GP-Led Continuation Funds: The New Private Equity Exit Strategy Reshaping Returns

This is not a temporary response to closed IPO windows. Continuation funds performed strongly in 2021 when exits flowed freely. They performed strongly in 2023 when exits dried up. The structure has become a permanent fixture of private equity portfolio management, and understanding how it works creates opportunities for sophisticated individual investors seeking access to proven assets.

How Continuation Funds Actually Work

A continuation fund transfers one or more portfolio companies from an existing fund nearing the end of its life into a newly created vehicle managed by the same GP. Think of it as a controlled handoff where the general partner remains in the driver’s seat while passengers can choose to exit or stay for the next leg of the journey.

The mechanics involve several interconnected transactions happening simultaneously. The GP identifies assets with remaining value creation potential that would benefit from extended hold periods. A financial advisor runs a competitive process to determine fair pricing and identify a lead secondary buyer. Existing LPs receive detailed information and a minimum 30-day window to make their decision.

Each LP then chooses among three options: sell entirely and receive cash at the transaction price, roll their entire interest into the new vehicle, or split their position between cash and continued exposure. This optionality distinguishes continuation funds from traditional secondary sales where existing investors have no choice in the matter.

Secondary buyers provide fresh capital to fund the transaction and take positions alongside rolling LPs. The GP typically commits meaningful capital from its own balance sheet or by rolling carried interest from the original fund, aligning incentives with the new investor base.

Single-Asset Versus Multi-Asset Structures

Continuation vehicles come in two primary configurations, each serving different strategic purposes and offering distinct risk profiles.

Single-Asset Continuation Vehicles

SACVs concentrate all capital in one company the GP considers a trophy asset. These transactions represented approximately 50% of GP-led volume in 2024 according to HarbourVest research, with aggregate volume between 2021 and 2023 totaling $70 billion, more than triple the prior three-year period.

The appeal lies in positive selection bias. When a GP chooses to roll their own capital into a single asset and extend their management commitment by three to five years, they are signaling exceptional conviction. Research from Morgan Stanley found that 87% of single-asset transactions price at or above 90% of NAV, reflecting buyer confidence in GP valuations.

KSL Capital Partners’ $3 billion continuation fund for Alterra Mountain Company illustrates the model. Rather than selling the ski resort operator at potentially suboptimal pricing, KSL retained ownership to capture additional growth trajectory. The transaction ranked among the largest single-asset vehicles ever completed.

Multi-Asset Continuation Vehicles

MACVs bundle multiple portfolio companies into a single new vehicle, offering diversification across several proven investments. Multi-asset structures accounted for roughly half of GP-led volume, with median MOIC slightly outperforming single-asset deals at 1.5x versus 1.4x according to Morgan Stanley data.

The diversification benefit comes with trade-offs. MACVs may include assets of varying quality, potentially blending trophy holdings with companies the GP simply needs to move off the original fund’s balance sheet. Due diligence requirements increase substantially when evaluating multiple underlying businesses.

Performance Data: The Risk-Return Profile

Early skeptics viewed continuation funds as mechanisms for struggling GPs to extend fee streams on mediocre assets. The data tells a different story, as documented by CFA Institute research on continuation fund ethics and performance.

Morgan Stanley’s analysis of continuation vehicles from 2018 through 2024 found they outperformed buyout funds across all quartiles on a MOIC basis. Upper-quartile continuation funds achieved 1.8x MOIC compared to 1.6x for comparable buyouts. The median continuation fund delivered 1.4x versus 1.3x for median buyouts. Even third-quartile continuation vehicles outpaced their buyout equivalents.

More compelling than the return premium is the risk reduction. Continuation funds showed a 9% loss ratio compared to 19% for traditional buyouts, meaning less than half the downside exposure according to Bain Global Private Equity Report analysis. The asymmetric profile, private equity upside with substantially lower loss frequency, reflects the structural advantages of investing in proven assets rather than blind pools.

HEC School of Management research confirms these findings, documenting continuation fund outperformance across vintage years from 2018 through 2022. The consistency suggests systematic advantage rather than statistical noise.

Why the Structure Generates Alpha

Several mechanics explain why continuation funds deliver attractive risk-adjusted returns despite entering at higher valuations than primary fund investments.

Positive selection bias operates powerfully. GPs choosing to extend their commitment to specific assets are making concentrated bets on companies they know intimately. They have operated these businesses for four to seven years, understand the management teams, and see specific value creation levers remaining. This informational advantage transfers to continuation fund investors.

Change-of-control risk disappears. Traditional M&A exits require new owners to learn the business, potentially disrupting operations and management teams during transition. Continuation funds maintain GP oversight, preserving institutional knowledge and operational continuity. The value creation plan continues uninterrupted.

Alignment mechanisms strengthen. GPs typically roll meaningful capital into continuation vehicles, often from carried interest earned on the original fund. When the sponsor has substantial personal wealth at stake alongside LPs, incentive conflicts diminish. Most continuation structures target 2x MOIC and 20%+ IRR for single-asset deals, with slightly lower thresholds for multi-asset transactions.

Duration shortens. Continuation funds typically hold assets for three to five years rather than the ten-year standard fund lifecycle. Buying into mature assets closer to exit compresses the time between capital deployment and realization, potentially improving IRR even if absolute multiples remain similar.

The Conflict Problem

Continuation funds present inherent conflicts of interest that require careful navigation. The GP sits on both sides of the transaction, simultaneously representing the selling fund and the buying fund. They set the transfer price that determines whether existing LPs receive fair value.

The Institutional Limited Partners Association has issued comprehensive guidance addressing these conflicts through process requirements. LPAC approval is mandatory for conflict waivers. GPs should provide at least 30 days for LP evaluation. Information provided to potential acquirers must also be made available to existing LPs. Independent fairness opinions validate pricing.

Not all GPs follow best practices consistently. The 2024 Fifth Circuit Court of Appeals decision vacating portions of the SEC’s Private Fund Advisers Rule removed mandatory fairness opinion and disclosure requirements. This ruling increases the burden on investors to perform thorough independent diligence rather than relying on regulatory protections.

For individual investors accessing continuation funds through SPVs, the sponsor structuring the vehicle becomes the first line of defense against poorly governed transactions. Established secondary specialists with reputations to protect generally avoid participating in continuation funds where LP treatment raises concerns.

Accessing Continuation Funds Through SPVs

Individual accredited investors cannot typically participate directly in large continuation fund transactions. The minimum commitment sizes run into tens of millions of dollars. But the same SPV structures enabling secondary market access work for continuation vehicles.

Secondary specialists and placement agents structure SPVs to participate in specific continuation fund opportunities. These vehicles aggregate capital from multiple investors to meet allocation thresholds, then provide pro-rata exposure to the underlying transaction. The SPV holds the continuation fund interest while investors hold units in the SPV.

Fee structures for continuation fund SPVs typically include setup costs of 1-2% and carried interest of 15-20% on profits. Management fees vary, with many vehicles charging minimal ongoing fees given the relatively short expected holding periods. Compare total cost structures across available opportunities since fee drag compounds over multi-year holds.

Platform providers like AngelList, EquityZen, and specialized secondary marketplaces occasionally offer continuation fund SPV participations to their accredited investor networks. Family offices with relationships at major secondary buyers may receive direct allocation opportunities. Building these relationships takes time but provides access to higher-quality deal flow.

Due Diligence Framework for Continuation Fund Investments

Evaluating continuation fund opportunities requires analysis across multiple dimensions beyond standard private equity diligence.

Transaction Process Assessment

Determine whether the GP ran a competitive auction process or negotiated directly with a single buyer. Review whether an independent fairness opinion was obtained and from whom. Verify that LPAC approval was secured with proper conflict disclosure. Examine the timeline provided to existing LPs and whether information asymmetries existed between sellers and buyers.

GP Motivation Analysis

Understand why the GP chose continuation over traditional exit. Strong motivations include specific value creation initiatives requiring additional capital and time, unfavorable market conditions for the asset’s sector, or strategic benefits from maintaining ownership during a business transformation. Weak motivations include simply extending management fee streams or avoiding marking assets to depressed exit valuations.

Economics Review

Compare the continuation fund’s fee structure to the original fund. Watch for management fee increases, carried interest resets, or reduced preferred return hurdles that disadvantage rolling LPs. Verify GP co-investment levels and whether carried interest from the original fund is being rolled or crystallized. New investors often negotiate terms more favorable than rolling LPs receive.

Asset Quality Verification

For single-asset vehicles, conduct thorough company-level diligence including financial performance, competitive positioning, management quality, and specific value creation plan. For multi-asset vehicles, evaluate each underlying company and understand how assets were selected for inclusion. Request third-party valuation reports where available.

Sector Patterns in Continuation Fund Activity

Continuation funds cluster heavily in sectors where extended ownership periods create disproportionate value. Technology leads single-asset deal flow, growing from 12% to 19% of transactions in 2024 according to BlackRock Secondary Market Outlook. Healthcare and business services follow closely.

The buy-and-build strategy drives many continuation structures. Apex Service Partners exemplifies this pattern, using the continuation vehicle to fund continued HVAC, plumbing, and electrical services acquisitions. When a platform company’s growth trajectory depends on additional M&A that would exceed the original fund’s capacity, continuation provides dedicated capital for expansion.

Infrastructure continuation funds have gained significant traction, particularly for energy and data center assets. These long-lived assets often require hold periods exceeding traditional fund lifecycles to realize full value. Continuation structures align capital duration with underlying asset characteristics.

Venture capital continuation funds represent an emerging category. Leading VC firms have established blueprints for continuation structures that unlock liquidity for LPs while facilitating strategic portfolio management of later-stage companies. Successful transactions in 2024 accelerated adoption among a broader set of managers.

Portfolio Construction Considerations

Continuation fund exposure fits within a broader private markets allocation as a complement to, not replacement for, diversified secondary funds and primary commitments.

Family offices building AI exposure might allocate 10-20% of their secondary strategy specifically to SACV-focused vehicles, mirroring continuation funds’ share of overall secondary market volume. This concentration allows meaningful participation in trophy asset opportunities while maintaining diversification through the core allocation.

Size positions for illiquidity despite the shorter duration expectations. Continuation funds may experience delayed exits if market conditions deteriorate. Ensure any single continuation fund SPV represents a position you can hold indefinitely if necessary.

Balance single-asset and multi-asset exposure based on your concentration tolerance. SACVs offer higher return potential but introduce company-specific risk. MACVs provide diversification but may include lower-quality assets alongside trophy holdings.

The Governance Evolution

As continuation funds mature from novel structures to mainstream portfolio management tools, governance standards continue evolving. More than 80% of the top 100 GPs have now accessed the continuation market, making best practices increasingly important for market integrity.

The ILPA guidance represents current industry consensus on appropriate protections. Key provisions include avoiding LPA terms that pre-clear conflicts at fund formation, ensuring rolling LPs are not disadvantaged compared to new investors, providing LPAC members with resources to engage independent counsel, and requiring competitive processes for price discovery.

Sophisticated LPs increasingly demand these protections before participating. GPs with reputations for LP-friendly continuation processes attract better secondary buyers and achieve higher valuations. The market is self-correcting toward better governance as participants recognize that fair treatment benefits all parties over repeated transactions.

Looking Forward

The $3.6 trillion exit backlog virtually guarantees continued growth in continuation fund volume. GPs facing pressure to return capital while holding assets with unrealized potential will increasingly turn to continuation structures. Industry projections suggest continuation vehicles could account for 20% or more of total PE exits in coming years.

Competition among secondary buyers has intensified as dedicated secondary funds, traditional buyout firms, and evergreen retail vehicles all pursue continuation opportunities. This capital abundance supports transaction execution but may compress returns as buyers bid more aggressively for high-quality deals.

For individual investors, continuation funds offer access to proven assets that GPs consider their best work, structures that historically deliver private equity returns with lower loss rates, and holding periods shorter than traditional fund commitments. The key lies in accessing quality transactions through reputable intermediaries while maintaining rigorous diligence on governance and economics.

The GP who structured a successful continuation fund has made a statement. They believe so strongly in remaining upside that they are committing additional years of their career and often rolling their own capital forward. That conviction, properly verified through independent analysis, can translate into compelling opportunities for investors who understand the structure.