Private equity has a problem: some of the best assets in a fund reach maturity before the GP is ready to let go. The portfolio company is performing exceptionally, further value creation is clearly available, and selling now would mean leaving significant returns on the table. Continuation funds were invented to solve this tension — and they have become one of the most debated structures in private markets.
Why GPs create continuation funds
Standard private equity fund terms run 10 years (often with 1–2 year extensions). When an outstanding portfolio company reaches year 8–9 and the fund is approaching its contractual end, the GP faces a forced exit — regardless of whether the timing is optimal. Selling a business you believe has 3–5 more years of strong compounding ahead of it, simply because the fund clock has run out, destroys value for everyone.
A continuation fund solves this by transferring the asset(s) into a new vehicle with a fresh term, allowing the GP to remain the steward of the investment for additional years. The GP receives a new management fee and carry structure on the continuation vehicle — which is simultaneously one of the criticisms of the structure.
The structure and the choice given to LPs
Why continuation funds are controversial
The structure creates a fundamental conflict of interest: the same GP is simultaneously the seller of the asset (acting on behalf of the old fund's LPs) and the buyer (acting on behalf of the new continuation vehicle). They are on both sides of the transaction, setting the price at which the transfer occurs.
If the GP marks the asset too high, rolling LPs overpay and new secondary investors get a bad deal. If the GP marks it too low, the cashing-out LPs receive less than fair value — effectively subsidising the rolling LPs and the GP's new carry opportunity. Getting independent valuation right is critical, and the practice of using a fairness opinion from an independent adviser has become standard precisely because of this structural tension.
What LPs should scrutinise
When presented with a continuation fund offer, LP investors should assess: the independence and credibility of the valuation process (who set the price and on what basis?), the GP's track record of honesty in marking assets (have they historically been conservative or aggressive?), the nature of the remaining value creation thesis (is there a genuine reason to hold longer, or is the GP simply extending to earn more fees?), and the liquidity terms offered to those who exit (is the cash-out pricing genuinely fair?).
Institutional LPs with dedicated secondary teams are in a much stronger position to evaluate these transactions than smaller LPs without the analytical capacity. The power asymmetry between GPs and smaller LPs in these situations is real, and regulators in both the US (SEC) and Europe have begun scrutinising disclosure standards around GP-led secondaries precisely because of these concerns.