A continuation fund is a new investment vehicle created by a general partner to acquire one or more portfolio companies from an existing fund that is approaching or has reached the end of its term. The GP transfers assets from the old fund into the continuation vehicle. Existing limited partners choose to either roll their interest into the new fund or cash out at a transaction price. New secondary investors provide the capital to fund those cash-outs and potentially support additional investment in the portfolio companies.
The Problem Continuation Funds Solve
Private fund terms are finite. A standard buyout fund has a 10-year life with two one-year extension options. That 12-year maximum was designed for a world where typical hold periods were 3-5 years. But value creation does not always follow a predictable timeline. A company might be in the middle of a transformative acquisition, a market expansion, or a technology migration that would be disrupted by a sale process forced by fund term expiration.
Before continuation funds became common, GPs in this situation had limited options: sell the asset at a potentially suboptimal time, negotiate repeated term extensions that frustrated LPs wanting distributions, or hold assets in a zombie-like state past the fund’s intended life. Continuation funds provide a structural solution by creating a fresh vehicle with a defined hold period, clear terms, and genuine LP optionality.
How the Structure Works
The continuation fund is a separate legal entity with its own limited partnership agreement, fee terms, and investor base. The GP serves as the manager of both the old fund and the new vehicle.
The transfer price, the value at which assets move from the old fund to the continuation fund, is the most critical negotiation point. This price determines the cash-out proceeds for departing LPs, the entry point for incoming secondary investors, and the basis for the GP’s carried interest crystallization on the old fund. An independent fairness opinion and a competitive secondary buyer process are standard practices to validate the transfer price.
For the GP, the continuation fund crystallizes carry on the old fund at the transfer price and resets the economics on the new vehicle. The new fund typically has a fresh preferred return hurdle (usually 8%) and a new carry calculation. This means the GP earns carry twice on the same assets, once at transfer and once on the value created in the continuation fund, which is why LP scrutiny of the terms is important.
Single-Asset vs. Multi-Asset
Continuation funds come in two main formats. Single-asset vehicles are built around one portfolio company that the GP has high conviction in and wants to hold for an additional 3-5 years. Multi-asset vehicles transfer a broader portfolio, sometimes the entire remaining portfolio of a maturing fund.
Single-asset continuation funds have become the more common structure in recent years. They are easier for secondary buyers to underwrite because the diligence is concentrated on one company. However, they also concentrate risk for LPs who roll over, removing the portfolio diversification that the original fund provided.
What GPs Should Know About Execution
Running a continuation fund process involves significant cost and complexity. The GP needs to engage a secondary advisor, obtain a fairness opinion, run a competitive buyer process, manage LP communications and elections, and negotiate new fund documents. The entire process typically takes 3-6 months from initiation to closing.
The LP Advisory Committee (LPAC) of the existing fund plays an important governance role, reviewing the transaction terms and any conflicts of interest. GPs should expect active LPAC engagement and should provide full transparency on economics, including management fee terms, carry crystallization, and the GP’s commitment to the new vehicle. ILPA guidance recommends that GPs commit meaningful capital to the continuation fund to demonstrate alignment with investors.
The secondary market now views continuation funds as a standard GP tool rather than an unusual event. For fund managers planning their next fundraise, demonstrating thoughtful and LP-friendly use of continuation structures can strengthen the relationship with allocators rather than strain it.
Frequently Asked Questions
How is a continuation fund different from a fund term extension?
A term extension simply extends the life of the existing fund, keeping all LPs invested on the original terms. A continuation fund creates an entirely new legal entity with new terms, a new fee structure, and new investors. Critically, a continuation fund gives existing LPs the choice to cash out or roll over, while a term extension does not provide liquidity. The continuation fund also resets the GP's carried interest calculation and can bring in fresh capital for follow-on investments.
What assets typically go into a continuation fund?
Most continuation funds are structured around one to three high-conviction portfolio companies that the GP believes have significant remaining upside. These are usually the fund's strongest performers, where a forced sale at fund maturity would leave value on the table. Some continuation funds transfer a broader portfolio of assets, but single-asset and concentrated continuation vehicles have become the most common structure in recent years.
What are typical continuation fund terms?
Continuation funds generally have a 3-5 year term with extension options, shorter than a primary fund. Management fees typically range from 1.0-1.75% on NAV. Carried interest is usually 20% with a preferred return hurdle of 8%, though terms vary based on the GP's negotiating leverage and the quality of the underlying assets. The GP is expected to make a meaningful commitment to the new vehicle to demonstrate alignment.
