Private Equity's Continuation Fund Surge Raises Quality Concerns

In Brief:

Private equity's continuation fund market is experiencing explosive growth, with these vehicles now representing 13% of global PE exits in 2024, up from just 5% in 2021, according to investment bank Jefferies data reported by The Wall Street Journal. However, industry experts warn that as firms increasingly use these tools to extend asset ownership and provide liquidity to cash-starved investors, the real test lies not just in providing liquidity but in maintaining asset quality. The trend has sparked intense debate among limited partners who question whether continuation vehicles truly serve investor interests or primarily benefit general partners through fee resets and extended management periods. As exit markets remain challenging and distribution pressure mounts, the phenomenon has evolved from emergency liquidity solutions into mainstream portfolio management tools, raising fundamental questions about alignment between GPs and LPs. PitchBook research shows the emergence of controversial "CV-squared" transactions, where continuation funds are created from existing continuation funds, while Morgan Lewis legal analysis reveals standardization in fee structures as the market matures.

Big Picture Drivers:

• Exit Drought: Traditional IPO and M&A markets remain severely constrained, forcing firms to seek alternative liquidity solutions for aging portfolios

• Fee Pressure: LPs face mounting pressure to generate distributions while GPs seek new revenue streams through continuation vehicle management fees

• Market Evolution: Secondary markets have matured sufficiently to support large-scale continuation transactions, with dedicated capital pools emerging

• Regulatory Scrutiny: Increasing oversight from regulators and industry bodies seeking to establish best practices and prevent conflicts of interest

By The Numbers:

• 13%: Share of global private equity exits now represented by continuation fund sales, up from 5% in 2021

• $31.1 billion: Total raised by continuation funds globally in 2024 across 85 funds, hitting a new peak

• €5.3 billion: Capital raised by European continuation funds in 2025 so far, already 68% of 2024's record level

• 75%: Percentage of continuation vehicles featuring tiered carry structures with "super carry" ranging from 10-30%

• 90%: Share of continuation vehicles with organizational cost caps, while 80% pay lead investor expenses on a capped basis

• $3.05 billion: Record amount raised by New Mountain Capital for Real Chemistry single-asset continuation vehicle

Key Insights:

• Market dynamics are fundamentally shifting as continuation funds transform from distressed solutions into standard portfolio management tools, with sales to these vehicles now representing a record 13% of private equity exits globally.

• The emergence of "CV-squared" transactions creates new risks for investors, as firms struggle to exit assets that have already been through one continuation process, potentially indicating underlying quality issues.

• Fee structures are converging toward market standards, with 75% of continuation vehicles now featuring tiered carry structures and management fees settling at 1% or below due to competitive pressure.

• Limited partners face increasingly complex decisions with limited timeframes, typically having only 20 business days to evaluate multi-asset continuation vehicles while managing bureaucratic approval processes.

• Secondary market capital availability has created a more balanced dynamic, shifting from historically buyer-favorable conditions to more competitive pricing for quality assets.

• Regulatory frameworks are still evolving, with organizations like ILPA introducing guidelines to address conflicts of interest while firms navigate complex compliance requirements.

Memorable Quotes:

• "Private-equity managers need to manufacture liquidity in today's environment, and the easiest route is really through continuation funds" - Martha Heitmann, LGT Capital Partners, explaining the current market pressure driving CV adoption

• "I hope not to see too many CVs on CVs, because somehow, if something went wrong and you cannot exit, that would be the worst thing" - Aiyu Nicholson, StepStone Group, expressing concern about the CV-squared trend

• "There are so many firms that want to do this, and there is limited capital. You can be so picky about what it is you want to go for" - Katrina Liao, Coller Capital, describing the competitive landscape for continuation fund capital

• "Every company takes about 12 years to go public when 20 years ago it was six years. Do we need VC funds to now go for 14 years or 15 years or even 20 years?" - Alan Vaksman, Launchbay Capital, questioning whether continuation funds address fundamental market timing issues

• "We're witnessing the maturing of a CV market that now represents nearly 50% of all secondary transactions" - Ted Craig, Morgan Lewis, highlighting the scale of market evolution

The Wrap:

The continuation fund boom represents both innovation and risk in private markets, offering necessary liquidity solutions while potentially masking deeper structural issues around exit timing and asset quality. As this market matures, success will depend on maintaining alignment between GPs and LPs while establishing robust governance frameworks that prevent abuse of these powerful financial instruments.