Continuation Fund: Reset Clock, New Fees, Old Assets

Key Takeaways

• A continuation fund allows a GP to sell mature assets from an expiring fund to a new vehicle they continue to manage, giving existing LPs a cash-out option or a roll into the new structure.
• The new vehicle's carry reset means LPs who roll are paying fresh management fees and 20% carry starting from the elevated transaction price, on assets they already held and helped build.
• The GP simultaneously acts as seller for the old fund and sponsor for the new one, creating a price-setting conflict that independent advisors and LPAC oversight only partially address.
• Single-asset continuation vehicles give rolling LPs concentrated exposure with no diversification; some institutional investors' allocation policies cap single-asset concentration and may not permit the roll.

What It Is

The structure has two sides. On the sell side, the predecessor fund transfers specific portfolio companies (one asset in a single-asset continuation vehicle, several in a multi-asset continuation fund) to the new vehicle at a negotiated price. On the buy side, the continuation fund raises capital from secondary investors who are new to these assets, plus rolling LPs from the predecessor fund who choose to maintain exposure.

The economics of the new vehicle reset. Management fees, carried interest, hurdle, and fund life are negotiated fresh between the GP and the secondary lead investors. The result is a vehicle that owns mature assets but has the fee clock, economic terms, and life of a new fund.

The Intuition

Private equity funds have a fixed 10-year life, extendable by two years. That clock does not always align with the value creation runway of a portfolio company. A GP might identify a software business that needs three more years of platform building before an optimal exit, but the fund that owns it has only two years left and its LPs want liquidity.

The continuation fund separates the two timelines. LPs who want liquidity get it now at a negotiated price. LPs who want to keep exposure can roll in. The GP keeps managing the asset into its next value creation phase, with fresh capital for add-ons and enough time to execute. Secondary buyers get concentrated access to assets the GP has already underwritten and operated for years.

How It Works

A typical continuation fund transaction runs through these steps:

1. Strategic rationale
   Asset needs more time, capital, or a specific exit window
   Predecessor fund approaching end of life or LP pressure for DPI

2. Advisor engagement and process
   Independent secondary advisor runs competitive process
   Secondary investors submit bids on the asset

3. Pricing and terms
   Price at or near last marked NAV, sometimes with discount
   New LPA: reset fees, new carry stack, new GP commitment
   Crystallization of carry on sale from predecessor fund

4. LP election
   20 to 30 day window to choose:
   cash out at transaction price, or roll into new vehicle
   Some deals offer a third option at modified terms

5. Closing
   Predecessor fund receives cash for the asset
   New vehicle is capitalized by rollover LPs and secondary investors
   GP typically commits 2 to 5 percent of new vehicle

The new vehicle's carry reset is the feature that generates the most LP scrutiny. Suppose the predecessor fund bought the asset at 300 million and it is being sold to the continuation vehicle at 1.2 billion. The new vehicle's 8 percent hurdle and 20 percent carry start from the 1.2 billion cost basis. Value created above that base is split, even though much of the original operating work has already been done.

Worked Example

A healthcare GP's 2015 vintage fund owns a specialty clinic chain marked at 900 million, acquired for 250 million in 2016. The asset still has a 3 to 5 year runway of geographic expansion, but the predecessor fund is in year 9 of its life with 18 months of runway left.

The GP engages an advisor to run a continuation vehicle process. Three secondary firms submit bids. The winning bid prices the asset at 870 million (a small discount to NAV) and sets new terms: 1.5 percent management fee on invested capital, 20 percent carry over an 8 percent hurdle, 6-year life with two one-year extensions, and a 4 percent GP commitment.

LPs receive 25 days to decide. Roughly 55 percent by commitment cash out at the transaction price, realizing 3.5x gross on the original investment. The other 45 percent roll into the continuation vehicle alongside the new secondary buyers. The GP's carry from the predecessor fund crystallizes on the 870 million sale, and a new carry clock starts in the continuation vehicle.

Common Mistakes

1. Underweighting the price-setting conflict. The GP is simultaneously the seller (for the predecessor fund) and the sponsor (for the continuation vehicle). Even with independent advisors and LPAC approval, the transaction price carries more conflict risk than a sale to a third-party strategic buyer.

2. Overlooking the new fee stack. Rolling LPs pay new management fees and new carry on assets they have already held for years. The true return from holding the asset through the continuation vehicle has to clear the new fee and carry load, not just the pre-transaction NAV.

3. Missing disclosure on GP economics. ILPA guidance asks for full disclosure of the GP's interest in the transaction, including any change in GP commit, fee discounts, or carry treatment. Rolling LPs should read those disclosures carefully rather than default to the roll option.

4. Treating transaction proceeds as clean DPI. If the crystallized carry from the predecessor fund is large, the LP's effective net return from the sale can be significantly below the headline price received.

5. Ignoring single-asset concentration. A single-asset continuation vehicle gives LPs a concentrated position with no diversification. Some institutional investors' policies cap concentration at the fund level, and rolling into a single-asset vehicle can violate those limits.

Frequently Asked Questions

Q: What is a continuation fund in simple terms? It is a new fund created by the same GP to buy specific portfolio companies from an old fund approaching the end of its life. Existing investors choose to cash out at the sale price or roll their stake into the new fund to continue holding the asset.

Q: How do continuation funds affect investment decisions? For LPs, it is a forced decision: accept liquidity now at a negotiated price or continue under a reset fee and carry structure. Because carry crystallizes on the sale, the effective net return from rolling must clear a new hurdle starting from the elevated transaction price.

Q: What is a real-world example of a continuation fund? A healthcare GP's 2015 fund owns a specialty clinic chain marked at $900 million (bought for $250 million in 2016). In year 9, the GP runs a continuation vehicle process at $870 million. 55% of LPs cash out at 3.5x gross; 45% roll into the new vehicle alongside two secondary investors who provide the liquidity for exiting LPs.

Q: How can LPs evaluate whether to roll or sell in a continuation fund? Model the expected return from the continuation vehicle's new fee and carry structure starting from the transaction price. Compare it against the certainty of selling now. If the implied exit multiple needed to earn a decent IRR in the new vehicle requires significant additional upside, the sell option may be better.

Q: How is a continuation fund different from a fund life extension? A fund extension simply adds one or two years to the existing fund with minimal change in economics. A continuation fund creates a new legal entity with new investors, new capital, and reset fee/carry terms. It is more formal, more expensive to execute, and provides actual liquidity for LPs who want out, which an extension does not.

Sources

1. Institutional Limited Partners Association. "Continuation Funds Guidance." https://ilpa.org/resource/ilpa-continuation-funds-guidance/
2. Bain & Company. "Global Private Equity Report 2024." https://www.bain.com/insights/topics/global-private-equity-report/
3. Simpson Thacher & Bartlett. "Private Capital Funds Practice." https://www.stblaw.com/our-team/practices/private-capital-funds
4. Kirkland & Ellis. "Secondaries Practice Insights." https://www.kirkland.com/practices/funds/secondaries

Disclaimer

This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.