A continuation vehicle transfers a portfolio company from an existing fund into a new vehicle, giving existing LPs a choice between taking liquidity at a market price or rolling into the new structure for continued exposure. Secondary buyers provide the capital to cash out departing LPs.
For GPs, the structure avoids a forced sale of a strong asset when the fund term runs out. For LPs, it offers a clean decision point with real options. For secondary buyers, it provides access to known, de-risked assets with aligned GP economics.
GP-led secondaries have grown into one of the most active segments of the private markets. As fund terms expire with strong-performing assets still in portfolio, continuation vehicles have become a standard tool for managing the tension between fund lifecycle constraints and investment timelines.
How Continuation Vehicles Work
The GP forms a new fund vehicle and transfers one or more portfolio companies from the existing fund into it. Existing LPs elect to either sell their interest (receiving cash) or roll into the new vehicle. New capital from secondary buyers funds the liquidity for selling LPs.
Step 1: The GP evaluates the opportunity. The GP identifies one or more portfolio companies that would benefit from continued ownership, typically because there is a clear value creation path that needs more time than the original fund allows.
Step 2: Pricing and structuring. The transaction needs a price. This may involve third-party valuation, a competitive bidding process among secondary buyers, or a combination. The GP structures the new vehicle's terms, including carried interest, management fees, fund term, and governance.
Step 3: LP notification and election. Existing LPs receive disclosure materials explaining the transaction, the price, the new vehicle terms, and their options. LPs typically have a defined window to elect to sell, roll, or partially do both.
Step 4: Closing. Secondary buyers commit capital to the new vehicle. Selling LPs receive cash distributions from the original fund. Rolling LPs transfer their interest into the new vehicle. The portfolio company moves to the continuation vehicle's books.
Step 5: Ongoing management. The GP manages the continuation vehicle under its new terms until exit, distributing proceeds to investors according to the new vehicle's waterfall.
Key Parties and Their Interests
The GP
The GP initiates the transaction and manages the process. Their interests include maintaining management of a strong asset, resetting or continuing economic terms (carry, fees), and demonstrating continued conviction by committing capital to the new vehicle.
The GP is typically on both sides of the transaction, which creates inherent conflicts that need to be managed through process, disclosure, and governance.
Existing LPs
Existing LPs are being offered a choice they did not originally underwrite. Some want liquidity after a long hold period. Others have conviction in the asset and want to maintain exposure. The key for LPs is having enough information and time to make an informed election.
LP considerations include current liquidity needs, conviction in the asset's continued upside, the new vehicle's fee and carry terms, tax implications of selling versus rolling, and whether the transaction price reflects fair value.
Secondary Buyers
Secondary buyers provide the capital that makes the transaction work. They underwrite the asset independently, evaluate the GP, and negotiate terms for the new vehicle. Their participation validates the pricing and provides a market check.
Secondary buyers look for strong assets with clear value creation trajectories, aligned GP economics (particularly GP commitment to the new vehicle), reasonable entry pricing relative to the asset's potential, and a clean governance structure.
Portfolio Companies
The portfolio company itself is affected by the transaction, though its operations typically continue unchanged. Board composition may shift, governance documents may need consent provisions addressed, and management teams sometimes see changes to equity incentive arrangements as part of the restructuring.
Deal Structures
Single-Asset Continuation Vehicles
A single-asset CV transfers one portfolio company into a new vehicle. This is the most common structure when a GP has a clear standout performer that warrants dedicated, continued management.
Single-asset deals offer pricing simplicity (one company to value), clearer investment thesis for secondary buyers, and direct alignment between GP economics and asset performance. The tradeoff is concentration risk for investors in the new vehicle. For a deeper comparison, see Single-Asset vs. Multi-Asset Continuation Vehicles.
Multi-Asset Continuation Vehicles
A multi-asset CV transfers two or more companies into a single new vehicle. This structure suits situations where no single asset justifies standalone treatment, the fund is winding down with several remaining positions worth continued management, or assets benefit from being managed together.
Multi-asset vehicles introduce more complexity in pricing (multiple companies to value), LP decision-making (harder to evaluate a basket), and secondary buyer diligence. They can also raise questions about whether weaker assets are being packaged with stronger ones.
GP-Led vs. LP-Led Dynamics
Continuation vehicle transactions are typically GP-led, meaning the GP identifies the opportunity and drives the process. However, LPs sometimes initiate the conversation, particularly when they see value in a portfolio company but recognize the fund is nearing its term. Regardless of who initiates, the core mechanics are the same: forming a new vehicle, pricing the assets, giving LPs an election, and bringing in new capital.
Pricing and Valuation
The price at which assets transfer from the old fund to the new vehicle drives the entire transaction. It determines what selling LPs receive, what entry point new investors get, and how much carry the GP crystallizes.
Common approaches to establishing price include engaging third-party valuation firms, running a competitive process among secondary buyers, obtaining fairness opinions, and using recent financing rounds or comparable transactions as benchmarks.
The approach varies by transaction. Some GPs run a full auction process; others work with a single lead secondary buyer and use independent valuation to support the price. The process should be transparent, the methodology defensible, and LPs should have enough information to evaluate the price in the context of their election decision.
LPAC (Limited Partner Advisory Committee) involvement is common in pricing oversight, though the specific role depends on the fund's governing documents and the transaction's structure.
LP Election Mechanics
Existing LPs typically have three options. For a detailed breakdown of the election decision, see LP Elections in Continuation Vehicles.
Sell. Take cash at the transaction price and exit the investment entirely. This triggers a taxable event.
Roll. Transfer their interest into the new vehicle on the same economic basis as new investors (or on negotiated terms). Rolling typically allows tax deferral, though structures vary.
Partial election. Sell a portion and roll the rest. Not always available, depending on minimum thresholds and transaction structure.
LPs receive disclosure materials outlining the transaction terms, the asset's investment case, the new vehicle's economics, and the election timeline. The election period varies but should provide enough time for LPs to evaluate the opportunity, consult advisors, and make an informed decision.
What happens to non-electing LPs depends on the fund documents and the transaction structure. In some cases, non-election defaults to selling. In others, the GP specifies a default in the transaction materials. LPs should review this carefully.
GP Economics in the New Vehicle
The GP's economic terms in the continuation vehicle are a central negotiation point.
Carried Interest
Carry treatment generally follows one of two approaches:
Crystallization. The GP's accrued carry on the transferred assets is calculated and either paid out or rolled into the new vehicle. The new vehicle starts with a fresh carry arrangement.
Rollover. The GP rolls accrued carry into the new vehicle, effectively deferring economics until the new vehicle generates returns above its hurdle.
The structure affects GP alignment with new vehicle investors. Secondary buyers typically prefer meaningful GP carry rollover because it demonstrates continued economic alignment.
Management Fees
The new vehicle has its own fee arrangement. Fee structures vary and are part of the negotiation with secondary buyers and rolling LPs.
GP Commitment
The GP's capital commitment to the new vehicle signals conviction. Secondary buyers and rolling LPs evaluate this as part of their decision-making.
Regulatory and Fiduciary Considerations
Continuation vehicle transactions involve the GP acting on both sides, which creates fiduciary obligations that need careful attention.
Disclosure. The GP should provide full disclosure about the transaction, including potential conflicts, the pricing methodology, the new vehicle's terms, and any arrangements that differ between parties.
Process integrity. A well-run process, with appropriate governance, pricing validation, and adequate LP election periods, supports the GP's fiduciary obligations and reduces the risk of LP disputes.
Fund document compliance. The original fund's LPA may contain provisions relevant to the transaction, including consent requirements, conflict procedures, LPAC consultation obligations, or restrictions on related-party transactions. Review these carefully before structuring the deal.
Adviser obligations. Depending on the GP's regulatory status (RIA, ERA, or state-registered), adviser-level compliance considerations may apply, including conflict disclosure, books and records obligations, and potentially updating Form ADV.
Administration and Operations
Once a continuation vehicle closes, the operational work begins. The new vehicle requires its own fund administration infrastructure.
Entity formation and setup. The CV needs its own legal entities, bank accounts, tax identification numbers, and registered agent arrangements. See Funds vs. SPVs for how vehicle type affects setup.
Investor onboarding. New investors complete subscription documents and KYC/AML checks. Rolling LPs may need to execute new subscription agreements for the continuation vehicle.
Fund accounting. The CV requires its own general ledger, separate from the original fund. Opening balances reflect the transaction price, and ongoing accounting tracks the new vehicle's economics.
LP reporting. Investors in the continuation vehicle receive their own capital account statements, performance reports, and tax documents (K-1s). Rolling LPs should see a clean transition from old fund reporting to new vehicle reporting.
Tax filings. The CV files its own partnership tax return and issues K-1s to its partners. The original fund handles the tax consequences of the asset transfer on its side.
Ongoing compliance. Regulatory filings (Form D, blue sky filings, Form ADV updates) may be required for the new vehicle.
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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.