The economics of a continuation vehicle determine how value is shared between the GP, rolling LPs, and new investors. The assets are known, the hold period is typically shorter than a primary fund, and each party has a different reference point for what constitutes fair terms. Carry treatment, fee structure, GP commitment, and hurdle rates are all negotiated against that backdrop.
Carried Interest
Carry drives the core economic negotiation in a CV. Two key questions shape the discussion: what happens to carry accrued in the original fund, and what carry arrangement applies in the new vehicle.
Accrued Carry Treatment
When assets transfer from the old fund to the new vehicle, the GP typically has unrealized carry associated with those assets. There are several approaches to handling it.
Full crystallization. The GP's carry on the transferred assets is calculated at the transaction price and either paid out from the original fund or treated as realized. The new vehicle starts with a clean slate.
Partial crystallization. A portion of accrued carry is crystallized, with the remainder rolled into the new vehicle or forfeited.
Full rollover. The GP rolls all accrued carry into the new vehicle, effectively deferring their economics until the CV generates returns. This demonstrates maximum alignment with new vehicle investors.
Each approach has tradeoffs. Full crystallization gives the GP liquidity and certainty but may reduce alignment. Full rollover maximizes alignment but means the GP has significant deferred economics in the new vehicle. Transactions frequently land somewhere in between, negotiated based on the specific circumstances.
Secondary buyers pay close attention to carry treatment. A GP who rolls meaningful carry into the new vehicle is signaling that they believe in the asset at the transaction price and expect to generate returns beyond the hurdle.
New Vehicle Carry
The continuation vehicle has its own carry arrangement, which may differ from the original fund. Key parameters include:
- The carry percentage
- The hurdle rate (preferred return threshold before carry kicks in)
- The waterfall structure (deal-by-deal vs. whole fund)
- Catch-up provisions
Because CV assets are known and typically later-stage, the risk profile differs from a blind-pool primary fund. This can affect how carry terms are negotiated. Secondary buyers and rolling LPs evaluate the new vehicle's carry in the context of the expected hold period, the asset's maturity, and the GP's overall economic package.
Management Fees
The new vehicle needs a fee structure to compensate the GP for ongoing management. Fee arrangements in CVs vary based on the asset type, expected hold period, and negotiation dynamics.
Common fee bases include NAV (net asset value) of the portfolio, committed capital, and invested capital. The fee basis can step down over the vehicle's life, reflecting the expectation that management intensity decreases as the asset approaches exit.
The fee structure should be proportionate to the GP's expected workload and the vehicle's economics. LPs and secondary buyers evaluate fees in the context of the total GP compensation package (fees plus carry) and the expected return profile.
GP Commitment
The GP's capital commitment to the continuation vehicle is both an economic term and an alignment signal. It represents real capital at risk alongside investors.
GP commitment in a CV can come from several sources:
- New cash commitment from the GP
- Rollover of existing GP commitment from the original fund
- Rollover of accrued (but unrealized) carried interest
The source matters to investors. New cash commitment is the strongest signal of conviction. Carry rollover demonstrates alignment but represents money the GP has not yet received. How the GP funds their commitment is often a discussion point with secondary buyers.
Hurdle Rates and Waterfalls
Hurdle Rates
Most CVs include a preferred return (hurdle rate) that investors earn before the GP participates in carry. The hurdle rate reflects the return threshold that investors expect before the GP shares in profits.
Waterfall Structures
The distribution waterfall determines how proceeds flow between investors and the GP. CV waterfalls follow the same general principles as primary fund waterfalls: return of capital, preferred return to investors, GP catch-up (if applicable), and residual split between investors and GP based on carry percentage.
Because CVs typically hold fewer assets and have shorter terms than primary funds, the waterfall mechanics may be simpler. Single-asset CVs effectively operate as deal-by-deal waterfalls by default, since there is only one investment. The GP clawback mechanism also works differently in a single-asset context, where there is no cross-subsidization risk across investments.
How CV Economics Differ from Primary Funds
Known assets vs. blind pool. Investors in a CV know exactly what they are investing in. This changes the risk profile and the basis for negotiating terms.
Shorter expected hold. CVs typically have shorter terms than primary funds, reflecting the later-stage nature of the assets. This compresses the period over which fees are charged and carry is earned.
Mature value creation. The core value-creation work on many CV assets has already been done. The remaining work may involve different activities (preparing for exit, improving operations) than the original investment required (scaling, market development).
Multiple investor classes. CVs often have rolling LPs (who entered at the original fund's cost basis) and new investors (who entered at the transaction price). How economics apply to each class can be a structuring consideration.
Alignment Considerations
The best CV economic structures align the GP's incentives with investor outcomes. Key alignment indicators include a meaningful GP capital commitment (not just carry rollover), carry structures that reward performance above a reasonable hurdle, fee arrangements proportionate to the expected workload, and terms that treat rolling LPs and new investors fairly relative to their entry economics.
LPs and secondary buyers should evaluate the total economic package rather than any single term in isolation. A higher carry percentage with a meaningful hurdle and substantial GP commitment may be more aligned than a lower carry percentage with minimal GP capital at risk.
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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.