TL;DR: A continuation fund is a new vehicle a GP creates to move portfolio assets out of an expiring fund without selling them. LPs choose: take cash now or roll into the new vehicle. The secondary market hit $226 billion in 2025. Continuation funds drove $95.8 billion of that. This is no longer a niche tool. It is a mainstream exit alternative.
The secondary private equity market set a record in 2025: $226 billion in total transaction volume, according to Kroll's 2026 analysis of continuation fund activity. Continuation funds drove $95.8 billion of that, nearly half of all secondary volume. That is not a liquidity gimmick. That is a restructured PE industry finding new ways to operate when the exit market dries up.
If you are evaluating a PE firm as a potential buyer, or invested as an LP in a fund that owns businesses like yours, you need to understand what continuation funds are and how they work. The deal you thought you understood may look different in year five or six.
What a continuation fund actually is
A continuation fund is a newly created investment vehicle, typically a special purpose vehicle (SPV), that a general partner sets up to acquire one or more portfolio companies from an existing fund nearing the end of its life. The GP transfers the assets into this new entity. The original fund's LPs are given a choice: sell their stake at the transaction price and take cash, or roll their position into the new continuation fund and stay invested.
New secondary buyers (institutional investors who specialize in buying fund stakes) provide the capital to pay out exiting LPs. The GP continues to manage the company. The holding period effectively resets. The company itself may not even notice the transaction. From the portfolio company's perspective, the owner is the same GP, now operating through a different legal entity.
Two structures dominate the market. Single-asset continuation vehicles (SACVs) hold one company. These are common when a GP has one standout asset they want to hold longer without tying up the entire fund's remaining term. Multi-asset vehicles bundle several companies together, offering the new secondary investors some diversification.
Why GPs use them
The primary driver is timing. A traditional PE fund has a defined 10-year life, typically with a five-year investment period and a five-year harvest period. If the exit market is weak (slow IPOs, compressed M&A multiples, higher financing costs), a GP faces a choice: sell into a bad market at a price that does not reflect the company's value, or find another way.
Continuation funds are another way. They let the GP keep what they believe is a strong asset, return liquidity to LPs who want out, and bring in new capital from buyers who are specifically set up to take on seasoned assets at current valuations.
The Dechert 2026 Global Private Equity Outlook survey found that 46% of PE respondents are now using GP-led secondaries or continuation vehicles to accelerate distributions to existing LPs. That is nearly double the number from the prior year. The incentive is not just to avoid a bad exit. It is also to boost DPI (distributed-to-paid-in capital), the metric LPs track when evaluating whether a GP is actually returning money, not just reporting paper gains.
There is also a fundraising angle. About 37% of GP-led secondary deals now include a stapled commitment, where the secondary buyer agrees to commit to the GP's next fund as part of the transaction. That is up from 24% the prior year. A continuation fund is not just an exit vehicle. For some GPs, it is also a fundraising mechanism.
What happens to LPs
LPs in the original fund face a binary decision under time pressure. The typical election window runs four to six weeks from when the GP presents the transaction to when binding commitments are due. The GP is required to get an independent third-party valuation of the assets and, in most cases, present the transaction to the LP advisory committee for conflict-of-interest approval.
LPs who sell receive cash at the transaction price. Their IRR and DPI for that fund are locked in at that number. LPs who roll into the continuation fund reset their cost basis at the transaction price and begin building a new performance track with the continuation vehicle as the starting point. If the original fund had unrealized gains, the roll-over LPs are essentially marking their position to the new price.
The decision depends on two factors: your view of the asset's remaining upside, and your own liquidity needs. A pension fund with a 30-year horizon might roll every time. A fund of funds approaching its own end of life might need the cash. There is no universally right answer.
The conflict of interest problem
The GP sits on both sides of the transaction. They are seller (as manager of the expiring fund), buyer (as the new manager who will run the continuation fund), and deal process designer (they set the timeline, selected the advisor, and determined which assets to transfer). That is a significant conflict of interest.
Best practice requires three things to mitigate it: an independent third-party fairness opinion from a firm like Kroll, Duff and Phelps, or a similar transaction advisory group; LP advisory committee approval that formally waives the conflict; and a genuine market test of value, meaning some form of competitive process to validate the transaction price.
Dechert's co-head of private equity practice stated it directly in their 2025-2026 survey: "You can't afford to rush or take LPs for granted. You have to give them time and information to make a decision. The GP also has to have skin in the game, and the structure has to be prudent and not over-leveraged."
LPs have started negotiating for more explicit protections. The 2026 Akin Gump analysis found that LPs are increasingly pushing for express consent, consultation, or opt-out rights specifically addressing what happens when portfolio companies end up in continuation vehicles. Historically, GPs retained broad discretion over affiliate transactions. That discretion is now being contested at the fund document level, before any deal happens.
The lower-middle-market difference
Continuation funds in the lower-middle-market operate differently than megacap PE deals. The secondary buyer universe for smaller assets is thinner. Not every secondary fund can efficiently underwrite a $20 million equity check in a $5 million EBITDA business. The deal structures are less standardized. The advisory process is less formal.
That creates two realities. First, lower-middle-market GPs may face more friction when attempting a continuation fund. They cannot simply call Goldman Sachs or Lazard and run a standard secondary process. They need relationships with the handful of secondary buyers who specialize in smaller deals.
Second, for LPs in smaller funds, the continuation vehicle option may arrive with less competitive pricing than a large-cap deal. The market test is thinner. The fairness opinion may carry more weight relative to actual competitive tension. This is an area where LP advisory committee engagement matters. If your fund is in a continuation vehicle process, the committee needs to push back on process rigor, not just price.
Middle-market exits are declining: continuation funds are filling the gap
The data makes the macro context clear. Middle-market U.S. PE exits in the $25 million to $1 billion range totaled 972 deals in 2025. That compares to 1,535 in 2021. Deal volume declined each year. Meanwhile, Grant Thornton's 2025 PE exit analysis shows GP-led continuation fund activity running in the exact opposite direction, with volume rising annually as traditional exits slow.
This is not coincidence. The two trends are directly linked. When GPs cannot exit through an M&A transaction or an IPO at an acceptable price, they use continuation funds to return some capital to LPs while preserving the asset. The continuation fund is the instrument that converts an illiquid fund position into a semi-liquid one without forcing a value-destroying sale.
What business owners should know
If you sell your company to a PE firm, there is a meaningful probability that at some point during the hold period, your company moves from the original fund into a continuation vehicle. This does not change your day-to-day operations. The GP is still the GP. Your management team and business plan stay the same.
But it does change the incentive structure around your company's exit. When a company moves into a continuation vehicle, the new investors bought in at a reset valuation. The performance clock restarts. The GP now has a new set of return expectations to meet for the continuation fund's secondary investors, in addition to any continued obligations to original fund LPs who rolled over.
Ask any PE buyer you are evaluating: have they done a continuation fund transaction before? How did they handle the LP election process? What is their view on single-asset versus multi-asset structures? Their answer tells you how they think about portfolio management under stress, which is exactly how they will manage your company when the exit timing does not align with their original plan.
For context on what the actual post-close management period looks like, see our 100-day post-acquisition integration blueprint.
The bottom line: Continuation funds have moved from niche to mainstream. $95.8 billion of the 2025 secondary market was continuation fund volume. 46% of PE firms are using these structures to manage distributions. LPs get a choice at the transaction price. Business owners get a company that stays under the same GP umbrella, now operating in a different vehicle. The structure is not inherently harmful. But it requires informed participation. Know what you are agreeing to before the election window opens.
Frequently Asked Questions
What is a continuation fund and how does it differ from an original PE fund?
A continuation fund is a newly created vehicle, typically a special purpose vehicle, that a GP sets up to move one or more portfolio companies out of an expiring fund without selling them. The original fund's LPs choose to take cash at the transaction price or roll their position into the new vehicle.
How large has the continuation fund market grown, and what share of secondary volume do they represent?
The secondary private equity market hit $226 billion in total transaction volume in 2025, according to Kroll's 2026 analysis. Continuation funds drove $95.8 billion of that, nearly half of all secondary volume.
What conflict of interest exists when a GP creates a continuation fund?
The GP sits on both sides of the transaction, acting as seller of the expiring fund, buyer as the new manager, and designer of the deal process. Best practice requires an independent third-party fairness opinion, LP advisory committee approval, and a genuine market test of value.
How does a continuation fund transaction affect a business that has been sold to a PE firm?
From the portfolio company's perspective, the owner is the same GP, now operating through a different legal entity. Day-to-day operations stay the same, but the performance clock resets for the new continuation fund investors, and the GP faces a new set of return expectations.
