When a continuation vehicle transaction is announced, every existing LP faces a decision: take cash now at the transaction price or roll into the new vehicle for continued exposure to the asset. The decision depends on more than conviction in the company. Liquidity needs, portfolio construction, fee economics, tax consequences, and the new vehicle's terms relative to the original fund all factor in.
The Election Options
Sell
Selling LPs receive cash for their pro rata share of the transferred assets at the transaction price. They exit the investment entirely.
When selling makes sense: The LP needs liquidity, has concerns about the asset's forward trajectory, wants to redeploy capital elsewhere, or believes the transaction price adequately reflects fair value.
Selling triggers a taxable event. The LP should evaluate after-tax proceeds, not just the headline price. If the LP has a low cost basis, the tax hit can be meaningful. See Tax Considerations in CV Transactions for detail on capital gains treatment and basis calculations.
Roll
Rolling LPs transfer their interest into the new vehicle. They maintain exposure to the asset under the continuation vehicle's terms, including its new fee structure, carry arrangement, and fund term.
When rolling makes sense: The LP has conviction in the asset's continued upside, the new vehicle terms are acceptable, the LP does not need near-term liquidity, and the tax cost of selling is material.
Rolling means accepting a new set of fund terms. The carry may be higher, the fees may be structured differently, and the GP's economics in the new vehicle may differ from the original fund. The LP should evaluate the new terms as if considering a new investment at the transaction price.
Partial Election
Some transactions allow LPs to sell a portion of their interest and roll the rest. This provides partial liquidity while maintaining some exposure. Partial elections are not always available. They depend on transaction structure, minimum thresholds, and administrative feasibility. When offered, they give LPs more flexibility, but they add operational complexity to the transaction.
Factors LPs Should Consider
Conviction in the Asset
The starting point is whether the company is worth more than the transaction price and whether the GP will create that additional value within the new vehicle's time horizon.
- The company's current performance
- The GP's track record with this specific company
- The proposed value creation plan
- Realistic exit scenarios and timelines
Liquidity Needs
Some LPs have portfolio-level liquidity constraints that make selling the right choice regardless of their view on the company. Fund-of-funds may have their own distribution obligations. Institutional allocators may be rebalancing their private markets exposure. Individual LPs may need cash for other purposes.
Fee and Carry Economics
Rolling into a continuation vehicle means accepting a new fee and carry arrangement. LPs should calculate the impact of fees and carry on their net returns in the new vehicle.
If the new vehicle charges fees on NAV and takes carry above a hurdle, the LP's net return needs to exceed the hurdle plus the cumulative fee drag. An asset that generates a solid gross return can produce a materially lower net return after fees and carry, particularly in a vehicle with a short hold period.
Tax Implications
The tax consequences of selling versus rolling can significantly affect the economic outcome.
Selling typically triggers a capital gains event. The gain is the difference between the transaction price and the LP's tax basis in the transferred assets.
Rolling may allow tax deferral if the transaction is structured appropriately. The LP's tax basis carries over to the new vehicle, and no gain is recognized until the CV ultimately exits the investment.
The actual tax treatment depends on the transaction structure, the LP's tax status (taxable, tax-exempt, foreign), and the specific entities involved. LPs should consult their tax advisors before making an election.
The New Vehicle's Terms
LPs should evaluate the continuation vehicle's terms as they would any new investment. Key areas include:
- Fund term and lock-up period
- The fee structure
- The carry and hurdle arrangement
- The GP's commitment to the new vehicle
- Governance and information rights
- Whether terms differ between rolling LPs and new investors
Transaction Price
LPs should evaluate whether the price reflects fair value. Consider how the price was established, whether it reflects a competitive process or a negotiated deal, how it compares to recent valuation marks, and whether independent validation was obtained.
The price is the most important input for both selling and rolling LPs. Selling LPs receive it as cash. Rolling LPs use it as their effective entry point for evaluating future returns.
The Election Process
LPs typically receive a package of disclosure materials including:
- A description of the transaction
- Company performance data and the investment thesis
- The new vehicle's terms
- Details on pricing methodology
- Conflicts of interest disclosure
- The election form with deadlines
The election period gives LPs a defined window to make their decision. LPs should use this time to review materials, model returns under different scenarios, consult tax and legal advisors, and submit their election before the deadline.
What Happens if an LP Does Not Elect
Non-electing LPs are treated according to the transaction's default provision. This varies: some transactions default non-electing LPs to selling, others to rolling. The default should be clearly stated in the disclosure materials. LPs should not rely on the default; making an active election ensures the intended outcome.
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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.