Private equity (PE) exit strategies have adapted and evolved past the days of smooth IPO runways and quick M&A turnarounds to include continuation funds. The backdrop of low financing costs that encouraged record transaction volumes, rapid fund rotations, and steady exit opportunities have evaporated over the last five years. In today’s high-rate environment, exit options have narrowed, financing has become more expensive, and holding periods have lengthened. Last year, average buyout holding periods rose to 6.7 years from a two-decade average of 5.7 years with the exit backlog now bigger than at any point since 2005, according to McKinsey research.
Enter the continuation fund, which has rapidly moved from niche to mainstream, offering opportunity to many investors while inviting caution from others. The emergence of continuation funds reflects a structural evolution in private equity rather than a temporary adjustment. These funds, a relatively new addition to the PE ecosystem, enable liquidity in a capital-constrained world while testing the boundaries of transparency and governance.
Understanding Continuation Funds
A continuation fund allows a PE firm to transfer one or more portfolio assets from an existing, maturing fund into a new vehicle, often managed by the same general partner (GP). Existing limited partners (LPs) can either cash out or roll them into the new structure, while new investors can acquire stakes in mature, high-performing assets with shorter holding periods.
The market for continuation funds has expanded quickly. In 2024, 96 such vehicles were recorded, up 12.9% year-over-year, representing 14% of all PE exits. Single-asset continuation funds, like the $3 billion Alterra Mountain Company deal, underscore their growing scale. Analysts at Greenhill & Co. predict that continuation funds could account for 20% of PE exits in the coming years, driven by a maturing secondary market and challenging exit environments.
Why the Rise?
All of this has slowed strategic M&A. In 2023, global M&A recorded its lowest level in a decade, underscoring the post-pandemic slowdown in dealmaking. Global PE exit count declined to 3,796 from the 2021 peak of 4,383. While off its highs, global PE dry powder is still around $2.5 trillion as of mid-2025, and the pressure to deploy capital remains high even as exit channels tighten. Several forces underpin the recent proliferation. Among them: a lack of traditional exit paths, a looming maturity wall, and a need for LPs to free up cash.
First, rising financing costs have constrained leveraged buyouts and widened the bid-ask gap in M&A deals. Continuation funds allow managers to retain high-conviction assets and provide investors with liquidity options. The impending maturity wall is another factor. More than 50% of PE funds are now six years or older, with 1,607 funds set to wind down in 2025 or 2026. Continuation funds allow firms to extend value creation without forced sales.
Finally, these funds align with investor demand for flexibility. LPs can exit for immediate liquidity or roll over to chase future upside. New investors gain exposure to proven assets with lower blind-pool risk. Continuation funds boast a 9% loss ratio compared to 19% for buyouts, offering better risk-adjusted returns.
The Benefits: A Win-Win-Win?
Proponents argue that continuation funds benefit all parties involved: GPs, existing LPs, and new investors. For GPs, this extension allows them to continue managing high-performing assets, thereby generating continued management fees and carried interest.
LPs gain liquidity without sacrificing potential upside, while new investors access mature assets with a clearer path to returns. Recent analysis suggests continuation funds have outperformed buyout funds across all quartiles in terms of multiple-on-invested-capital (MOIC) while also demonstrating lower loss ratios.
Empirical evidence supports their appeal. Morgan Stanley found that upper-quartile continuation funds achieved 1.8x MOIC, compared with 1.6x for comparable buyout funds. Sector-specific examples, such as Lime Rock Partners’ use of continuation structures in energy assets, illustrate how managers can extend value creation through market cycles. The firms have utilized continuation funds to extend their ownership of assets in less favored basins, betting on future market shifts. This flexibility can turn a good investment into a great one, especially when market timing is suboptimal.
Risks and Governance Challenges
Despite their benefits, continuation funds have raised governance and valuation concerns. When GPs act as both seller and buyer, conflicts of interest are inherent. Investors have raised eyebrows at the nature of these transactions, with critics likening them to circular financing structures if not carefully governed. For a deeper understanding of this dynamic, read CFA Institute Research and Policy Center’s report Continuation Funds: Ethics in Private Markets.
Transparency in valuation is also essential. LPs must trust that the purchase price for transferred assets reflects fair market value. Many firms address this by engaging third-party financial advisors for unbiased opinions or conducting auctions to ensure market-driven valuations. Yet, LPs often lack the resources to thoroughly vet these deals, and the concentrated risk of single-asset funds (vs. diversified secondary funds) can deter rollovers.
Compounding these concerns, the 2024 Fifth Circuit Court of Appeals decision to vacate portions of the SEC’s Private Fund Advisers Rule removed mandatory fairness-opinion and disclosure requirements for continuation funds. This ruling reduces mandatory reporting requirements, potentially increasing conflict risks as GPs face less regulatory oversight but also allows for faster transaction execution. It also increases the onus on investors to perform thorough due diligence underscoring the need for voluntary and robust governance.
Best Practices for Investors
For those navigating continuation funds, several best practices can mitigate risks and enhance outcomes:
- Ensure Independent Valuation: : Demand third-party valuations from reputable advisors, such as Houlihan Lokey or Evercore, to verify fair asset pricing and seek auction processes where feasible. LPs should request detailed pricing methodologies and comparable transaction data.
- Align GP and LP Incentives: Require GPs to roll over 100% of their investment and negotiate carried interest and management-fee structures that balance long-term alignment with investor protection.
- Assess Concentration Risk: Single-asset continuation funds can introduce heightened exposure; investors should compare their risk-return profiles against diversified secondary funds and conduct stress tests under adverse market conditions.
- Negotiate Governance Early: LPs should negotiate continuation fund terms during initial fund formation, setting clear expectations for pricing, governance, and LP options. Establish LP veto rights or advisory roles at initial fund formation to ensure influence over future continuation transactions.
- Leverage Specialist Expertise: Engage advisors experienced in secondary and GP-led transactions to assess valuation methodologies, cash-flow models, and regulatory implications.
- Monitor Post-Transaction Performance: Require transparent, periodic reporting on operational and financial metrics to confirm that extended holding periods generate incremental value.
- Engage in Active Dialogue: Foster open communication with GPs to address concerns about conflicts or transparency. Participate in LP advisory committees to influence governance and ensure accountability. Active engagement can deter self-dealing and promote fair outcomes.
The New, New PE Normal
For investors, success in this environment depends less on the structural novelty of the vehicle and more on the rigor of its oversight. The lesson from both the zero-rate expansion and the current high-rate adjustment is clear: in private markets, value creation endures only when alignment, transparency, and discipline do.
