Henri Steenkamp, Chief Financial Officer, Chief Compliance Officer, Treasurer and Secretary of Saratoga Investment Corp.
Private equity firms are increasingly turning to continuation funds as a deliberate strategy to navigate liquidity constraints, retain control of high-performing assets and optimize investor outcomes. Throughout my time in the field, I have observed these general-partner-led vehicles evolve from a perceived stopgap into a mainstream tool for liquidity planning, often providing a balance between capital recycling and long-term value creation— assuming they match a firm’s unique goals and functionality.
What Are Continuation Funds?
Continuation funds are GP-led secondary transactions in which a private equity firm transfers one or more portfolio companies from an existing fund into a newly created vehicle, typically backed by a mix of existing and new investors. The GP remains in control of the asset, and the original limited partners (LPs) can roll their interest into the new fund or cash out.
What started as a way to deal with old assets locked in expiring funds has developed into a tool for forward-looking strategy. Continuation funds can potentially offer GPs greater control over exit timing and valuation transparency as well as an extended runway to grow strong-performing assets, while providing LPs with liquidity optionality. I have witnessed this strategy becoming especially popular as time-to-exit increases during volatile markets—an especially pertinent factor in the modern, widely unpredictable economic climate.
With these facts in mind, it is important to understand that continuation funds are not for everyone; in some cases, they could even be detrimental to a firm’s overarching strategic and ethical framework if they entail potential conflicts of interest, needless complications in sponsor-investor correspondence or tensions surrounding pricing.
Market Forces Driving Growth
Several macro trends are fueling the rise of continuation funds. A constrained exit environment, especially in IPO and M&A markets, has made it harder for GPs to monetize assets at desired valuations. At the same time, fund lives are reaching maturity, and LPs expect liquidity events.
GPs are increasingly using continuation funds as a strategic tool to manage liquidity while retaining control of high-performing assets. These vehicles allow GPs to extend ownership, reset economics and align incentives for a new phase of value creation. Industry data from Jefferies and BlackRock shows that GP-led secondaries now account for around 50% of the overall secondary market, underscoring their central role in exit planning and fund lifecycle management.
A Tool For Strategic Liquidity Planning
Despite starting as a defensive strategy, continuation funds are now a proactive component of GP liquidity planning. GPs with an eye on the future are integrating continuation strategies into asset management conversations, timetable expectations and fund design.
These funds give GPs several benefits:
1. Liquidity Timing Control: Public markets and buyer preparedness are no longer the only sources of liquidity for GPs. They can now design liquidity periods that more closely align with fund mandates and asset maturity.
2. Value Maximization: GPs can lock in partial exits for LPs while increasing value by moving high-performing assets to a new vehicle.
3. Alignment Reset: To align incentives for the subsequent stage of ownership, continuation funds frequently propose new governance conditions, carry structures and investor bases.
This flexibility can be especially beneficial in industries with lengthy growth arcs, like software, healthcare and infrastructure, where asset maturity time frames frequently exceed conventional fund lifecycles.
Complexity Of Regulation And Operations
Amid their increasing popularity, it’s useful to note that continuation funds are subject to operational and regulatory scrutiny. Regulators, particularly the U.S. SEC, are paying more attention to disclosure, conflict management and valuation methods.
To lessen conflicts of interest, GPs commonly employ third-party fairness opinion providers, LPAC consultations (registration required) and organized marketing methods. Gen II Fund Services asserts that continuation vehicles emphasize the need for robust operational frameworks and investor communication by dramatically increasing administrative and reporting complexity.
Final Thoughts
Continuation funds are becoming a key component of the private equity playbook rather than an exception. They provide GPs with a tactical tool to control liquidity, hold onto high-performing assets and adjust to market fluctuations. And they offer LPs a well-balanced option between long-term growth and liquidity.
Best practices are appearing as the market develops. GPs will be better positioned to manage performance, reputation and long-term capital relationships if they approach continuation funds as planned elements of fund architecture rather than as last-minute salvage operations.
I believe this trend in continuation funds indicates a more general change in how private equity views liquidity. These funds have gained exposure as a way for general practitioners to gain control, flexibility and alignment in a market where time horizons and exit routes are getting shorter. Their sustained expansion may reflect the private equity ecosystem’s structural and strategic adaptation to a more dynamic and complicated future—a variable worth keeping an eye on in the coming years.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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