Continuation Funds: How PE Managers Restart the Fee Clock on Their Best Assets

Continuation Funds: How PE Managers Restart the Fee Clock on Their Best Assets

GP-led secondaries hit $71 billion in 2024 — a 39% jump from the prior year, according to Evercore's Full-Year 2024 Secondary Market Review. Vista Equity Partners put an exclamation point on that number when it closed a $5.6 billion continuation fund around Cloud Software Group, the largest single-asset deal ever recorded. 130-plus continuation funds launched in 2024, compared with five in 2018. This is no longer a niche tool for distressed situations. It is a primary exit mechanism. You need to understand who benefits.

What Continuation Funds Are and How They Work

A continuation fund is a GP-led secondary transaction. The private equity manager identifies one or more portfolio companies sitting inside an aging fund (typically near or past its 10-year term) and transfers those assets into a brand-new vehicle it also manages. The existing limited partners face a binary choice: take cash at the transfer price, or roll into the new fund and stay invested.

Mechanically, the GP hires an investment bank (Evercore, Jefferies, or Lazard) to run what looks like an auction. Secondary buyers like Lexington Partners, HarbourVest Partners, Hamilton Lane, and Ardian compete to set a market price. That price becomes the transfer price paid to the legacy fund. Selling LPs get their money out. Rolling LPs carry their interest forward. New institutional capital fills whatever gap remains.

The GP ends up managing both sides simultaneously: the legacy fund (which is receiving the sale proceeds and winding down) and the new continuation vehicle (which now holds the asset from here). That simultaneous role is the structural conflict at the center of every criticism you will read in this article.

Today, continuation vehicles represent approximately 84% of all GP-led secondary volume and account for roughly 13% of all sponsor-backed exits, a position that barely registered five years ago. The 2024 vintage exceeded $80 billion, more than the $48 billion raised in IPOs that year. Over 80% of the top 100 global GPs have already accessed this market.

The Fee Restart Problem: Here Is the Actual Math

Continuation funds are how PE managers hold their winners longer and restart the fee clock while doing it. That sentence needs a concrete example before you can fully feel how significant it is.

Suppose a GP bought a software company in 2016 for $100 million. By 2025, it has grown to $300 million. The fund is past its preferred investment period. Management fees on that asset are winding down. Carried interest (typically 20% above an 8% preferred return hurdle) was being calculated on the full appreciation from $100 million to $300 million. The LP's gain is $200 million; the GP's gross carry on that gain is $40 million.

Instead of selling, the GP launches a continuation fund and transfers the asset at $300 million. Two things happen simultaneously.

First, the management fee clock restarts on the new vehicle's capital base. What was a declining fee stream on a maturing asset becomes a fresh annual fee, typically around 1% on invested capital, on a vehicle that may run another five to seven years. The fee termination that would have occurred at exit never happens.

Second, and more consequentially, the carry clock resets to current NAV. The new continuation fund calculates carry starting from $300 million, not from the original $100 million cost basis. Any future appreciation above $300 million, above the hurdle, generates fresh carry for the GP. The legacy LPs who funded the asset from $100 million to $300 million have been cashed out. The GP has effectively set up a second performance fee cycle on the same underlying company, with the baseline elevated to exclude the value already created on LP capital.

I find this dynamic underappreciated by most LP investors. The GP is not penalized for running a continuation fund. It is rewarded with a reset to a more favorable carry baseline on what is already a proven winner.

Three Named Deals That Show the Pattern

Vista Equity Partners, $5.6 billion: Cloud Software Group (2024-2025). Vista's flagship Funds VII and VIII rolled approximately $2.2 billion in equity; Coller Capital and Goldman Sachs Asset Management led $2.7 billion in new secondary capital. Cloud Software Group, formed by Vista's 2022 combination of Citrix and TIBCO Software, transferred at a 5% discount to Q1 2024 NAV. Existing Fund V LPs were offered a 4.1x MOIC on the liquidity option at an enterprise value of roughly $26.86 billion. This is the largest single-asset continuation fund on record. Vista did not pursue a trade sale or IPO. It moved the asset into a vehicle it continues to manage, with the carry clock reset on one of the largest software platform positions in private equity.

Warburg Pincus, $2.2 billion: multi-asset fund (December 2024). HarbourVest Partners, Ardian, and CPP Investments co-led and fully capitalized this vehicle, Warburg's first continuation fund after decades as one of the most traditional exit-focused PE firms. Its entry into the continuation fund market signals something clear: this structure has normalized all the way up to the most established managers in the industry. Firms that historically relied on M&A and IPO exits are now building continuation fund programs.

Insight Partners, $1.5 billion: multi-asset software vehicle (October 2024). HarbourVest Partners led commitments. Insight pooled software assets from several aging fund vintages into a single continuation vehicle, extending hold periods across multiple legacy funds simultaneously. This multi-fund pooling structure introduces a layer of pricing complexity that most LPs cannot realistically unpack: investors in different Insight vintages may have materially different cost bases and return profiles for the same underlying assets now held inside one new vehicle.

The LP Dilemma: Liquidity Now or Roll In at Worse Terms

The choice looks fair on paper. Take cash or stay invested. But the conditions around that choice matter enormously.

The transfer price is set through a process the GP controls, using information the GP holds exclusively, on a timeline the GP sets. You typically have 20 to 30 business days to evaluate a decision involving hundreds of millions of dollars in a company whose financials and growth trajectory you have never directly accessed. The GP has all of that. The secondary buyers negotiating the price have it too, through their own diligence. You are deciding based on a disclosure package curated by the party that benefits most from the transaction proceeding.

If you take the cash, you exit at a GP-set price in a market where the most sophisticated secondary buyers in the world have just determined that price is attractive enough to compete for. The secondary buyer signal is not subtle: when Hamilton Lane, Lexington Partners, and Coller Capital are all bidding for the buy-side of a continuation fund, legacy LPs are accepting the worst terms in that deal.

If you roll in, you stay invested under terms that may be materially worse than your original fund documents. Hamilton Lane's 2024 Continuation Fund Study found that a true "status quo" option, meaning rolling LPs face no fee or carry deterioration, appeared in only 17% of deals reviewed. In 83% of cases, rolling LPs accepted some form of economic step-down relative to their original fund terms.

Distributions to PE limited partners fell to just 11% of NAV in 2024, the lowest in over a decade. That liquidity drought is real, and it is what makes the cash-out option feel attractive even when the price is not optimal. The GP knows this. The choice between imperfect liquidity today and uncertain returns under worse terms tomorrow is not a free choice.

ILPA Guidance and SEC Scrutiny

ILPA published its foundational continuation fund guidance in May 2023, co-developing a 2026 Disclosure Template with Coller Capital. The core principles are sensible: rolling LPs should face no higher management fee, no higher carry rate, no lower preferred return, and no crystallization of carry on transfer. The GP should roll 100% of its accrued carry into the continuation vehicle. LPs should receive at least 30 calendar days to elect. A non-responding LP's default outcome should be cash-out, not automatic rollover.

These are reasonable rules. The problem is they are voluntary. ILPA guidance is not regulation. A GP who controls the process, the timeline, and the LPAC composition has limited incentive to follow guidance that constrains its own economics. Advisory board members approving conflicts often hold co-investment relationships with the same GP whose conflict they are reviewing. That is not independence.

The SEC has recognized the structural problem. The Division of Examinations placed GP-led secondary transactions on its annual priority list for three consecutive years. In August 2023, the SEC adopted Rule 211(h)(2)-2, requiring registered investment advisers in GP-led secondary transactions to provide LPs with an independent fairness opinion or a valuation opinion from a nationally recognized firm. The SEC has explicitly cited advisers who appear on both sides of the transaction with potentially different economic incentives as its enforcement focus. That is a direct description of every continuation fund ever structured.

The NBER Research: Selling to Yourself

Professors Victoria Ivashina, Chris Mayer, and Ludovic Phalippou published a 2025 NBER working paper titled "Selling to Yourself," examining continuation funds across the full range of GP-led secondary transactions. Their findings are direct: raising a continuation fund generally benefits the GP. Legacy LPs who roll into continuation vehicles typically do so under worse economic terms. The majority of original LPs choose to exit rather than roll, an implicit vote on the fairness of the offered terms.

The paper's central observation is structural. The GP is selling an asset to a vehicle it will continue to manage, setting its own transfer price, and restarting its own compensation clock. No arm's-length buyer faces equivalent information disadvantage. The CFA Institute Research and Policy Centre agrees: the conflict is structural and unresolved.

The data point that appears repeatedly in independent research: 75% of LPs view continuation funds as creating problematic conflicts of interest. That consensus did not stop the market from growing to $80 billion in a single year. When the party with pricing power and information asymmetry controls the process, LP discomfort does not translate into LP protection.

The secondary market overview you should read before participating in any LP election covers the secondary buyer's perspective in detail. Understanding what Lexington, HarbourVest, and Hamilton Lane are actually underwriting when they buy into a continuation fund tells you something important about the deal you are being asked to exit from.

What LP Investors Should Demand Before Agreeing

If you are an LP receiving a continuation fund election notice, here is what I would require before making any decision.

Read the independent fairness opinion in full. Under SEC Rule 211(h)(2)-2, registered advisers must provide one. The full opinion will tell you the valuation methodology, the comparable transactions considered, and the range of values the independent firm found acceptable. If the transfer price sits at the low end of that range, you are being asked to exit at a discount to independent fair value.

Require disclosure of the GP's carry rollover amount. ILPA guidance says the GP should roll 100% of accrued carry from the legacy fund into the continuation vehicle. If the GP proposes to crystallize any portion of legacy carry at closing, that is a direct transfer of value from your position to the GP. Demand the exact figure and the contractual obligation backing it.

Run the status quo test against your original LPA. Compare the continuation fund's proposed management fee rate, carry rate, preferred return hurdle, and investment period terms against your original limited partnership agreement line by line. If any term has deteriorated, you are being asked to accept worse economics on an asset you have already held for seven to ten years. That requires explicit justification and, ideally, a concession on another economic term in exchange.

Request the full election window. ILPA recommends a minimum of 30 calendar days. If your GP compresses the timeline below that, push back in writing. A deal that cannot survive a full 30-day election window is a deal the GP needs more than you do.

Evaluate the secondary buyer's implicit signal. When Lexington Partners and HarbourVest are competing for the buy-side position, they have completed far more diligence on the asset than you have received. Ask yourself why the GP is offering you the exit rather than placing more of the continuation vehicle on its own balance sheet. The answer tells you whose interests the transaction structure serves.

You can also read our guide to reviewing private equity fund terms and LP agreements and the AIN framework for evaluating GP-led secondary transactions before you vote for additional context before any election deadline.

PitchBook projects the GP-led secondaries market at $70 to $105 billion annually by 2028. Global buyout funds hold approximately 28,000 unsold companies worth $3.2 to $3.6 trillion. The structural pressure to use continuation funds rather than pursue open-market exits is not going away. Your best protection as an LP is not hoping the GP follows ILPA guidance voluntarily. It is knowing exactly what you are being asked to sign — and what you are giving up when you do.

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.