Continuation Funds: Why GPs Are Holding Their Winners Longer

Venture and private equity funds are designed to end. After roughly ten years, a fund is supposed to sell its investments and return capital to its limited partners. But what happens when a fund's best company still has years of growth ahead, and the exit market is slow?

Increasingly, the answer is a continuation fund. The general partner moves one or more assets from the old fund into a new vehicle, giving existing LPs the choice to cash out or keep their exposure, while new investors provide fresh capital. Long common in private equity, continuation funds are now spreading into venture capital.

1. How a Continuation Fund Works

1. The GP identifies one or more assets it wants to keep holding.
2. A new continuation vehicle is created, often backed by specialist secondary investors.
3. The assets are sold from the old fund to the new vehicle at an agreed price.
4. Existing LPs choose to sell their share and receive cash, or roll their interest into the new vehicle.
5. The GP continues to manage the assets, usually with new fee and carried interest terms.

Deals can involve a single asset or a portfolio of several companies.

2. Why They Are Growing

• Slow exit markets. When IPOs and acquisitions are limited, continuation funds provide liquidity without forcing a sale.
• Holding winners longer. GPs can keep backing their best companies rather than selling too early.
• LP demand for liquidity. Many LPs want cash back from older funds to meet commitments and rebalance portfolios.
• A deeper secondary market. Specialist secondary buyers have raised large amounts of capital to invest in these deals. See secondaries and tender offers.

3. The Conflict of Interest

In a continuation fund, the GP effectively sits on both sides of the transaction: selling from the old fund and buying for the new one. It also typically earns new fees and a fresh carried interest opportunity. That creates a clear potential conflict, particularly over the price.

Industry groups such as the Institutional Limited Partners Association have published guidance on GP-led secondaries, recommending safeguards like:

• Independent pricing, often through a competitive process or fairness opinion.
• Advisory committee review of the transaction.
• Enough time and information for LPs to make a considered decision.
• A genuine choice to sell or roll, without penalties.
• GP commitment, often rolling their own carried interest or investing new money into the vehicle.

4. How LPs Should Evaluate an Offer

1. Is the price fair? Compare against recent valuations and the process used to set the price.
2. What are the new terms? Check fees, carried interest, duration and hurdle rates in the new vehicle.
3. How much is the GP investing? Significant GP commitment aligns interests.
4. What is the asset's outlook? Rolling makes sense only if you believe in the company's future.
5. What do you need? Your own liquidity needs and portfolio strategy may favour selling or rolling.

For fund economics more broadly, see how VC funds make money.

Frequently Asked Questions

Do LPs have to participate?

No. LPs typically choose to sell their interest for cash or roll into the new vehicle.

Are continuation funds good for LPs?

They can be, by offering liquidity and continued exposure to strong assets. Their value depends on fair pricing, transparent terms and GP alignment.

Why would a GP use a continuation fund instead of selling the company?

To keep backing a company it believes has more upside, especially when exit markets are weak or the fund's term is ending.

Are continuation funds common in venture capital?

They are more established in private equity but have become increasingly common in venture capital as holding periods have lengthened.

The Bottom Line

Continuation funds let GPs keep their best assets while giving LPs a choice of liquidity or continued exposure. They are a useful tool in slow exit markets, but the GP's conflict of interest means LPs should scrutinise pricing, terms and alignment carefully before deciding. See also becoming an LP.

Global Capital Network connects LPs, GPs and secondary investors through our events and investor network. Get in touch to learn more.

This article is general information, not investment advice.