Understanding Continuation Funds: A Growing Trend
Understanding Continuation Funds: A Growing Trend
What Are Continuation Funds?
Continuation funds are investment vehicles that allow investors to extend their involvement in a particular asset beyond its original term. They serve two main purposes: they help de-risk the sales process while providing Limited Partners (LPs) with liquidity, especially useful in tough market conditions. Additionally, they enable General Partners (GPs) to retain and manage assets they believe have further growth potential.
These funds can be structured as single-asset or multi-asset continuation funds. Single-asset funds focus on one specific asset, allowing managers to concentrate their efforts, while multi-asset funds offer diversification and risk spreading. According to Evercore's 2024 research, about 55% of GP-led secondaries involved single-asset continuation vehicles.
The Rise of Continuation Funds
Since gaining traction during the 2008 financial crisis, continuation funds have been increasingly used for trophy assets, particularly when exit markets are challenging. While the US saw early adoption, the EMEA region has witnessed growing popularity in recent years, driven by difficult exit markets and the desire to hold onto valuable assets. In 2024, the number of continuation funds rose to 27, up from 14 in 2023 and four in 2022 and 2021, with total deal volume estimated at €1.8bn1.
A notable 2024 deal involved Carlyle Group’s AlpInvest and Sixth Street recapitalising Essential Pharma, reportedly worth €548m. Research2 suggests continuation funds will become a more popular exit route over the next 24 months. The Investec PE Trends 2025 survey3 found over 40% of GPs consider them a viable exit option, with expectations for more single-asset continuation vehicles and increased specialisation.
Challenges and Conflicts
Continuation funds can present conflicts of interest, primarily due to asset transfers between funds managed by the same team. Fund managers must be mindful of LP perceptions, as transferring an asset into a continuation vehicle might suggest a difficult 'true exit' , whereby an asset would have gone through a full exit process involving a third party and potentially attracting a higher value. Key areas of conflict include:
- Valuation Disputes: The valuation of assets being transferred can be contentious. The original fund may want a higher valuation to maximise returns, while the continuation fund might prefer a lower valuation to ensure future gains.
- Fee Structures: Different fee structures between the original and continuation funds can lead to conflicts. The management team might be incentivised to favour one fund over the other based on fee arrangements.
- Investor Interests: Existing investors in the original fund might have different interests compared to new investors in the continuation fund. Balancing these interests can be challenging, especially if the management team has stakes in both funds.
- Decision-Making Bias: The management team might face pressure to make decisions that benefit one fund over the other, particularly if they have personal investments or bonuses tied to performance.
- Transparency Issues: Ensuring clear communication and transparency between all parties involved is crucial. Lack of transparency can lead to mistrust and perceived conflicts of interest.
Addressing these conflicts requires careful management, clear communication, and often third-party oversight to ensure fairness and transparency for all investors involved.
BDO Valuations are able to provide independent valuation services for funds looking to address the issues mentioned above. If you’d like to learn more or discuss any of the contents of this article, please do get in touch.
1. Mergermarket data
2. BDO interviews with private equity contacts