PE exit strategies: Continuation funds and carve-outs

How firms navigate exit challenges in volatile markets

In today’s volatile economic environment, private equity (PE) firms are rethinking traditional exit strategies. Two approaches are gaining traction: continuation funds and portfolio company carve-outs. These strategies not only offer liquidity and flexibility but also enable PE sponsors to tailor exits to market conditions and asset performance.

Continuation funds: Extending ownership and unlocking value

Continuation funds have emerged as a powerful tool for general partners (GPs) to extend ownership of high-performing assets while offering liquidity to limited partners (LPs). Once considered niche, these GP-led secondary transactions are now a mainstream strategy. In 2024, global deal secondary deal volume hit $162 billion, with GP-led deals accounting for 44% of that total. 

A continuation fund is a new investment vehicle created by a GP to acquire one or more assets from an existing fund nearing the end of its life. This allows the GP to continue managing the assets and unlock further value, while giving LPs the option to either cash out or roll their investment into the new fund. These structures typically take two forms: single-asset continuation vehicles, which focus on one asset and multi-asset continuation vehicles, which bundle multiple assets, offering diversification.

Several factors are driving the surge in continuation fund activity:

• Exit drought: With slow IPO markets and quiet M&A activity, GPs are turning to continuation funds as a viable liquidity solution.
• Investor appetite: Secondary investors have capital to deploy and growing confidence in the risk-return profile of continuation funds.
• Performance: These vehicles often deliver returns comparable to traditional buyouts with lower downside risk.

While continuation funds offer flexibility, they also raise governance concerns as the GPs are on both sides of the deal. To mitigate this risk, GPs should prioritize obtaining third-party fairness opinions and independent appraisal to help validate pricing and mitigate perceived conflicts of interest.

Accounting implications are equally nuanced. Transactions often involve in-kind transfers between the original fund and the continuation vehicle, requiring careful treatment of noncash distributions and contributions.  Rollover investors must assess whether their interests represent new investments or modifications of existing ones, impacting recognition and measurement under applicable accounting standards.