In the evolving landscape of private equity (PE), exit strategies employed by firms are undergoing significant changes. Traditional methods such as initial public offerings (IPOs) and rapid mergers and acquisitions (M&A) are declining in popularity. The emergence of continuation funds is altering this landscape, particularly within a financial environment marked by high interest rates and tighter capital constraints.
Recent years have witnessed a notable shift in exit options. As financing costs rise, PE firms encounter challenges in achieving swift exits, resulting in longer holding periods for investments.
Research by McKinsey indicates that the average duration of buyout holdings has increased to 6.7 years, surpassing the two-decade average of 5.7 years. Since 2005, an unprecedented backlog of exits has also developed.
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The rise of continuation funds
The concept of continuation funds is rapidly moving from a niche strategy to a mainstream approach within the private equity sector. These funds serve as a critical instrument in a market where traditional exit routes have become constrained. They facilitate liquidity while addressing concerns regarding transparency and governance, essential for maintaining investor confidence.
A continuation fund enables a PE firm to transfer one or more portfolio assets from an aging fund into a newly established vehicle, usually managed by the same general partner (GP). This framework allows existing limited partners (LPs) to either cash out or roll their investments into the new fund, while new investors can acquire stakes in established, high-performing assets with comparatively shorter holding periods.
Market growth and statistics
The continuation fund market is expanding rapidly. In 2025, the number of these vehicles increased to 96, representing a 12.9% rise from the previous year and accounting for 14% of all private equity exits. High-profile transactions, such as the $3 billion deal involving Alterra Mountain Company, underscore the growing scale and acceptance of these funds. Analysts from Greenhill & Co. anticipate that continuation funds may constitute as much as 20% of PE exits in the future, driven by the expansion of the secondary market and current exit challenges.
Challenges in the current market
Current market dynamics pose significant challenges to strategic M&A activities. In 2025, global M&A activity fell to its lowest level in a decade, reflecting a general slowdown in deal-making following the pandemic. The number of global PE exits also declined to 3,796, down from a peak of 4,383. Despite these difficulties, approximately $2.5 trillion in global private equity dry powder remains available, indicating ongoing pressure on firms to deploy capital.
Several factors have contributed to the recent increase in continuation funds. Rising financing costs have constrained leveraged buyouts, leading to a widening gap between buyer and seller expectations in M&A transactions. Continuation funds allow managers to retain valuable assets while offering liquidity options to investors. Additionally, the looming maturity wall presents a challenge, with over 50% of PE funds now exceeding six years in age, and 1,607 funds expected to close by 2025 or 2026. Continuation funds enable firms to extend value creation without the need for hasty asset sales.
Investor flexibility and insights
Another significant advantage of continuation funds is their alignment with investor priorities for flexibility. Existing LPs can opt for immediate liquidity or roll over their investments to capitalize on potential future gains. New investors can access proven assets with reduced exposure to blind-pool risks. Notably, continuation funds exhibit a 9% loss ratio, compared to a 19% loss ratio for traditional buyouts, indicating superior risk-adjusted returns.
Proponents of continuation funds argue that they benefit all stakeholders involved. For GPs, these funds enable continued management of high-performing assets, generating ongoing management fees and carried interest. LPs gain liquidity without sacrificing the potential for upside returns, while new investors engage with matured assets that offer a clearer path for returns. Recent analyses suggest that continuation funds outperform buyout funds across all quartiles regarding the multiple-on-invested-capital (MOIC) metric, while also demonstrating lower loss ratios.
However, the growth of continuation funds is not without its challenges. Concerns about governance and valuation persist, especially when GPs assume dual roles as both sellers and buyers. Critics have raised alarms regarding potential conflicts of interest, comparing these transactions to circular financing structures if not managed carefully. To alleviate these concerns, many firms are enlisting third-party financial advisors for unbiased valuations or conducting auctions to ensure fair market pricing. Nonetheless, LPs may lack the resources to thoroughly evaluate these deals, and the concentrated risks tied to single-asset funds can deter potential rollovers.
Best practices for investors
Recent years have witnessed a notable shift in exit options. As financing costs rise, PE firms encounter challenges in achieving swift exits, resulting in longer holding periods for investments. Research by McKinsey indicates that the average duration of buyout holdings has increased to 6.7 years, surpassing the two-decade average of 5.7 years. Since 2005, an unprecedented backlog of exits has also developed.0
Recent years have witnessed a notable shift in exit options. As financing costs rise, PE firms encounter challenges in achieving swift exits, resulting in longer holding periods for investments. Research by McKinsey indicates that the average duration of buyout holdings has increased to 6.7 years, surpassing the two-decade average of 5.7 years. Since 2005, an unprecedented backlog of exits has also developed.1
