When a fund is approaching maturity, managers must find ways to liquidate their positions. One option is to take certain companies public through a stock market listing. They can also sell them to other companies or to other private equity funds.
In some cases, fund managers are unable to find buyers or obtain a satisfactory price for the companies they wish to sell. In other cases, the private companies held by these funds are excellent businesses whose growth potential remains attractive. In such situations, private equity firms have the option of selling the companies to themselves through a new fund known as a “continuation fund” (or “continuation vehicles”). As with the original fund, the continuation fund must raise capital from investors. Within this fund, the “transferred” companies will continue to be managed by the same manager, who will eventually seek to sell the company in a few years’ time, once the right valuation or its full potential has been reached.
I often hear about private equity funds, but rarely about continuation funds.
Over the last few years, I have noticed a trend that raises some questions. According to Jefferies, 14% of private equity exits were redirected to continuation vehicles in 2025. In 2020 and 2021, that figure was only 5%.
Source: 2025 Global Secondary Market Review: Another Record-Breaking Year | Jefferies.com
Continuation funds are not new; they have existed for decades. In my view, they are entirely logical when a manager owns a high-quality asset whose long-term growth potential remains evident. In such cases, the manager may not want to part with it.
Nevertheless, I doubt that all the 14% of assets transferred to continuation funds were high-quality assets.
Some may argue that higher interest rates, economic and political uncertainty, and market volatility made it more difficult to sell companies at appropriate valuations. I acknowledge that liquidity in the markets was weaker over the last few years, as evidenced, for example, by the relatively low number of initial public offerings (IPOs). Today, the situation appears to be improving and liquidity has returned. We can also observe a revival in capital markets activity, including renewed investor interest in IPOs. Even so, the recent increase in transfers to continuation funds leads me to believe that there were probably abuses over the last few years.
When a company is sold to a continuation fund, the transaction can be recorded as a realization within the calculation of a fund’s returns. I see a conflict of interest here, since managers have every incentive to sell a company at an attractive price to a continuation fund. As a result, the use of these funds may artificially sustain the high returns reported by private equity firms, making them appear more successful than they truly are. Moreover, it is a simple way to “kick the can down the road” when dealing with an underperforming portfolio company.
This dynamic raises several questions: are the returns generated by private equity funds, in some cases, overstated? Were sales to continuation funds conducted at fair prices? What is the true quality of the companies held within these continuation funds? Have some managers taken advantage of this loophole?
Continuation funds are not necessarily problematic. They meet a genuine need when the value-creation process of a company is not yet complete. However, their growing use raises legitimate questions. Time will tell whether this trend continues to accelerate or eventually reverses. I hope it reverses, because excesses always end up creating problems.
Jean-Philippe Legault, CFA
Senior Portfolio Manager at COTE 100
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