The strategic advantage of continuation vehicles

The main draw of private equity funds is their ability to help investors achieve higher returns, diversify their portfolios, and mitigate risk. But what happens when a high-performing private equity fund reaches the end of its fund term, especially one whose underlying assets still show signs of continued profit potential?

Rather than shutting the fund down wholesale and selling the assets to a third party, the fund’s general partners (GPs) could instead elect to transfer the assets in a specialized secondary structure known as a “continuation vehicle.”

These niche funds create potentially favorable scenarios for all stakeholders involved: GPs get to maintain their control over promising assets instead of being ‘forced sellers’ while legacy limited partners (LPs) gain the optionality to cash out after spending 8-10+ years in the fund (as is typical for most PE investments). Meanwhile, it allows potential new LPs to participate in trophy assets well-known to the General Partners.

“Continuation vehicles solve multiple problems,” says Dimitri Krikelas, Westmount’s Chief Investment Officer for Private Markets. “They enable General Partners to lengthen the investment duration of companies they’ve come to know deeply and help create significant value for over the years. By keeping these assets in the hands of experienced management teams and giving them more time to execute their growth strategy, there’s potential to unlock even greater value. At the same time, the structure provides liquidity for existing Limited Partners and opens the door for new investors to gain access.”

Benefits to LPs
Because most private equity funds tilt toward illiquidity, continuation vehicles offer an attractive solution for existing LPs looking to realize returns without having to wait out the clock for the asset to sell or go public at a later date. Third-party auditors are routinely consulted to issue fairness-opinion valuations, providing a built-in transparency mechanism and ensuring objective, true market-clearing values and price discovery.

Under this kind of structure, LPs can walk away confident in the valuations of their stakes in the investment since the underlying assets are already well-defined. Plus, because the legacy LPs have already been invested in these funds and companies for many years, they are likely to have generated substantial returns and are now ready to realize their long-term investment.

How Continuation Vehicles Stand Out in the Secondary Market
While LP-led transactions of large asset pools chiefly lead the secondary space, continuation vehicles target GP-led investments in trophy assets with the ability to generate long-term value, usually at compelling valuations. For example: 70% of continuation fund deals were completed at a 0-10% discount to NAV in 2022.¹ Loss ratios are typically lower, while multiples on capital are generally higher, mainly due to the high caliber of business acumen a company’s management brings to the table.

In most cases, the original fund that spawns a continuation vehicle will have cycled through at least 10 years of operational problem-solving first, where the fund’s underlying company executives have already navigated through the usual logistical growing pains. Consequently, they know which levers to pull to increase growth, cut costs, and meet consumer demand.

Rather than cashing out and pocketing profits, the GPs of continuation funds reinvest their profits into the new vehicles. In other words, the structure of a continuation vehicle blends the GP and management team’s on-the-ground expertise with the GP’s renewed capital commitment, aligning interests with LPs and instilling investor confidence in return potential.

On the Climb

Although continuation vehicles currently represent just 3-4% of total private equity exits, the asset class has witnessed a surge in demand in the wake of recent liquidity constraints in the private market space. Consider the following:

• According to Pitchbook, global private equity exits to continuation vehicles totaled 89 in 2024—up 7.2% from the previous year and representing $47.3 billion.²
• Continuation funds now represent a record 14% of total sponsor-backed exit volume.³
• More than 80% of the top 100 GPs have participated in the continuation market.⁴
• Continuation funds outperform buyout funds in each quartile, with less than half the risk (9% loss ratio for continuation funds versus 19% for buyouts).⁵

“General Partners want to retain their best assets, as they possess unique insight into the value-creation opportunities ahead,” says Krikelas. “Combining the strength of established companies and experienced management teams—backed by years of investment from General Partners—with attractive pricing creates a highly compelling case for continuation vehicles.”

Flexible Participation: Should I Stay or Should I Go?

Legacy LP investors can answer this question for themselves by participating at a level that best aligns with their individual investment objectives and liquidity needs. For example, the investor may be looking for a liquidity event to finance the purchase of a new home or pay for a child’s college education. In some cases, that means cashing out a portion of their holdings while channeling some assets into the new fund. Continuation vehicles give investors the flexibility to tailor their portfolios and access liquidity in alignment with their specific goals.

“LPs receive a tender offer where they get the benefit of access to the new vehicle—partially or wholly—that they wouldn’t get if you were on the outside looking in,” explains Krikelas.

How Westmount Sources CV Opportunities

Westmount accesses this niche asset class by leveraging a longstanding relationship with a premier partner who aggregates multiple continuation vehicles in a single fund. This relationship not only affords investors access to a cadre of underlying businesses, but also the wisdom of multiple management teams who know the risk characteristics and behavioral patterns of each specific asset.

Taking the Next Step

Private market assets typically carry high investment minimums and require investors to have the right relationships, sourcing channels, and due diligence capabilities. To learn more about how we navigate these challenges on our clients’ behalf, call us at 310-556-2502 or visit westmount.com/alternatives.