Continuation vehicles: when an exit is not the answer

July 2026 | SPOTLIGHT | PRIVATE EQUITY

Financier Worldwide Magazine

July 2026 Issue

If you devote your time and effort to making private equity (PE) investments happen, you will surely agree that one of the most significant, and not fully understood, phenomena that have emerged in the PE industry is the continuation fund, also known as the continuation vehicle.

This article introduces the continuation fund, examines the factors and incentives that have driven its rapid expansion among market participants and identifies the structural challenges that continuation vehicles bring with them.

Concept, characterisation and advantages of continuation funds

A continuation fund may be described as a type of secondary market PE vehicle established by general partners (GPs) to extend the holding period of one or more assets held within an existing fund – also referred to as the legacy fund – under their management. Within this structure, the legacy fund’s limited partners (LPs) are typically offered the following options: (i) selling their interest in the legacy fund and receiving a pro-rata share of the proceeds; (ii) rolling over their interest into the continuation vehicle, either on a reset basis or on a status quo basis; or (iii) in some cases, a combination of both.

Roll-overs may be structured on different terms. First, on a ‘reset basis’, the LPs participate in the continuation fund on updated economic terms, while the GP of the legacy fund crystallises its carried interest and receives new terms for managing the acquired assets, including revised carried interest and management fee arrangements.

Second, on a ‘status quo basis’, by contrast, the LPs participate in the continuation fund on substantially the same economic terms as those applicable under the legacy fund. As a general principle, rolling LPs should not be placed in a less favourable position relative to their standing prior to, or absent, the transaction. This entails no increase in the management fee rate, no change in the management fee base, no increase to the carried interest rate, no decrease to the preferred return hurdle or other GP-favourable amendments to the distribution waterfall, and no crystallisation of carried interest.

The growing use of this structure has been justified by a number of advantages that it offers to market participants: sponsors, legacy limited partners, incoming limited partners and portfolio companies.

General partners. One of the defining features of PE funds is their limited duration, with the market standard being a 10-year term, typically subject to one or two extension options. This structural characteristic serves several important functions: it provides liquidity to limited partners whose capital is locked up for extended periods, it incentivises general partners to avoid opportunistic behaviour, it subjects the sponsors’ valuations to periodic market scrutiny and it prevents GPs from retaining underperforming assets in order to continue accruing management fees.

However, the limited duration of PE funds is not without its drawbacks. The expiry of the fund’s term may compel sponsors to divest assets at an inopportune moment, leading to suboptimal returns. Certain portfolio companies may be capable of generating significantly greater value beyond the fund’s typical lifespan, whether because prevailing market conditions are unfavourable for exit or because the assets have yet to reach their full potential.

Furthermore, continuation vehicles are particularly well-suited to situations involving high-performing assets – commonly referred to as ‘trophy assets’ – that retain the potential to generate substantial additional value beyond the expiry of the legacy fund’s term.

It is precisely in these circumstances that continuation funds have emerged as an increasingly attractive solution for sponsors.

Legacy LPs. From the perspective of legacy LPs, continuation funds represent an institutional response to a structural tension inherent in private markets: the illiquid, long-dated nature of private assets on the one hand, and the varied, often unpredictable liquidity requirements of a heterogeneous LP base on the other.

Continuation fund transactions afford LPs in the legacy fund a choice between three options: liquidating their interests and realising their gains, rolling over their investment into the continuation vehicle, or a combination of both. This optionality is one of the structure’s most significant advantages. Since the decision is made at the level of each individual LP, those in need of liquidity can exit and crystallise their returns without compelling the remaining LPs to do likewise. At the same time, those who elect to roll over benefit from continued exposure to assets which they are already familiar with.

Furthermore, information frictions arise when legacy LPs encounter difficulty selling their stakes in long-lived funds, owing to the inherently private nature of portfolio company information – data that is typically inaccessible to a broad universe of potential buyers. This friction is particularly acute in LP-led transactions, where an LP seeks to sell its stake directly to a third-party investor. In such cases, what is being transferred is, in substance, a claim over a portfolio of underlying companies to which neither the seller nor the prospective buyer may have meaningful access, creating a significant information asymmetry. Continuation funds offer a compelling structural solution to this problem. Because the new vehicle is sponsored and managed by the GP, who normally possesses full informational access to the underlying assets, it is well-positioned to acquire those assets directly from the legacy fund at a better-informed valuation.

Incoming LPs. For incoming LPs, continuation vehicles present an opportunity to invest in mature, well-understood assets over a shorter time horizon than the full lifecycle of the underlying portfolio companies, entering the structure with full visibility into the assets in which they are investing, their performance history and their remaining value creation potential.

Portfolio companies. Continuation funds may also prove advantageous to the portfolio companies themselves. Where a company exhibits strong growth prospects that are best realised under continued private ownership, a forced sale may be value destructive. Moreover, by enabling fresh capital infusions, the continuation fund structure can address the financing needs of portfolio companies seeking to accelerate their growth and expansion trajectories. The latter is particularly pronounced in circumstances where a simple extension of the legacy fund’s term does not represent a viable alternative, whether because an extension does not provide for the raising of additional capital, or because it is contingent upon the consent of all (or a substantial majority of) limited partners.

Challenges raised by the continuation fund structure

Continuation funds are, nonetheless, sometimes regarded with scepticism, principally on account of the potential conflict of interest that the structure entails.

The principal source of friction in continuation fund transactions is pricing. While legacy LPs typically seek to divest their interests at the highest possible valuation, the incoming LPs are incentivised to acquire those same assets at the lowest possible price. This is further compounded by the fact that, in accordance with available data, the overwhelming majority of legacy LPs elect to cash out rather than roll over into the continuation vehicle, with only approximately 5 percent of the LPs rolling their investments. Moreover, the GP is itself subject to incentives that may pull in conflicting directions.

To address these challenges, a number of conflict-mitigation instruments could be used. Those instruments, when properly deployed, afford meaningful protection and underpin the integrity of the continuation fund transaction, particularly when the transaction is structured on a ‘reset basis’.

First, the participation of independent third-party investors as co-investors alongside the continuation vehicle constitutes one of the most effective safeguards. The involvement of arms-length capital providers who have conducted their own valuation analysis and negotiated entry on independently agreed terms serves as a market-based validation mechanism.

Second, a comparable function is served by the commissioning of an independent fairness opinion. While it does not eliminate the GPs’ discretion in determining the transfer price, it introduces a layer of scrutiny that provides an external benchmark against which to assess the proposed valuation. In particularly complex transactions, more than one fairness opinion may be required, or they may even be replaced altogether by an independent valuation.

Third, a fairness opinion could (and probably should) be complemented by a demonstrably ‘fair process’, evidenced by documented market checks or by involving an independent placing agent vested with authority to oversee the sale process.

Fourth, structural protections may further be achieved through the deferral or limitation of exit-linked incentives, the application of clawback mechanisms, or the imposition of a mandatory general partner roll-over requirement, provided each of these measures is appropriately calibrated to the circumstances of the transaction.

Fifth, applying ‘status quo’ terms to those LPs that decide to roll their interest in the legacy fund into the continuation vehicle. Legacy fund’s terms do not always apply to incoming LPs.

Finally, at a procedural level, the establishment of separate deal and advisory teams, together with formal protocols for information management and the avoidance of conflicts in the flow of confidential information, materially enhances the credibility and defensibility of the overall process.

Conclusion

Continuation funds have firmly established themselves as one of the most consequential structural innovations in contemporary PE by offering meaningful advantages to sponsors, legacy limited partners, incoming investors and portfolio companies. They are, though, not exempt from challenges that should, and can be managed through appropriate preparation, structuring and transaction documentation.

Tomás José Acosta is a partner and Javier Vasallo is an associate at Uría Menéndez Abogados. Mr Acosta can be contacted on +34 91 586 04 18 or by email: tomas.acosta@uria.com. Mr Vasaallo can be contacted on +34 91 586 04 00 or by email: javier.vasallo@uria.com.

Tomás José Acosta and Javier Vasallo

Uría Menéndez Abogados