Continuation funds boom, but scrutiny grows over governance

Continuation funds and single-asset continuation vehicles have surged into the mainstream of private equity secondaries, with deal volumes hitting a record $109 billion in 2025 and projected to more than triple to over $330 billion annually by 2035, according to Schroders Capital. This explosive growth reflects a fundamental structural shift away from traditional sponsor-to-sponsor secondary buyouts toward manager-led continuation vehicles, which allow general partners to retain control and inject fresh capital into high-performing assets, effectively extending investment horizons beyond conventional fund life cycles.

The rise of manager-led continuation vehicles is reshaping private equity’s portfolio management philosophy, moving from the classic five-to-seven-year exit cycle toward longer-term hold and evergreen fund structures. Industry voices like Jane Trueper highlight that fund terms now increasingly emphasize current yield and operating cash flow over a single back-end capital event, with operationally intensive assets such as data centers and healthcare-adjacent facilities particularly suited to this compounding value strategy. This evolution is not merely reactive to market conditions but is becoming a mainstream approach among both first-time and seasoned sponsors.

By early 2026, manager-led continuation funds dominated private asset secondary deal flow, driving a record $121 billion in transactions during H1 2026 and accounting for approximately 5% of medium- and large-sized buyout deal flow over the next decade. This dominance extends into credit secondaries, where GP-led transactions comprised 83% of the $20.4 billion market in H1 2026, signaling broad market adoption and a structural shift toward GP-led secondary strategies that optimize mature portfolios and extend asset duration amid macroeconomic headwinds.

The proliferation of continuation funds also addresses the challenge of record-high assets locked up in aging funds, with U.S. buyout funds holding $348.5 billion in NAV over ten years old by end-2025. As high interest rates, valuation gaps, and a stagnant IPO market delay traditional exits, continuation vehicles provide liquidity options for limited partners increasingly focused on cash distributions rather than paper returns. This shift is underscored by McKinsey’s finding that 54% of LPs now prioritize the Distributed to Paid-In (DPI) cash multiple, reinforcing continuation funds as a vital tool for aligning GP and LP interests in a transformed exit landscape.

Continuation vehicles have become pivotal tools for private equity firms to manage liquidity and optimize mature portfolios amid challenging exit environments marked by high interest rates and stagnant IPO markets. By transferring assets into new vehicles, GPs provide existing LPs with liquidity options while extending holding periods to capitalize on operational improvements and steady cash flows, a strategy exemplified by infrastructure continuation vehicles securing billion-dollar deals and reshaping fundraising dynamics. This approach aligns with LPs’ shifting priorities toward realized cash distributions over paper returns, as highlighted by Korea’s National Pension Service emphasizing opportunity cost and cash realization in its evaluation framework.

The rise of evergreen and long-hold fund models reflects a strategic evolution from traditional five-to-seven-year exit cycles to patient ownership frameworks that prioritize operational value creation. Jane Trueper notes that fund documents increasingly incorporate longer investment horizons and distribution waterfalls favoring current yield and operating cash flow, particularly benefiting operationally intensive real estate assets like data centers and healthcare-adjacent facilities. This shift is driven both by market conditions limiting exit opportunities and by sponsors intentionally designing funds to nurture assets over extended periods, enabling durable distributions and enhanced portfolio resilience.

In the credit secondaries market, which more than doubled to $20.4 billion in H1 2026 with GP-led transactions comprising 83% of volume, continuation vehicles serve as vital mechanisms to provide LP liquidity, extend asset duration, and optimize portfolio composition amid redemption pressures on business development companies. Sponsors are increasingly evaluating secondary transactions to address persistent redemption requests, signaling a broader adoption of continuation strategies beyond traditional private equity into credit markets, thereby enhancing flexibility for both GPs and LPs in managing mature portfolios.

Continuation vehicles also underpin 'hold and grow' strategies by enabling GPs to retain and scale high-performing assets while offering liquidity to early investors, as demonstrated by Blue Sea Capital’s single-asset continuation fund for One Physics. This vehicle provided a fresh five-year investment runway and capital to pursue aggressive growth through 22 acquisitions, consolidating fragmented medical physics practices into a national powerhouse. By attracting new investors like Apogem Capital and Churchill Asset Management, continuation funds reduce blind-pool risk and facilitate portfolio optimization in mission-critical sectors, marking a fundamental shift toward patient, value-driven asset management.

By early 2026, GP-led continuation funds have surged past $100 billion in assets, spotlighting the delicate balance between providing liquidity and upholding robust governance standards. Private equity firms are increasingly navigating conflicts of interest through rigorous disclosure protocols and auction processes to maintain investor trust and regulatory compliance, reflecting a heightened market emphasis on transparency and ethical management.

The layering of special purpose vehicles (SPVs) within continuation structures has raised significant governance and valuation concerns reminiscent of pre-2008 financial complexities, where opaque fee stacking and diminished transparency obscured true asset value. Industry voices caution that SPVs driven by genuine investment theses differ markedly from those primarily designed to repackage assets for sale, underscoring the importance of provider expertise and investor due diligence to avoid conflicts and misaligned incentives.

Regulatory scrutiny has intensified, with the SEC’s enforcement division probing continuation vehicles for conflicts of interest, asset valuation methodologies, and adequacy of investor disclosures. Matthew Malone of Opto Investments advises caution, highlighting governance red flags such as carry resets, outsized fees, and incentives that discourage market transactions, especially in single-asset continuation vehicles where outside investors often lack sufficient insight into the underlying business.

In response to these governance challenges, some industry participants, including Opto Investments, favor LP-led secondaries managed by independent third parties as a more investor-aligned alternative to GP-led continuation vehicles. This structure enhances price negotiation on behalf of investors and mitigates conflicts inherent in GP-led deals, reflecting a broader market shift toward transparency and fiduciary responsibility in private equity secondaries.