In most continuation vehicle transactions, the GP is on both sides: representing the existing fund as seller and structuring the new vehicle as buyer. Even in LP-initiated transactions, the GP typically runs the process. That dual role creates conflicts around pricing, economics, and information access that require careful management. Good process protects the GP, reassures LPs, and helps secondary buyers get comfortable with the transaction.
The Core Conflict
In a traditional exit, the GP's job is straightforward: maximize value for the fund's LPs. The GP and LPs are on the same side, and the buyer is an unrelated third party negotiating at arm's length.
In a continuation vehicle, the GP has interests that diverge from a pure sale mandate. The GP wants to continue managing the asset, preserving management fees and carry. The GP influences the transfer price, which affects both what selling LPs receive and what entry point the GP and rolling LPs get in the new vehicle. And the GP negotiates the new vehicle's economic terms, which directly benefit the GP.
The GP needs to demonstrate that the process was fair, the price was reasonable, and LPs had enough information to make an informed election.
Pricing Conflicts
Price is where conflicts are most acute. A lower price benefits the GP (better entry point in the new vehicle, more upside potential) and new investors while disadvantaging selling LPs. A higher price benefits selling LPs but gives rolling LPs and secondary buyers a less favorable entry.
Managing Pricing Conflicts
Third-party valuation. Engaging an independent valuation firm to assess the asset provides an external reference point. This is not mandatory in every transaction, but it adds credibility to the pricing process.
Competitive bidding. Running a process with multiple secondary buyers introduces market-based price discovery. When multiple parties are bidding on the asset, the resulting price carries more weight than a negotiated deal with a single buyer.
Fairness opinions. Some transactions include a fairness opinion from an independent advisor confirming that the transaction price is fair to selling LPs. This is more common in larger transactions.
LPAC engagement. The Limited Partner Advisory Committee often plays a role in reviewing the pricing methodology and potential conflicts. The extent of LPAC involvement depends on the fund's governing documents and the transaction's specifics.
The right approach depends on the transaction. A large, institutional CV with significant LP capital at stake may warrant a full competitive process with independent valuation. A smaller transaction may rely on a single secondary buyer's bid supported by the GP's internal valuation work. The approach should be proportionate, disclosed, and documented.
Economic Conflicts
The GP negotiates the new vehicle's terms, and those terms directly benefit the GP. This creates potential tension around several economic elements.
Carry structure. Whether the GP crystallizes accrued carry (taking economics off the table) or rolls it into the new vehicle (maintaining alignment) is a significant factor for both LPs and secondary buyers.
Management fees. The fee structure in the new vehicle determines the GP's ongoing compensation. Fees that reset at a higher rate or on a different basis than the original fund raise questions about whether the GP is using the transaction to improve its own economics.
GP commitment. The GP's capital commitment to the new vehicle signals how much capital at risk the GP has alongside investors. A meaningful commitment demonstrates alignment. A minimal commitment may raise questions about the GP's conviction.
Transparency matters here. LPs and secondary buyers should understand the full economic picture, including how the GP's economics compare to market norms and to the original fund's terms.
Information Asymmetry
The GP knows more about the portfolio company than LPs or secondary buyers. This information advantage is inherent in fund management, but it becomes more consequential in a CV transaction where LPs are making an irreversible election decision.
Managing Information Asymmetry
Detailed disclosure materials. LPs making election decisions need enough information to evaluate the asset independently. This means providing detailed company performance data, the investment thesis for continued ownership, financial projections and key assumptions, and the new vehicle's complete terms. LPs should be able to review these documents with their own advisors.
Adequate election periods. LPs need enough time to review materials, consult advisors, and make a considered decision. Compressed timelines can disadvantage LPs who need more time to evaluate the opportunity.
Access to management. In some transactions, LPs or their advisors have opportunities to interact with portfolio company management or the GP's deal team to ask questions and develop their own view.
Structural Conflicts
Other structural elements can create conflicts:
Different terms for different investors. If secondary buyers negotiate terms that differ materially from what rolling LPs receive, this creates an asymmetry. For example, if new investors receive preferential economics, governance rights, or information rights that rolling LPs do not get, this should be disclosed and justified.
Default elections. How non-electing LPs are treated matters. If the default is to sell, LPs who miss the deadline lose their option to roll. If the default is to roll, they may end up in a vehicle they have not evaluated. The default should be clearly communicated in the election materials.
Expense allocation. Transaction costs can be significant. How they are allocated between the original fund, the new vehicle, the GP, and secondary buyers affects net returns for each party.
Best Practices for GPs
Document the process. Keep records of how and why the transaction was initiated, how the price was established, what alternatives were considered, how conflicts were identified and managed, and what disclosure was provided to LPs.
Be transparent about economics. Disclose the carry treatment, fee arrangement, and commitment to the new vehicle. LPs and secondary buyers will evaluate these carefully.
Give LPs real choices. An election with inadequate information or insufficient time is not a meaningful election. Invest in the disclosure materials and the process. The fund's LPA may also specify procedural requirements that the GP must follow.
Align interests visibly. A meaningful GP commitment to the new vehicle is the single strongest signal that the GP believes in the asset at the transaction price.
This content is for informational purposes only and does not constitute legal, tax, or compliance advice. Consult qualified counsel for guidance specific to your situation. Capital Company is not a law firm and does not provide legal advice.