The growing popularity of continuation funds in the private equity landscape

Continuation funds, otherwise known as GP-led secondaries, have become a key investment trend in the private equity landscape, accounting for between 45 to 60% of all global secondary market deal flow in each of the last five years.

Of the record total of $160 billion worth of secondaries deals completed in 2024, $71 billion was accounted for by continuation funds, itself a record total.

Around half of all secondary transactions every year since 2021 have been continuation fund deals, and by some estimates, the volume of these deals could reach into hundreds of billions of dollars by the end of this decade and beyond.

What is a continuation fund, and how are these transactions structured and executed?

Continuation funds are a vital tool in a private equity fund manager's toolkit. They enable managers to crystallise returns for either a single asset or a small selection of assets, to provide liquidity to their existing investors.

What makes these deals different from other exit options is that the transaction also allows the manager to retain control over the company being sold. Hence, they allow for the ‘continuation’ of ownership and growth strategy.

Deals are structured using a continuation fund, which is a new vehicle set up by the fund manager. These vehicles are backed by new capital from the managers themselves, the management team of the company being acquired, and new secondary investors.

This continuation fund buys the asset, or assets, from the manager's existing fund, with proceeds being used to provide distributions to existing investors.

Additional capital in the continuation fund is a source of new growth capital for the business that has been acquired, which is given a new lease of life in a new fund structure.

As these deals are initiated by private equity fund managers, referred to as general partners or GPs, they're also known as GP-led secondaries. GP-led secondaries have become a mainstay of the broader secondary market in recent years and have helped to drive the industry to new records in terms of transaction volume.

Why have these transactions become so popular?

In the past couple of years, GP-led secondaries have provided a valuable alternative exit option to a sale or initial public offering (IPO) at a time when public market listings have declined due to market volatility and economic uncertainty has limited appetite from large corporates for M&A.

But they're also part of the longer-term growth story of secondaries. As the private equity market has continued to mature and grow, so has the secondary market by providing innovative liquidity solutions for investors.

In this context, continuation funds represent an important evolution, as they solve for some fundamental limitations of private funds.

Put simply, there are times when a star portfolio company's growth potential extends over a longer time horizon than a typical private equity fund's investment period or requires more investment than a fund is able to provide.

Continuation funds enable the manager to own these high-quality assets for longer and realise the full growth potential of their most prized companies. Existing investors can take advantage of the liquidity option or roll over their investment into the new transaction.

New secondary investors are given access to exciting investment opportunities with the benefit of buying into proven assets and growth plans, and established fund manager and management team relationships.

* Van der Kam is the head of secondary investments and private equity at Schroders.

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