If you’ve been around this industry for more than a few years, you’ve watched the classic private equity playbook stop working the way it used to. Buy a company, spend five to seven years improving it, sell it or take it public, return the capital, raise the next fund. That model still exists on paper. In practice, it’s no longer the default plan sponsors underwrite to. More and more, GPs are reaching for a tool that used to sit on the fringe of the industry: the continuation vehicle.

Where this used to sit

For most of my career, continuation vehicles were a niche move. You saw them in distressed situations, or on assets nobody else particularly wanted to buy. That’s changed. Today, sponsors use them on their best companies, not their hardest ones, and it’s becoming normal for LPs to expect at least one continuation option before a fund fully winds down.

Why that’s a problem worth paying attention to

Here’s the part that should give any LP pause. A continuation vehicle isn’t a normal sale. The GP sits on both sides of the table, selling as manager of the old fund and buying as manager of the new one. That’s a real conflict of interest, built into the structure itself. It doesn’t mean the deal is bad. It means you can’t take the price at face value just because the sponsor says it’s fair.

What’s actually driving this

None of this happened by accident. Three things pushed continuation vehicles from a rare tool into a standard one.

• IPO windows got unreliable. Betting on a public listing as your exit plan is a much shakier bet than it was a decade ago, so sponsors need a backup that doesn’t depend on the market cooperating.
• Buyers got pickier and slower. Strategic and financial acquirers take longer to commit and walk away more easily than they used to, which stretches hold periods well past what the fund originally modeled.
• LPs need their own liquidity. Distributions have slowed across the industry, and LPs are pushing GPs to find a way to return cash on assets that are doing fine but just aren’t ready, or the right fit, for a full sale.

What LPs should actually do about it

You don’t need to reject every continuation offer that lands on your desk. You need a short list of questions that tell you whether the process behind it deserves your trust.

• Was the price actually tested? Ask whether there was an independent fairness opinion, a competitive process with outside secondary buyers, and a real vote from the LP advisory committee. If any of those three are missing, ask why.
• Why now, specifically? A good continuation thesis explains what changes in the next hold period that didn’t happen in the last one. “We still like the company” is not a thesis. It’s a feeling.
• What do the numbers look like on both sides? Compare the new fee and carry terms, the entry price for LPs who roll forward, and the exit price for LPs who cash out. Look at all three together, not one at a time.

A quick example

Picture a mid-market buyout fund holding a healthcare services company for six years. The business is growing nicely, but the fund is at the end of its life and needs to return capital. Instead of forcing a sale into a soft M&A market, the sponsor rolls the company into a continuation vehicle backed by a new secondary investor, at a price set through a competitive process with three outside bidders. LPs who want out get paid at that tested price. LPs who believe in the next chapter can roll forward at the same terms. That’s the version of this transaction that works. The version to worry about is the one where the GP sets the price internally, tells the LPs it’s fair, and calls it a day.

The bottom line

Continuation vehicles aren’t good or bad on their own. They’re a structure, and structures are only as trustworthy as the process behind them. The sponsors worth backing again are the ones who make that process transparent without being asked twice.

The lesson

If you remember one thing from this, make it this: ask how the price was set before you ask what the price is. The number matters, but the process behind it tells you whether you can actually trust that number.

Evaluating a continuation offer, or structuring one as a sponsor? Discuss a mandate →