Calculating a new route

The private equity model is tried and pretty well tested. General partners (GPs) raise a fund from limited partner (LP) investors and invest the money in a portfolio of assets. They then use financial leverage and operational improvements or efficiencies to drive up the value of those businesses, selling them to deliver healthy returns back to the LPs. It’s a well-established cycle that typically takes place over five to 10 years.

At least that’s how it used to be. But in today’s market, GPs are increasingly opting (or having) to hold on to assets they have acquired for longer periods. And continuation vehicles – new funds raised by the GP to acquire assets from the same GP’s initial fund – enable them to do exactly that. Globally, these funds raised more than $40bn during the first half of 2025, according to data from Jefferies, and acted as acquirer in almost a fifth of all PE exits.

The H1 2025 fundraising total – 60% up on H1 2024 –included some very sizeable vehicles: Vista Equity Partners raised a record $5.6bn continuation fund, for example; and New Mountain and Inflexion have each launched $3.1bn vehicles.

Desirable assets?

It’s a marked shift. Once seen as a last resort, continuation funds have become a mainstream means of returning capital to investors and crystallising performance fees for managers. In part, that reflects market conditions.

Amid geopolitical volatility, slower growth and rising interest rates, traditional exit routes such as IPOs, strategic sales and even offloads to other private equity firms have remained constrained. GPs have therefore explored a fourth option: selling assets to a new vehicle they also control. Perhaps unsurprisingly, many in the private equity sector are keen to stress a more positive narrative – that GPs simply want to hold on to their prized assets longer.

“Continuation vehicles are becoming a very regularly used tool, with some GPs taking the view that at least one portfolio company in every fund they raise will be earmarked for a follow-on fund,” says Stefano Manna, London-based managing director at Investec and its head of private capital advisory. “They don’t want to sell to a peer and watch them pocket the value to come.”

Duncan Cox, partner and head of private equity in the UK at PwC, agrees. “The GP mindset is increasingly that if they’re working with a high-quality business with a clear growth trajectory and a strong management team, they want to remain a part of that,” he says. “They want to do more with these businesses because they really believe in them. There’s an honest view that there is more to be gained by keeping the assets, including for their LPs.”

Continuation funds don’t just work for GPs either. For LPs, they represent a liquidity opportunity – a chance to cash out their holdings or roll over some or all of the exposure into the new vehicle. There’s also the comfort of investing in known assets, rather than taking a punt on a GP’s ability to find new opportunities (although, in theory, that is a big part of why they pay GPs in the first place). New investors, meanwhile, get exposure to more mature assets, for which holding periods may be shorter than in a primary fund.

Favourable terms

There’s also a potential cost advantage. Since continuation funds don’t need to source new investments, they may be able to operate with fewer expenses, enabling investors to negotiate reduced fees and carried interest. Carried interest structures are often reset for the new fund, with the GP typically rolling over its existing carry earnings into the new vehicle to align interests with investors. The new carry will be negotiated with all investors in the new fund. It helps that from the GP’s perspective the new vehicle represents a diversification of traditional revenue streams, often bridging the gap between primary fund launches.

“There is significant demand for continuation vehicles from LPs, with many of these vehicles oversubscribed,” says Andrew Black, a partner in the private equity practice at EY. “The proportion of investors rolling over is often quite substantial, but there are also plenty of new LPs, including larger players looking to act as cornerstone investors.”

Some GPs also see continuation funds as an opportunity to broaden their assets’ investor base. In October, PAI Partners unveiled a $4.2bn continuation vehicle to buy its ice-cream business, Froneri, owner of Häagen-Dazs and brands such as Nuii. Backed by investors including Goldman Sachs, the fund will invest alongside the Abu Dhabi Investment Authority, bringing in a new source of capital.

“There is real desire from sovereign wealth funds to be part of these structures,” says Alexander De Mol, a leader in Bain & Co’s private equity practice and senior partner in the firm’s London office. “They like the fact that the GP is staying in the business, offering them a partnership approach to managing the asset.”

The Froneri deal highlights another notable development of recent years – the emergence of single-asset continuation funds. Traditionally, GPs used continuation vehicles to buy assets from primary funds reaching the end of their lifecycles – effectively mopping up the portfolio companies the fund had failed to exit.

By contrast, single-asset funds acquire only one business from the primary fund – typically an asset seen by the GP as having significant potential for further upside, perhaps through M&A activity or technology-driven transformation. The new fund may seek to raise additional capital to fund such growth strategies, in addition to the cash required to make the acquisition.

These deals are becoming more common. Data from Bain & Co reveals single-asset vehicles have accounted for the majority of continuation funds in each of the past three years. In 2020, by contrast, multi-asset vehicles accounted for more than two-thirds of such launches.

“If there’s a business that you’re really confident about, that you know really well, and you have good relationships with the management team, you may well want to support them through the next phase of growth,” says Chris Watt, managing partner at ECI Partners. “In which case, why not create a vehicle that facilitates that?”

Bigger boats

There are several options for maintaining exposure, Watt adds, but a continuation fund is often the most practical route. “If the business has performed well, the cheque size may be too large for you to acquire it through your next general fund,” he says. “You’ll need to raise additional capital for the transaction, which can also enable you to be more expansive around, for example, M&A strategy.”

It’s this thinking that has led ECI to launch its first continuation fund in early October. The fund is taking ownership of IoT specialist CSL, first acquired by ECI in 2020, and has raised sufficient capital to support both organic growth and further acquisitions.

It wasn’t a move that ECI made lightly. “We took a step back to do a proper due diligence exercise, particularly around the commercial outlook for the business and the broader market,” says Watt. “It’s important when you’ve lived with a business for a while, and you’re working with it day-to-day, that you take the time to look at the bigger picture.” In this case, ECI hired external advisers to scrutinise CSL – for its own peace of mind and to provide an independent view for potential investors in the continuation vehicle.

This type of scrutiny is especially important in the context of the conflicts of interest that continuation funds inevitably present. With the same GP sitting on either side of the transaction, LPs, both in the primary fund and in the continuation vehicle, may have concerns about pricing. LPs in the first fund, particularly those cashing out, will want as high a valuation as possible on the assets; the continuation vehicle’s investors, in turn, will not want to overpay.

Such tensions can be managed. One common strategy is for the GP to ask an independent third party – a corporate finance adviser, say – to provide an objective view on valuation. LP due diligence may also be more extensive than with a straightforward private equity investment.

An LP advisory committee’s review of terms will provide another check and balance. It should be noted that in 2023 in the US, the SEC flagged continuation fund transactions as an area for further scrutiny.

“GPs themselves are very aware of the responsibility they have, and it’s a priority for them to manage these transactions in a way that provides comfort to all parties,” says PwC’s Cox. Established and agreed valuation metrics provide a yardstick for pricing, he points out. Third-party advisers can provide assurance.

“New investors coming into the fund will also play a critical role, scrutinising the transaction to ensure it’s fair and reasonable, as well as exploring some of the other potential tensions,” he adds. “For example, what’s happening with fees and carry? How much capital is being rolled over?”

Thinking time

Stuart Ingledew, part of the fund solutions team at Investec, notes another issue – that LPs need to be given the time and space to address rollover propositions properly. “When we do see negativity from LPs, it’s often because they’ve got to put the proposal through an investment committee process, which takes time, or they’re dealing with too much volume because there are so many of these vehicles being launched.” Assuming these teething troubles are addressed, many private equity experts see a bright future for continuation vehicles.

There is another possibility: that the rise of these funds is solely connected to tough exit conditions, so they will taper off as markets improve. But Investec’s Manna, for one, believes it’s not that simple: “They do more than just provide liquidity; they give PE managers an extra portfolio management tool.”

For EY’s Black, continuation funds signify a change of mindset in the industry. “We’ve moved away from the idea that holding periods should only be three or four years at most,” he argues. “For some of these assets, sponsors are going to want to continue holding on to them for much longer – we may start to see the launch of serial continuation funds.”

Indeed, the idea of a “continuation fund-squared” – a continuation fund rolling over into another continuation fund – is beginning to gain traction. “GPs will get to a point where they feel there is further value to come, but some investors are looking for liquidity,” adds Black. “In which case, why not repeat the process?”

Bain & Co’s De Mol also expects to see continuation funds – including the squared variety – continue to launch in significant numbers, with mid-market managers showing an interest too. “Historically, the consensus view was that it wasn’t healthy for so many private equity exits to be to other firms, but the data shows these deals can be attractive,” says De Mol.

“There’s a growing realisation that it’s perfectly fine for some businesses to remain private equity-owned for an extended period,” he adds. “There’s an opportunity here for more GPs to take a longer-term view about how to grow the business over a longer timeframe.”