where the original fund term constraints to exit. This investment strategy is appealing, nevertheless, some legal considerations are to be kept in mind:
1. Conflict of Interest
Since General Partners are on both sides of the deal, a continuation fund will always entail conflicts of interest. GPs are selling assets from one fund, and purchasing them into another fund they also manage. Where’s the problem? General Partners set the asset pricing on both ends, meaning that existing investors and LPs exiting could be at a disadvantage, if the GP decides to set terms that favor only the new fund.
Independent valuations and conflict analysis are highly recommended and critical. In some instances regulators have already brought enforcement actions against advisers for breaches related to inadequate disclosure of conflicts and failure to obtain necessary consents from any eventual limited partner.
2. Fairness Opinions and Valuation
Fairness opinions are independent assesments that provide an objective perspective on whether the transaction is positive or negative for the buyer. They help LPs better understand if the terms and conditions of the continuation fund integration are fair or not. This has become a key step in the valuation, and although it isn’t mandatory in all regions, it’s still always highly recommended.
General Partners should approach fairness opinions as an opportunity to stregthen and build trust with investors and Limited Partners, they increase confidence and set good records for further projects.
3. Consent and Disclosure for Limited Partners
In the context of a continuation fund deal, disclosure means providing a clear understanding of the transaction terms, its rationale, and any potential conflicts of interest. The Institutional Limited Partners Association (ILPA) has issued guidance emphasizing the need for clear, timely, and complete information to enable a LPs to make informed decisions.
Once again, it boils down to being transparent with potential interested parties. It’s common to have investors ask for written consent from LPACs (Limited Partner Advisory Committee), stating all conflicts of interest and benefits to the buyers.
4. Regulatory Scrutiny and Compliance
Regulatory bodies are increasingly scrutinizing continuation fund transactions. In the UK for instance, the Financial Conduct Authority (FCA) has initiated reviews focusing on conflicts of interest in private asset management, including the use of continuation funds. The FCA’s concerns highlight the necessity for robust governance frameworks and conflict-of-interest policies to ensure investor protection.
For General Partners, it’s important to keep in mind that more regulations will come as continuation funds keep rising. It’s also relevant to stay close to legal teams in order to not miss out on anything, and ensure potential investors build trust with the fund.
What Interested Parties will Look for
Private equity firms should consider some of the most common practices when working on a continuation fund transaction. Remember, some aren’t enforced regulations, such as the independent valuation, but they’re often requested.
- Early Engagement with LPACs: Involve the Limited Partner Advisory Committee (LPAC) early in the process to discuss potential conflicts and obtain feedback on the proposed transaction structure.
- Independent Valuations: Secure independent third-party valuations to provide objective assessments of asset value, reinforcing the fairness of the transaction. All Private Equity firms should be well aware that these are in the rise.
- Comprehensive Documentation: Maintain detailed records of all communications, disclosures, and consents related to the continuation fund to demonstrate compliance and transparency.
- Regulatory Compliance Checks: Regularly review and update compliance policies to align with evolving regulatory expectations and industry best practices.
Conclusion
Continuation funds offer private equity firms a mechanism to retain and maximize the value of high-performing assets. However, the legal implications are significant, requiring meticulous attention to fiduciary duties, conflict management, and regulatory compliance. By implementing best practices and fostering transparent relationships with LPs, legal teams can effectively navigate the complexities of continuation fund transactions in 2025 and beyond.
We hope these you found these insights helpful, if you want to learn more about what DiliTrust can offer to Private Equity funds, explore our solutions today.
