Continuation Funds: The LP Liquidity Trap Hiding in Plain Sight

TL;DR: A continuation fund lets a private equity GP transfer its best-performing assets from an aging fund into a brand-new vehicle, collecting fees all the while. As an LP, you get a choice: take cash at the GP's stated price, or roll into the new fund. That choice is not as clean as it sounds. The GP sets the valuation, buys the asset from the old fund to the new one, and has every incentive to price it high. You need to understand this structure before you face that election notice.

A $75 Billion Market You Need to Understand

According to Jefferies' Global Secondary Market Review, GP-led continuation fund volume reached $75 billion in 2024, accounting for roughly 46% of the total secondary market. That figure was a 44% jump from 2023 and a new all-time record. By 2025, volume climbed further to $115 billion, with continuation vehicles representing 89% of all GP-led secondary activity. This is no longer a niche corner of private equity. Nearly 75% of the largest global private equity firms have now executed at least one continuation transaction. If you are an accredited investor with exposure to private equity funds, you will almost certainly encounter one.

What a Continuation Fund Actually Is

Private equity funds are built with a 10-year clock. The GP raises capital, invests it over roughly five years, then spends the next five selling portfolio companies and returning money to LPs. At year 10, the fund is supposed to be done.

In practice, not every asset is ready to sell when the clock runs out. Some companies are still growing fast. Some M&A markets are cold. Some GPs simply want more time with their best holding.

A continuation fund (also called a continuation vehicle or GP-led secondary) solves that problem for the GP. The GP creates a new, separate fund. It then transfers one or more of the original fund's portfolio companies into this new vehicle at a negotiated price. The GP manages both sides of this transaction: it is simultaneously the seller (on behalf of Fund I's LPs) and the manager of the new continuation fund.

Existing LPs in Fund I get an election notice. They choose: take cash at the agreed price, or roll their interest into the continuation fund and stay invested. Secondary market buyers, institutional investors who specialize in buying LP stakes, typically provide the liquidity for those who choose to exit. Those buyers also become the primary investors in the new vehicle.

On paper, this looks like a win for everyone. LPs get optional liquidity. The GP keeps its best asset. New investors get exposure to a proven company at a known price. In practice, the structure contains a conflict that you need to examine carefully before you sign anything.

Why GPs Use Them: The Economics Are Attractive

Be direct about the GP's incentives. Management fees in private equity typically run 1.5% to 2% per year on committed capital or net asset value. When Fund I winds down, those fee streams end. A continuation fund resets the fee clock. For a $500 million single-asset continuation vehicle, a 1.5% annual management fee generates $7.5 million per year for potentially another five to seven years.

Carried interest is the other driver. GPs typically earn 20% of profits above a preferred return hurdle. By transferring an asset into a new fund at a negotiated price and then selling it later at a higher value, the GP can crystallize additional carry that might not have been available under the original fund's terms. The Institutional Limited Partners Association (ILPA) specifically flags carried interest crystallization as a primary conflict to scrutinize in continuation fund transactions.

None of this makes continuation funds inherently bad. GPs who genuinely believe in an asset's remaining upside should have a way to pursue it. The problem is that the GP's financial incentives and the LP's best interest do not always point in the same direction.

The Warburg Pincus Example

In December 2024, Warburg Pincus announced a $2.2 billion multi-asset continuation fund, the firm's first formal continuation vehicle. The deal was co-led and fully underwritten by HarbourVest Partners, Ardian, and Canada Pension Plan Investment Board (CPP Investments), meaning no additional syndication was required. Existing LPs could either lock in returns by selling at the agreed price or roll their interests into the new fund and maintain exposure to the portfolio companies.

Warburg Pincus engaged Evercore as financial advisor and Kirkland & Ellis as legal counsel. Both are common signals of a structured, professionally run process. Evercore's involvement meant an independent party assessed pricing, which is the kind of process oversight that gives LPs at least some basis for evaluating the offered price.

This is what a well-run continuation fund looks like: large institutional co-investors providing price validation, professional advisors, and a clear LP election process. Not every continuation fund runs this cleanly.

The Conflict of Interest: Read This Section Twice

The core problem is straightforward. The GP sets the transfer price for the asset moving from Fund I to the continuation vehicle. That price determines how much cash exiting LPs receive. It also determines the entry price for rolling LPs and new investors.

The GP has a direct financial interest in setting that price high. A higher valuation generates a better-looking paper return on Fund I, which helps the GP raise Fund II or III. It may also trigger carried interest crystallization earlier. The GP is, in effect, buying an asset from itself and setting its own price.

In September 2023, the SEC brought an enforcement action against an investment adviser for transferring assets between funds without adequately disclosing conflicts of interest, without obtaining proper investor consent, and without allowing investors to exit their investments on fair terms. The SEC's Division of Examinations listed adviser-led secondary transactions as a 2025 exam priority, signaling continued regulatory attention even after the courts curtailed the agency's rulemaking power.

In August 2023, the SEC adopted Private Fund Adviser Rules that included a specific Adviser-Led Secondary Rule, requiring registered advisers to obtain a third-party fairness opinion or valuation opinion before completing any continuation fund transaction. That rule was struck down entirely by the U.S. Court of Appeals for the Fifth Circuit on June 5, 2024. The court held that the SEC exceeded its statutory authority under the Investment Advisers Act. The fairness opinion requirement no longer has the force of law.

What that means for you: the GP is not legally required to get an independent opinion. Many will still obtain one voluntarily, because institutional secondary buyers demand it. But some will not. You need to ask.

ILPA's 2023 guidance puts it plainly: any conflicts related to the transaction process and its final economics should be identified, mitigated, and approved by the LP Advisory Committee (LPAC). The guidance calls for a competitive bid process, third-party price validation, and a minimum of 30 calendar days for LPs to evaluate the deal. These are recommendations, not legal requirements. Whether the GP follows them is, itself, a data point about how they treat investors.

Your Three Choices (Not Two)

When you receive an election notice, the GP will present you with two options: take cash or roll. There is a third option most GPs will not highlight prominently.

You can sell your LP interest to a secondary buyer on the open market, completely independent of the GP's process. The secondary market for LP stakes has grown substantially. Total secondary market volume hit $162 billion in 2024 and continued expanding in 2025, with dozens of active buyers including Blackstone, Ardian, HarbourVest, and Lexington Partners. Secondary buyers may offer you a different price than the GP's stated NAV. Sometimes higher. Sometimes lower. It depends on how they view the underlying assets.

If you believe the GP's stated valuation is too high, selling to a secondary buyer may give you better terms than taking the GP's cash offer. If you believe the GP is undervaluing the asset to favor the new investors, rolling into the continuation fund may be the better move. Either way, getting an independent read on the asset's value before making any election is worth the effort.

LP Decision Framework: When to Roll, When to Exit

There is no universal answer. The right choice depends on five factors.

1. Your liquidity need. If you need capital now, take cash. Rolling into a continuation fund typically means another five to seven years of illiquidity. The continuation fund does not inherit your original fund's remaining term. It starts a new clock.

2. Your view on the asset. The GP is telling you this company has significant value remaining. Do you believe them? Ask for the operating metrics, the revenue trajectory, the exit path, and the timeline. A GP with a credible answer is a different conversation than one who talks in abstractions.

3. The entry price relative to fundamentals. The transfer price into the continuation fund is your effective entry price as a rolling investor. If the asset has been marked up aggressively during Fund I, you are rolling in at a high valuation. Upside from there requires further multiple expansion or earnings growth. Neither is guaranteed.

4. The fee and carry terms of the new vehicle. ILPA guidance specifies that rolling LPs should not face higher management fees, higher carried interest rates, or a lower preferred return hurdle than they had in Fund I. Confirm this in writing. If the GP has reset the economics upward, your rolling position is structurally worse than your original one.

5. The quality of the process. Did the GP run a competitive bid? Is there a fairness opinion from a truly independent firm, one that does not do substantial other business with the GP? Did the LPAC have meaningful review time? A well-run process reduces the risk that you are being transferred into a mispriced deal.

Red Flags vs. Legitimate Transactions

Some continuation funds make sense. A GP with a genuinely high-quality portfolio company, a clear value-creation plan, and transparent terms running a competitive process with institutional secondary buyers represents a defensible use of the structure. Morgan Stanley data shows continuation funds secured a top-quartile net MOIC of 2.6x between 2018 and 2020, compared to 1.6x for traditional buyouts. Strong performance is achievable when the process is sound.

Watch for these warning signs. The GP is running the continuation fund on a company that has missed its original investment thesis. The valuation has been marked up significantly in the months before the election notice. There is no independent fairness opinion. The LP election window is shorter than 30 days. The LPAC was not meaningfully consulted. The new vehicle carries higher fees or a higher carry rate than Fund I.

Any one of these alone warrants more questions. Two or more together is a serious concern.

What to Ask Before You Sign

Ask for the fairness opinion and read it. Not the summary — the full document. A fairness opinion contains the assumptions the advisor used to value the asset: projected revenue, EBITDA, comparable transactions, and discount rates. If those assumptions are aggressive, the opinion is covering a valuation that the market would not support. Independent advisors who do limited other business with the GP are more credible than those with deep existing relationships.

Ask whether a competitive process was run. How many potential buyers were approached? What was the range of bids? If the GP selected a price below the highest bid, ask why. The answers reveal whether the LP's interests or the GP's preferences drove the outcome.

Ask what the LPAC reviewed and approved. ILPA's guidance calls for the LPAC to review conflicts and provide guidance throughout the process. An LPAC that was given a brief presentation and asked to rubber-stamp a decision already made is not providing meaningful oversight.

Ask about the fee and carry structure in the new vehicle. Get it in writing. Compare it line by line to Fund I's limited partnership agreement.

The Bottom Line

Continuation funds are the fastest-growing structure in private equity. They can serve legitimate purposes. They also create one of the most direct conflicts of interest in the asset class. A GP buys assets from itself, at its own price, while continuing to collect fees and carry on both sides of the transaction. The regulatory requirement designed to address this, mandatory fairness opinions under the SEC's Private Fund Adviser Rules, no longer exists after the Fifth Circuit struck it down in June 2024.

That puts the burden back on you. Ask for the fairness opinion anyway. Read it. Check the assumptions. Look at the process. Evaluate whether the GP's rationale is about maximizing your returns or extending their own fee stream. The best GPs will welcome those questions. The ones who resist them are telling you something important.

Author Disclosure: Jeff Barnes, MBA has no personal position in any company, fund, or platform named in this article. Angel Investors Network has no current commercial relationship with any party mentioned. AIN provides marketing and education services, not investment advice. Past performance does not guarantee future results. All investments involve risk, including loss of principal.