The world of private equity (PE) is experiencing a notable transformation as traditional exit strategies are increasingly overshadowed by the rise of continuation funds. Historically, PE firms relied on straightforward initial public offerings (IPOs) and quick mergers and acquisitions (M&A). However, rising financing costs and extended holding periods now present substantial challenges. Recent data shows that the average duration for buyouts has increased to 6.7 years, compared to a historical average of 5.7 years.
This situation creates hurdles for PE firms, which are facing the largest backlog of exits since 2005, as highlighted by McKinsey research.
In this evolving landscape, continuation funds have emerged as a viable alternative, shifting from a niche offering to a mainstream solution within the PE sector. These funds provide liquidity options in a capital-strapped market while raising important questions regarding governance and transparency. By facilitating the transfer of assets from aging funds into new entities, continuation funds are reshaping investment and exit strategies.
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The mechanics of continuation funds
A continuation fund serves as a mechanism for a private equity firm to transition one or several assets from a maturing fund into a newly established vehicle, typically managed by the same general partner (GP). This structure allows existing limited partners (LPs) the option to cash out or reinvest in the new entity, while also allowing new investors to acquire stakes in established, high-performing assets with shorter investment horizons. This flexibility is particularly appealing in today’s volatile financial climate.
Market trends and growth
The growing appetite for continuation funds is evident in the rapid expansion of this market segment. In 2025, the industry recorded 96 continuation funds, reflecting a year-over-year increase of 12.9%, which constitutes 14% of all PE exits. High-profile transactions, such as the $3 billion deal involving Alterra Mountain Company, underscore the rising significance of these funds. Analysts at Greenhill & Co. project that continuation funds could account for as much as 20% of PE exits in the near future, driven by a maturing secondary market and ongoing challenges in traditional exit pathways.
Driving factors behind the shift
Numerous factors contribute to the burgeoning popularity of continuation funds. Rising financing costs have hindered leveraged buyouts, widening the gap between buyer and seller expectations in M&A transactions. Continuation funds enable managers to retain control over promising assets while providing LPs with liquidity options. Furthermore, the looming maturity wall raises critical concerns, as over half of current PE funds are six years or older, with many set Continuation funds help facilitate value creation while avoiding forced asset sales.
Aligning investor interests
These funds also cater to investor demands for flexibility. LPs can choose to exit for immediate liquidity or roll their investments into new opportunities for potential future gains. New investors benefit by entering established assets with reduced risks associated with blind-pool investments. Notably, continuation funds have demonstrated a 9% loss ratio compared to 19% for traditional buyouts, indicating superior risk-adjusted returns.
Proponents of continuation funds argue that they create mutual benefits for all stakeholders involved. General partners can continue managing high-performing assets, ensuring ongoing management fees and a share of profits. Existing LPs receive liquidity while retaining the potential for future returns, and new investors gain access to mature assets with clear revenue prospects. Recent analyses suggest that continuation funds tend to outperform buyout funds across all performance quartiles concerning multiple-on-invested-capital (MOIC) while exhibiting lower loss ratios.
Challenges and considerations
Despite their advantages, continuation funds face several challenges. Concerns about governance and valuation have arisen, particularly when general partners act as both sellers and buyers, creating potential conflicts of interest. Critics have drawn parallels to circular financing structures, emphasizing the need for rigorous oversight. Ensuring transparency in asset valuation is essential, as LPs must trust that the prices assigned to transferred assets reflect fair market value.
Many firms are addressing these issues by engaging independent financial advisors to provide impartial assessments or conducting competitive auctions to establish market-driven valuations. However, LPs often lack the resources necessary for comprehensive deal evaluations, and the concentrated risk of single-asset funds can deter investment rollovers.
Additionally, a recent ruling by the Fifth Circuit Court of Appeals has eliminated mandatory fairness opinions and disclosure requirements for continuation funds, increasing the potential for conflicts while allowing expedited transactions. This scenario places a greater burden on investors to conduct diligent assessments, underscoring the importance of strong governance and transparency.
Best practices for navigating continuation funds
In this evolving landscape, continuation funds have emerged as a viable alternative, shifting from a niche offering to a mainstream solution within the PE sector. These funds provide liquidity options in a capital-strapped market while raising important questions regarding governance and transparency. By facilitating the transfer of assets from aging funds into new entities, continuation funds are reshaping investment and exit strategies.0
