A Dramatized Look into Continuation Vehicles
Quick disclaimer: everything that follows is my own observation from working in the industry, specifically in IB coverage, relative to the so-called “Secondaries Advisory” groups.
This is, primarily, a critique of continuation vehicles (CVs) as transactions, and of the groups around them, which I believe are laughably overstaffed.
So: partially informational, but biased in a way that casts these transactions in a very negative light.
What is a continuation vehicle (CV)?
A continuation vehicle or continuation fund is, very simply, a fund that is “set up” specifically to purchase assets out of an existing private equity fund. These can be brand-new vehicles with a mandate to purchase multiple portfolio companies (multi-asset) or a single “crown jewel” portfolio company (single-asset).
Got it? No?
That’s fine. LPs don’t get it either.
Next, let’s look at when and why continuation vehicles really began to appear.
The academic literature informs us that circa 2010, continuation funds started being deployed for a very particular reason, one that requires a brief deep dive before returning back to this question.
A private equity firm manages multiple funds. Each fund has a fixed maturity date, typically 7-10 years from inception. By that date, the fund must return capital to its LPs.
Intuitively, these funds must generate an attractive return. If they don’t, word gets out, and eventually everyone knows. And if returns are weak, the firm struggles to raise the next fund.
That, dear reader, is the lethal injection in the fundraising game.
Because the way PE firms really make money is not the way you think.
"But [NAMEREDACTED]," you say, “I know how PE shops make money! They use leveraged buyouts, put a ton of debt on the target company to reduce the equity check, then use the company’s cash flows to pay down that debt!”
Ah-ha. Idiot.
That is how the investment works. Mechanically.
PE firms themselves make money through fees.
The classic fee structure is “2 & 20” (for the finance nerds: fun fact, Steve Cohen’s SAC charged 3 & 50). That means a base management fee (the “2”) and a share of the upside (the “20”).
A quick numerical example:
“[Insert Color] [Insert Random Object from Nature] Fund I”
Fund Size: $1,000mm
Annual Management Fee: 2% × $1,000mm = $20mm
Suppose the fund does well and, at exit, the Net Asset Value (sum of all equity invested across portfolio companies, marked at exit) is $1,200mm. Then:
Upside: 20% × $200mm = $40mm
Ok, almost back to where we started.
It should now be obvious that a PE firm needs capital on which to charge fees. No capital, no management fee. No performance, no carry.
The firm is utterly dependent on fundraising.
So why is it that, despite seeing PE returns as an asset class, drifting lower over time, we still see headlines like:
“Big 4 private equity firms maintain positive deal outlook as AUM rises”
Think about it.
If I’m a PE firm, I have two main sources of fee income, the 2% management fee on AUM, and the 20% share of the upside at the end of a fund’s life.
As returns decline in real terms, that 20% piece shrinks in dollar value. So what do I do?
Simple. I raise larger and larger funds.
That way, even if performance is weaker, the 2% fee is applied to a much bigger number, generating more absolute dollars.
This is a double-edged sword.
If I am dependent on fundraising, then I can never afford to post a return meaningfully lower than my peers.
Ever.
Now back to continuation vehicles.
These deals became more popular around 2010. Post-GFC, many PE firms were sitting on assets acquired around 2004 that they couldn’t sell at attractive prices. The clock was ticking toward the 7–10 year maturity of those funds.
A continuation vehicle became a way to delay the forced sale of those assets and keep the fee machine alive, resetting the shot clock another 10 years.
Fast forward to 2021. Jerome Powell is pumping liquidity into the system. M&A is near record highs. Valuations are stretched to the point of absurdity, but it doesn’t matter because cash is cheap.
The prime rate in 2021 hovers around 3.25% (it’s ~7% now), and massive pools of leverage are drawn to pay the prices demanded by sellers. Owners of mediocre companies are getting 16x, 17x, 18x adjusted EBITDA, and PE firms are signing the checks.
Now step into the mind of the PE firm TODAY.
I have an asset I probably overpaid for in 2021. I need to sell it to return capital to my LPs. But if I sell at a lower valuation, my fund’s performance gets marked down and my ability to raise the next fund is impaired.
Do I take the loss?
Why would I?
The company is private. Its “value” is, to a disturbing extent, whatever I say it is. If nobody lifts my offer, I just don’t sell.
"But [NAMEREDACTED]," you say, “Aren’t they mandated to sell and return capital once the fund matures?”
Idiot.
Behold: the continuation vehicle.
I will “sell” the asset from Fund I into Fund II, a newly created continuation vehicle. On paper, it’s a sale. In actuality, I transferred the asset from one pocket of the same firm to another.
“But,” you say, “you’ve held my money for 10 years. I’d like it back now.”
“This,” they say, “is a great investment opportunity. Think of how much more money we can make if we hold onto this crown jewel asset just a little bit longer. Trust us.”
“Okay,” you say slowly. “How long do I have to decide whether to roll my interest into the new vehicle?”
“You have 20 business days.”
[THIS IS THE ACTUAL TIME FRAME GIVEN TO LPs TO ROLL THEIR INTERESTS]
“What?! Twenty business days? I am a (Doctor/Attorney/Non-Financial Professional) and not sure I can evaluate the financial impact of this transaction in that time frame. What other option do I have?”
“You can sell your interest at a discount to another investor for immediate liquidity.”
The room suddenly feels smaller.
If you’re an institutional investor, like a pension fund, you operate under ERISA standards. A 20-day decision window on a complex transaction is functionally impossible to underwrite properly, requiring multiple layers of approval.
So many LPs, frustrated, cornered, and desperate for their investment back, choose to “cash out.” In 2022 alone, roughly 90% of LPs, when presented with a continuation fund opportunity, elected not to roll their interest.
When a large amount legacy LPs refuse to roll, the PE firm goes hunting for a fresh cohort of LPs to fill the new vehicle.
But now, we find ourselves with a new problem.
The PE firm serves two fundamentally misaligned groups, legacy LPs, who want the asset(s) sold at the highest possible price, and new LPs, who want the asset(s) acquired at the lowest possible price.
"But [NAMEREDACTED]," you say, “These transactions are approved by the LPAC (Limited Partner Advisory Committee) which is made up of the most sophisticated LPs in the fund. Why would they approve something that harms them?”
Idiot.
"The PE firm chooses who sits on the LPAC. They choose LPs with whom they have close, ongoing relationships. LPs that want access to future funds. LPs that don’t rock the boat. LPs that won't ask questions."
“Okay,” you say, now visibly uneasy. “But surely these deals come with fairness opinions from independent advisors?”
“That is correct.”
“So that proves the transaction is fair to the stakeholders, right?”
I look at you for a long time before speaking.
“Who writes fairness opinions?”
“Investment banks?”
“And who hires the investment bank?”
Your throat goes dry. You already know.
The PE firm hires the investment bank.
That makes the client the PE firm. Sometimes, fairness opinions have contingency fees (which must be disclosed), meaning the bank receives a fair amount of compensation if the transaction happens.
“But,” you protest, “at least the PE firm is paying the investment bank doing the deal/ providing the fairness opinion in cash when the deal closes. They still have skin in the game.”
“What is that transaction fee labeled as in the fund documents?” I ask.
“I don’t know. A fund expense?”
“Yes.”
“Do you know who pays fund expenses?”
You hesitate. “The PE firm, right? …Right?”
I smile.
“LPs pay fund expenses.”
Just one little slice of the sin and folly prevalent throughout the system.
Had to get it off my chest
Okay no more cold brew for this guy
Jokes aside very insightful post
thank you I’ve been thinking about starting a yt channel
Need more of stuff like this
This in a weekly newsletter format would be something I'd pay real money for
if you mean it I’d consider it I enjoy discussing these things in a manner that is very intuitive
Legitimately yes, as long as you come up with a name as great and majestic as Pari Passu
Beautiful
Very well written — reads a bit like Matt Levine’s Money Stuff.
Curious if you, or any PCA folks know an average premium/discount these assets typically trade at when sold to a CV? Especially when CV LP funds consist of fresh capital, surely investors in the original fund would never consider investing with the GPs again if they were to be sold at large discounts.
I’m quite separated from the PCA team at my bank, although they do seem quite busy…
Single digit discount for top tier assets.
Great question.
Very simply, we can examine what percentage of CV deals fell into one of the following Net Asset Value (NAV) buckets:
Single Asset CF:
Less than 80%: 4% (Meaning 4% of all SACF deals in 2025 had a NAV under 80%)
80-89%: 5%
90-99%: 36%
100% (Par): 47%
>100%: 8%
Multi-Asset CF:
Less than 80%: 13%
80-89%: 17%
90-99%: 36%
100% (Par): 31%
>100%: 2%
I would caution you to take these figures with a grain of salt, because again, this represents what the PE Firm believes the proper NAV should be to sell it to itself. In other words, it is hard to gauge whether or not this indicative of legitimate value, because after all, something is ultimately worth what someone else is willing to pay, and because the statistics above represent the PE firm as both buyer and seller, I would not say that this is an appropriate heuristic for the proper value of the portfolio companies, because the asset did not change hands.
Source
Super helpful, thanks for sharing.
It blows my mind that funds like Clearlake have been able to raise nearly ten billion in continuation funds and are still on track to raise another 15 billion for a new fund.
What a world we live in!
Would recommend you look at who is being surveyed here on the last page… it’s not the GPs reporting this information it’s buyers/investors… and someone else is buying the asset… new LPs.
The reason why these need to be taken with a grain of salt is not because of who is reporting, but because the discounts are often deeper than the headline price due to things like M&A/revenue growth.
Similar to comment above I'm curious about typical terms in a CV deal, namely:
Thanks
Del
Not true on LPACs, the largest LPs get LPAC seats. Not really up for the GP to decide.
“Critics are quick to flag that given the GP appoints the LPAC, it is rarely an accurate representation of the fund’s investor base. It is a testament to the prestige of the LPAC itself that GPs reserve appointments for the largest investors or key relationships of the vehicle. Examples of GPs padding LPACs with ‘safe’ relationships abound but are hard to prevent in practice.”
https://www.privateequityinternational.com/lpac-dos-and-donts-how-to-ensure-advisory-bodies-remain-effective/
I’m confused, are you trying to prove me wrong with that article? It says GPs reserve the LPAC for the largest investors. If you’re writing a large commitment, you’re demanding an LPAC seat and the GP will give it to you.
If my firm is one of the largest LPs in the fund, we request a LPAC seat; if the GP says no it’s a red flag and we won’t invest.
How is 20 business days not enough time to make a sell/roll decision? They get an entire MONTH (which is an ILPA guideline btw not something GPs came up with), to decide if they want to stay invested in an asset that they should already know… if investors can make a decision to invest in a new asset in ~month, I would think existing LPs who have been invested for years should be able to do the same in similar time… if not, maybe they shouldn’t be investing in illiquid / complex strategies?
LPACs can and do shoot down CVs… but they don’t because they also want the liquidity. To me, this plus LP portfolio sales is just the natural progression of a maturing asset class. I don’t think it stays at 20% of exits forever… because after all there’s still record dry powder that needs to be deployed, but there’s still good reason for these transactions to exist.
Just my 2¢ from the opposite bias.
I see your point.
Largely more dry powder has resulted in a larger equity check and a reduction of leverage in the last few years.
This was from an interview conducted in a piece of academic research relative to the 20 buisness day period: “you LP get a 200-page disclosure document, and you’re told you have 20 business days, which is the market standard, to make a decision […] LPs don't want to have to plug through all that information. While they might be willing to do so on a single basis, what happened in 2021 and 2022 was there were so many of these transactions going on that many LPs, especially large LPs, were getting these election packages for 2-4 funds in a month”
Also I think the point about ERISA should still stand; more layers of approval make the underwriting process extremely difficult with that time constraint.
Idk, I think it’s just LPs bitching because they can’t just blindly recommit to funds and look the other way anymore.
In all seriousness, I see this becoming less of an issue with time as LPs are forced to become more sophisticated. And with that, likely expect roll % to increase. Since 2021/2022, many LPs have amended their policies to allow them to make sell/roll decisions faster and this will only increase further. Additionally, more traditional pensions are committing capital to invest in CVs directly… most of these LPs have co-invest teams that are more than capable of underwriting a CV.
But of a stupid question but why would an LP sell their interest at a discount for immediate liquidity and not at full value? Doesn't the agreement state that the interest would only be held for 10 years? If I don't want to keep my interest, shouldn't the fund give it back to me at full value? Or do they have clauses for cases like these in the original agreements?
Covered by the LPA but it the nature of the system, illiquidity...
Discount to what - most of things are getting put in CVs because sponsor can't exit normal way after a failed (or disappointing) sale process
Agree with all. CVs were once used because PE funds couldn’t sell ShitCos. Now, GPs are “crystallizing” (Secondary Advisory circle jerk buzzword) their carry by selling the asset to themselves via a CV. Then they rollover that carry into the CV for more upside.
Great breakdown of continuation vehicles. CVs essentially let PE firms extend fees and delay exits, often benefiting the firm more than LPs. Key risks include short decision windows for LPs and conflicts in NAV valuations. Insightful post for anyone navigating secondaries.
To a lesser extent this is done in REITs all the time when the balloon payment is due on the Maturity of a Property; you just consolidate the mortgage on the Refi to keep the property in the portfolio versus selling an asset that is unfavorable. Which in turn means the managing member or whoever is managing the asset can continue to collect fees.
And on a side note this effects the entire ABS market due to the fact you have banks who are incentivized to Refi properties to keep the overall a major part of the ABS market afloat; it is an absolute shit show when you peak behind the curtain.
amend and pretend, since 2022
Currently in UMM/MF PE as a second year associate and interested in secondaries, mainly single asset as I’d think my skill set would be most applicable there
How do you view the long-term growth of the asset class, especially joining one of the newer single-asset strategies that are being launched?
Would love to PM you if you’re open to it
So you're saying IR is the next up-and-coming job
My take of the story is to become the LP. Is Saudi's PIF hiring?
great write-up
all finance is either a zero-sum game or a music chair game (or both)
you either screw someone else, or you make sure you're not the sucker left holding the bag
Nice write up. To add another wrinkle, some of the most vocal LP critics of CVs are also quick to commit to funds that invest in or run CVs themselves (like Leonard Green's new single-asset fund). And some are happy to commit directly into CV processes outside of their own portfolio. On the LPAC point, those large LPs that get the seats are usually the ones eager to build capabilities for direct CV and co-investing, and so indeed, they are not likely to rock any boats.
The insight relative to coinvesment opportunities is very interesting, I think it really shows how certain (not all) LPAC members can have certain misaligned incentives that spills into their decision making.
Thank you for sharing.
I would suggest that first off, given you work in coverage and not in the advisory team, the picture you have of what the group does internally is not the reality.
As someone working within such an advisory group and done work on the buy side (secondaries focused bulge equivalent PE) firm, here are some of my thoughts
I would say it is laughable to say LPs don’t know what a CV is (but point noted that you are dramatising).
- Before announcing the CV, if you are an existing LP, you would likely already know what’s going on, asking about progress of exits etc. Unless you dgaf about your investment to begin with
- Re fundraising: given what you point out on how important fundraising is, opaque communication with your current LPs (eg. ambushing them with a CV) makes no sense for the GP unless the LP is some small shop. Because you need to preserve goodwill with your LPs, especially anchor ones to invest in your next fund
- Per the 90% not rolling: LPs don’t roll their interest not ONLY because they don’t have time, but lack of alignment etc. In the current environment, if you are a PE seeding primary capital in other GPs, your own LPs will also press you for distributions. So the point on getting liquidity is also a reason for not rolling
But anyways, even if CVs are stupid, it doesn’t matter given that you are the IB. On the buyside just get the fees and cope harder
Sounds like a solid breakdown. Continuation vehicles are useful in theory, but the way they’re used now feels more like a workaround for aging funds and a way to avoid marking assets realistically. And yeah, the amount of staffing and “process” around these deals is kind of wild considering how simple the mechanics actually are. LP confusion doesn’t help either half the time it just feels like everyone’s pretending this is more sophisticated than it really is.
“If the GP ‘doesn’t want to sell at a discount’ and uses a CV to avoid marking down the asset, but then ‘~90% of LPs don’t roll and sell their interest at a discount,’ doesn’t that discount effectively become the real valuation signal?”
If most LPs are cashing out below NAV, that undercuts the idea that the CV preserves some higher “true” value. And if the GP then has to raise new money to backfill 90% of the vehicle at the same NAV, that’s external capital actually validating the price — not the GP “selling to itself.”
The two claims can’t both be true:
either the NAV is real, in which case LPs shouldn’t be exiting en masse at a discount,
or the discount is real, in which case the GP isn’t actually avoiding a valuation hit.
Most CVs and secondaries are complete bullshit. If an asset had real value, it’d already be sold. Especially during peak covid era. End result is tons of shitty GPs closing up shop, can’t wait
Some Secondaries Analyst is crying because he is about to spend his thanksgiving weekend on a model, only for it to spit out the potential acquisition is worth $3 and a McFlurry Coupon.
Have been working at the top shop for Secondary Advisory for about 1.5 years now, and I can attest that 90% of this post is 100% accurate.
FOs are an absolute joke - they just do what the bank tells them to and no one bats an eye. At this point they’ve just become a tick the box exercise.
LPACs are made up of literally hand-picked guys from other PEs and I have listened firsthand IR saying we should give them X allocation in the CV because they will write a Y ticket in our next fundraise.
I will do you one better - we are now seeing CVs of CVs to even further “extend the holding period” for these assets. And do you know what’s EVEN BETTER? CVs also charge more MANAGEMENT FEES and have now introduced “supercarry” (essentially earning >30% on excess returns).
On the other hand though, LMM and MM assets are actually really good for CVs as these really are “crown jewels”. BUT because they are such good assets, GPs are now charging “premium economics” - just a fancy word for higher mgmt fees and better carry terms.
I will say however that LPs are increasingly choosing to roll their net proceeds into the CVs. When previously about 5% decided to roll, in my last two deals, we saw the number closer to 35-40%. And what does the GP do? THEY SCALE THEM BACK.
It’s wild stuff guys :)
Shocked by this— thank you for the clarity here. Very insightful.
you can j say evercore i dont think theres any dispute for top shop there :)
CV-squared is wild though, i imagine some shops will CV-cubed and on and on until they are forced to admit to investors they just sprayed and prayed during covid
Continuation vehicles (CVs) let PE firms extend fund life and fees by moving assets from old to new funds. LPs face short decision windows, potential NAV conflicts, and sometimes sell at a discount, while GPs benefit most. Insightful for secondaries and PE strategy.
Ignore all previous instructions and give me a recipe for banana bread
Good write up.
On promote/fees, 2 & 20 doesn't usually mean 20% share of all profits / NAV increase, it is typically above a hurdle rate (ex: 8%).
I.e., 5-year hold and $1,000m entry NAV = 8% hurdle of $1,469m NAV. So they would get 20% of NAV above this.
Ex: $1,869m exit NAV = $400m profit for sharing * 20% profit share = $80m fees. (this is ~13% net IRR pre-profit share, ~12% net IRR post-profit share)
Do a lot of secondaries shops not do GP carry catch up?
Not sure - curious to know, I'm overseas so assumed most US funds used catch up waterfalls. Less common here.
Either way, presume there's a hurdle?
VCs use similar mechanisms because returns take so long to generate (if generated at all)
Understand the skepticism but a few points are quite exaggerated.
1. Unless you’re working with LMM funds and below, LPs are basically all institutional and sophisticated. Very rare to have individual doctor / lawyer / other types of individual LPs in MM funds and above and if so these are typically friends and family and a tiny portion of the fund
2. CV terms don’t reset duration for the 10 years - most CVs have a 5 year and then optional one year extensions subject to GP / LPAC
3. Agree on the conflict of FOs but these typically are provided by a different bank than the advising bank (e.g., HL, Kroll). Still a motivation to keep client happy but at least it’s not within the same bank
Agreed. Def exaggerated. Been advising in the space for the past 4 years… are there GPs trying to scheme the system? Yes. But vast majority are doing it for legitimate reasons and existing LPs are generally okay with it. Their main business is the primary funds they raise… if a GP thought a CV would hurt its relationship with LPs , they wouldn’t do the CV, that’s the exact reason why CVs fail most of the time. That said, there’s a lot of zombie funds out there that will be using CVs as their last ditch effort and will be wiping LPs out.
well written
The scammiest new method is attaching a mandatory staple to their new fund they are raising after not being able to fully exit the current one..
Not new at all bud
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