Continuation Vehicle

A continuation vehicle, also called a continuation fund, is a new investment fund created by a private fund manager to acquire one or more portfolio companies from an existing fund that the same manager runs. Investors in the existing fund are offered a choice: sell their share of the assets for cash, or transfer their interest into the new vehicle and remain invested. New investors, usually specialist secondary funds, provide the money to buy out those who sell.

The transaction is a type of secondary fund transaction led by the general partner, as distinct from a sale by an investor of its own fund interest. It allows a private equity manager to keep an asset beyond the life of the fund that first bought it. Once used mainly to tidy up ageing funds, continuation vehicles have become a mainstream route for holding strong companies for longer.

A closed-ended fund has a fixed term, commonly ten years with possible extensions, by the end of which its investments should be sold. Sometimes a manager believes that a company has more growth ahead and that selling it on the fund's timetable would give away value. Sometimes markets are unfavourable: buyers are scarce, or a flotation through an initial public offering is not possible. A continuation vehicle offers a third route alongside a sale to another buyer and a listing.

For the manager, the vehicle provides further time, fresh capital and a new stream of fees. For investors in the old fund, it offers cash when distributions may otherwise be slow.

The manager first selects the asset or assets. A single-asset vehicle holds one company; a multi-asset vehicle holds several. The manager then engages an adviser to run a competitive process among secondary buyers, who bid a price for the assets. One or more lead investors negotiate the price and the terms of the new vehicle.

Existing investors receive a disclosure document and an election form. Their options usually include selling for cash at the agreed price and rolling their interest into the new vehicle, sometimes on unchanged economic terms and sometimes on the new terms. Investors who do not respond are generally treated as sellers.

At closing, the new vehicle buys the assets from the old fund, which distributes the proceeds through its distribution waterfall. The manager often becomes entitled to carried interest from the old fund at this point and is expected to reinvest a large part of it in the new vehicle, alongside a fresh general partner commitment. The new vehicle has its own term, commonly around five years, its own management fee and carry, and usually some unfunded capital that can be drawn through a capital call to support the business.

The manager is on both sides of the transaction. As manager of the selling fund, it owes a duty to obtain the best price; as manager of the buying vehicle, and as an investor in it, it benefits from a lower one. It also resets its own fees and incentive. This conflict is the central issue in every continuation transaction, and it engages the manager's obligations as a fiduciary.

Market practice has developed several safeguards. The fund's advisory committee of investors is asked to approve or waive the conflict. The price is set through a competitive process with independent buyers, and it is often supported by a fairness opinion or independent valuation. Investors receive full disclosure of the bids, the valuation, the manager's economics and the business plan. Investor association guidance recommends that existing investors be able to roll over on terms no worse than those they already have. In the United States, a 2023 securities rule that would have required a fairness or valuation opinion in adviser-led secondaries was struck down by a federal appeals court in 2024, so the practice remains a matter of market convention and general fiduciary duty.

Existing investors face a decision with limited time and information. Selling crystallises a return, usually at a price close to the latest reported net asset value (NAV), but gives up future growth in an asset the manager evidently wants to keep. Rolling over preserves exposure but concentrates it in one or a few companies and extends the holding period. Many institutions lack the resources to assess a single company and therefore sell by default.

Buyers gain exposure to assets the manager knows well, with a shorter expected holding period than a new fund. Their risk is that the manager knows more about the asset than they do, so lead buyers carry out detailed due diligence.

Critics describe continuation vehicles as a way for managers to sell assets to themselves and to realise carry and fees without a true market test. Supporters reply that prices are set by independent, well-informed buyers and that the best companies should not be sold merely because a fund's term has ended. Volumes have grown substantially, particularly when ordinary exits from a leveraged buyout have been slow, and the structure now sits beside the traditional fund model built around the limited partner commitment.