29. What is a continuation fund, and why is it so successful?

1. A structural tool that should stop being treated as an anomaly

Start with the order of magnitude, because it disposes of most of the argument that these vehicles are a sideshow. According to the annual review published by Jefferies in January 2026, GP-led volume reached $115 billion in 2025, up 53% year on year and 48% of a $240 billion global secondary market. Continuation vehicles account for the overwhelming majority: 87% of GP-led volume in the first half of 2025, against 12% for structured equity and fund finance and 1% for tender offers. Average vehicle size settled around $900 million in 2025, and 29 transactions exceeded $1 billion, against 21 in 2024. France is following the same path, in proportions that stand out relative to the size of its market: according to the 2025 activity study published by France Invest, the French private equity association, with Grant Thornton, continuation funds raised €5.9 billion across 23 vehicles, against €1.6 billion a year earlier — close to 20% of French private equity fundraising excluding infrastructure. They account for €1.9 billion of divestments, or 14.6% of the total, against €400 million and 3.4% in 2024. Strip that effect out and the French vintage deflates: fundraising down 2%, investment down 1%. We noted the rise of these vehicles in “Private Equity: An Asset Class Come of Age”, whose fifth part places the secondary market among the industry’s pressure points and records that the number of GP-led continuation funds has quadrupled in five years. And we showed in our analysis of the Invest Europe Transaction Value report (2016-2025) that London raises while Paris deploys; we can now add that Paris deploys partly into itself.

This growth is not a fashion. It is the arithmetic consequence of a backlog. The 2026 annual report from Bain & Company counts roughly 32,000 unsold companies in global buyout portfolios, worth an estimated $3.8 trillion, with holding periods at exit back up to around seven years against five to six over 2010-2021. As long as that backlog is not cleared through M&A or IPOs, it will be cleared some other way. The continuation fund is that other way.

The useful debate is therefore not whether continuation funds should exist. It is: on what terms can a manager sit on both sides of a negotiating table without contradicting himself?

2. The mechanism, in one page

A continuation fund is a new vehicle, formed and managed by the same GP, which buys one or more assets held by an earlier fund of that same manager. One or more third-party secondary investors fund the vehicle and set its price through a competitive process; the LPs of the legacy fund choose between cash and continued exposure; the holding period and the economics of the asset are reset.

The typical sequence runs four to nine months: asset selection, appointment of a secondary adviser, early engagement with the LPAC, price setting through competition supported by a fairness opinion, structuring of the vehicle, a decision window for LPs, closing. Every one of these steps is now well documented. None raises a serious conceptual difficulty — except the second to last.

3. The real issue: the choice put to LPs

Commentary on continuation funds concentrates almost entirely on valuation. The price is set by a third party through a process whose credibility is measured by the number of competing bids received; on that point the industry has made real and verifiable progress. The grey area has moved elsewhere: to the terms on which the legacy LP is asked to choose.

The market calls this choice an election. The menu has three branches. Cash out, at the transaction price, net of the legacy fund’s waterfall. Roll over on so-called status quo terms, meaning the economics of the original fund. Or roll over on the new vehicle’s terms, aligned with those of the incoming secondary investors. In practice most institutions do both: they monetize a portion to feed their DPI and roll the balance to keep the upside.

This is where the Institutional Limited Partners Association (ILPA) comes in, a trade body headquartered in Washington. It brings together roughly six hundred member institutions across some fifty countries — with a substantial European base — representing more than $3 trillion in assets, and presents itself as the only global organization dedicated solely to LPs. It holds no regulatory power. Its doctrine is nonetheless binding in practice: large institutions impose it through side letters, and a European manager raising from a largely North American investor base complies or explains himself at every due diligence. This is soft law, but soft law that is expensive to ignore.

The definition of “status quo” it has used since 2023 is precise, and worth setting out in full to see what it rules out: no higher management fee rate, no reset fee base, no higher carried interest rate, no lowered hurdle, and no crystallization of carried interest on transfer. Remove any one of those five locks and the option stops being a status quo.

One further point deserves attention the market rarely gives it: the default. An LP who does not respond within the deadline is deemed a seller. ILPA recommends a window of at least twenty business days or thirty calendar days, and the principle that no LP should ever be forced to roll. That “seller” default is logically sound — it replicates what would have happened in a sale to a third party. It has, however, a consequence rarely said out loud: in a transaction on a compressed timetable, an investor without analytical resources mechanically exits a quality asset. The process was not unfair; it was simply calibrated for those who have a secondaries team.

4. The four locks in ILPA’s 2026 proposal

The updated guidance put out for consultation on June 24, 2026 is useful precisely because it moves from the register of principles to that of named prohibitions. Four of them each answer a documented practice, and read together they amount to an instructive catalogue:

What is prohibited What it used to allow
Requiring a minimum commitment to access the rollover Effectively excluding smaller LPs
Conditioning the rollover on a commitment to the next fund Making the LP pay, in fresh money, for the right to stay exposed to an asset it already owned
Scaling back rollover elections pro rata Squeezing rolling LPs out in favor of the lead secondary buyer
Dropping existing side letters Stripping the LP of negotiated rights (MFN, excuse rights, reporting)

The text goes further on two counts.

First, it is no longer only about money. An investor who rolls must find in the new vehicle the rights he had in the old one: the same authority for his advisory committee, the same level of information, the same conditions for removing the manager. If any of those rights is trimmed, it must be disclosed before he decides, not left for him to discover in the legal documentation. That is the reading offered by Mayer Brown.

Second — and this is the real novelty — the manager will have to justify the transaction itself. Until now it was enough to show that the price was fair. He will now have to show that the continuation fund was the best available solution, and not merely the most convenient. The burden of proof changes hands.

The question that follows is simple, and the market has sidestepped it for five years: was the market tested, and what did the other buyers say? Every company has a price, and nothing guarantees that a strategic buyer offers a better one — sometimes none comes forward, sometimes the one who does disappoints, sometimes a sale at the wrong point in the cycle destroys more value than it realizes. Those are perfectly acceptable answers. They can be written down and documented, and they are worth more than silence: what the ILPA proposal makes unacceptable is not the choice of a continuation fund, it is failing to have asked the question.

The market, as it happens, did not wait for the guidance to ask it, and asked it bluntly. In early August 2026, the Financial Times revealed that Ares had been forced to cut a private credit continuation vehicle from €1 billion to about €400 million. The transaction was to house the loans remaining in a decade-old European direct lending fund; prospective buyers demanded a steeper discount than the manager was prepared to accept. Not a refusal, then, but a disagreement on price that cut the transaction by three fifths.

The reason for the resistance is the most instructive part. Accepting a marked discount would force the manager to write down the underlying loans, and therefore to recognize elsewhere in his portfolios a value he had taken for granted. A credit secondaries investor puts it plainly in the article: he does not want the market to conclude that these are assets nobody wanted, when many of the loans are performing and the vehicle serves liquidity, not a fire sale. The argument is fair.

Two pieces of context complete the picture. This is not an isolated case: another manager launched a process in the spring for a vehicle materially larger than €1 billion, then pulled it for lack of agreement on price. And the European credit secondaries market rests on a handful of buyers with the necessary balance sheet — four, according to the advisers cited — which gives them bargaining power far beyond that of an ordinary acquirer. Price discovery is therefore harsher there than in private equity, where continuation vehicles already accounted for roughly a fifth of exits last year.

Three lessons follow, and they hold beyond private credit. The price does not belong to the manager, even when he alone knows the assets intimately. The sanction is not refusal but reduction, a discreet way of saying that the price did not hold across the whole portfolio. And discipline comes from the market before it comes from the regulator, which is the industry’s best argument against prescriptive regulation — provided it accepts that these episodes become public.

5. And where is Europe in all this?

The attentive reader will have noticed an anomaly: everything above rests on the doctrine of an association composed largely of American investors. This is not selection bias, it is an observation. In a market where Europe accounts for a substantial share of transactions — we measured it over a decade in our analysis of the Transaction Value report — the reference corpus is written in Washington.

London is the exception, and instructively so. On March 5, 2025, the Financial Conduct Authority published the findings of its multi-firm review of valuation practices in private markets. Continuation funds are named there as a zone of conflict: where the valuation set by the manager determines the transfer price of the assets, and where that manager earns carried interest on unrealized performance, the regulator calls the conflict manifest. It also notes that investors may not have equal access to the information needed to form a view on price — precisely the point the 2026 ILPA proposal seeks to lock down through data room access. The FCA does note that the controls observed in the market are the ones the industry knows: LPAC consent and an independent fairness opinion on the transfer price.

What follows is more significant still. On February 26, 2025, the FCA announced in a Dear CEO letter a separate review, this time devoted to conflicts of interest at private asset managers, with continuation funds among the situations in scope. A mandatory questionnaire was sent to selected firms, due back by January 2, 2026. In a speech delivered in May 2026, the authority’s deputy chief executive confirmed that the work was under way and that findings would be published within the year. In other words: a European regulator is about to write on the subject, and that regulator is neither the AMF nor ESMA.

On the French side, the AMF’s supervisory priorities for 2026 do include a substantial strand on conflicts of interest — thematic SPOT inspections, scrutiny of cross-subscriptions into in-house funds, review of remuneration schemes — but no dedicated position or recommendation on continuation funds appears to date in its published doctrine. At European level, the professional standards handbook of Invest Europe does include a chapter on secondaries. It is reserved for members.

That last detail is worth dwelling on, because it sums up the problem. American doctrine is public, open to consultation, and can be commented on by anyone; European doctrine, where it exists, sits behind a membership wall. An industry that asks to be judged on the quality of its processes would do well to make those processes legible to the people judging it — journalists, legislators, and the retail savers whose access to private markets widens year by year. The argument from commercial confidentiality, valid for a single transaction, does not hold for a market-wide standard.

6. What performance says, and what it does not say yet

The data published so far is encouraging, and should be taken for what it is. HarbourVest reports, across five years of public data, that continuation funds outperform buyout funds in every quartile, with a loss ratio of 9% against 19%. The explanations offered are plausible: positive selection bias toward the best-performing companies, no blind pool risk, no change-of-control risk, and deep knowledge of the asset by the team that already owns it.

Two reservations nonetheless apply, and they are not matters of form. The first concerns the maturity of the sample: the vintages involved are post-2018, very largely unrealized, and unrealized performance remains a valuation. The second concerns the origin of the work: the most favorable studies come from firms that invest in these vehicles.

7. Eight questions for assessing a transaction

For an LP, an investment committee or an observer, assessing a continuation fund comes down to eight questions:

  1. How many credible bids were received, and from whom?
  2. Is the price a market price, or a slightly marked-up carrying value?
  3. Did the manager crystallize his carried interest, or reinvest it in the new vehicle?
  4. Was a genuine status quo option offered, with no minimum participation threshold?
  5. How much primary capital is being injected, and for precisely what use?
  6. What is the manager’s commitment, as a percentage of the new vehicle?
  7. Did the LPAC have independent advice, and when was it engaged?
  8. Which sale alternative was set aside, and on what documented basis?

The first seven reflect practice already well established among serious managers. The eighth is the one the ILPA proposal put out for consultation on June 24, 2026 seeks to make mandatory. It is also the only one a poorly built transaction cannot answer.

References

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