Continuation Funds: Key Considerations for Sponsors and LPs in an Evolving Market

A continuation fund is a newly formed vehicle, organized by the same sponsor that manages the selling fund, into which selected portfolio assets are transferred. Continuation funds have become a central tool in private equity portfolio management because, among other things, they allow sponsors to extend their management of certain assets while offering existing investors the option of liquidity or continued participation. As such, continuation fund activity is expected to remain a significant feature of the private equity landscape moving forward.

Continuation fund transactions have also attracted heightened regulatory attention. The U.S. Securities and Exchange Commission's (SEC) Private Fund Adviser Rule would have required continuation fund sponsors to obtain a valuation or fairness opinion from an independent provider and disclose any material business relationships with that provider.¹ Although the Fifth Circuit vacated the Private Fund Adviser Rule in 2024,² the SEC's guidance remains instructive for understanding how regulators, limited partners, and their counsel may scrutinize continuation fund conflicts.

This alert provides an overview of continuation fund mechanics, the conflicts they present, and practical guidance for sponsors and investors to structure these transactions in compliance with contractual obligations, fiduciary duties, and evolving market standards.

Structure and Mechanics

In addition to allowing the sponsor to extend its management of one or more assets beyond the original fund's term, continuation funds allow sponsors to deploy additional capital, while providing existing investors an opportunity to: (1) sell their interests for cash, (2) roll into the continuation vehicle, or (3) pursue a combination of both.

Buyout funds represent the most common category for continuation fund transactions, followed by venture capital and growth equity vehicles. Single-asset transactions have gained particular traction as secondary buyers have become more comfortable underwriting concentrated positions in well-understood companies.

The Election Process

At the core of every continuation fund transaction is the election offered to existing investors: take liquidity or maintain economic exposure through the new vehicle. The Institutional Limited Partners Association (ILPA) recommends that investors receive at least 30 calendar days to evaluate the proposal. In practice, timelines are sometimes compressed, leaving institutional investors insufficient time to conduct diligence and secure internal approvals.³ This creates an issue for many institutional investors, and they often must treat continuation fund elections as new investment decisions requiring full investment committee review. Therefore, ILPA recommends that investors who fail to submit an election should default to liquidation rather than being involuntarily rolled into the new vehicle.

Lead Investor Role and Fund Terms

The incoming lead investor anchors the transaction by committing significant capital (often 15 percent – 30 percent of total vehicle capital), negotiating the governing documents, and driving pricing discussions. Lead investors typically negotiate expense caps and may secure consent rights over exit strategy and term extensions.

Continuation funds typically have defined terms with extensions of up to two years. Initial extensions generally require only sponsor approval, while subsequent extensions increasingly require investor or Limited Partner Advisory Committee (LPAC) consent. Fee step-downs upon extension have become more common. Lead investors frequently insist on clarity regarding the exit path and resist the prospect of a second continuation vehicle.

Managing Conflicts of Interest

The Inherent Conflict

Continuation fund transactions present an inherent structural conflict: the sponsor occupies a dual role as manager of the selling fund and organizer of the acquiring vehicle. The sponsor controls the formation and terms of the continuation vehicle, influences the valuation, and determines the economic terms under which it will continue to manage the assets. A transaction that resets carried interest entitlements, extends management fee revenue, or permits the sponsor to acquire additional interests at favorable prices creates obvious tension with existing investors who may be selling at a potentially undervalued price.

Because these transactions involve sales among affiliated entities, sponsors owe fiduciary duties under the Investment Advisers Act of 1940 to identify, disclose, and appropriately manage conflicts.

LPAC Engagement

The Limited Partner Advisory Committee plays a central governance role in continuation fund transactions, reviewing conflicts and overseeing the process to ensure fairness to existing investors. ILPA guidance emphasizes engaging the LPAC well in advance so members can assess the transaction rationale and proposed structure.

Sponsors should ensure the LPAC has sufficient time and information to review proposed terms before any formal vote on conflict waivers. Recent Delaware litigation has highlighted risks when sponsors restrict communication among LPAC members or push for expedited votes without adequate information sharing.⁴ All conflicts should be surfaced and cleared by the LPAC as they arise. Sponsors and investors should resist merely following LPA provisions granting blanket waivers for continuation fund conflicts at fund formation.

Fair Process as Protection

Running a transparent, well-documented process is both good governance and a practical safeguard against disputes. A robust process includes: engaging an experienced financial adviser to solicit and evaluate bids, obtaining an independent fairness opinion, providing equitable disclosure to all investors, and securing LPAC approval at appropriate junctures. Secondary market participants generally avoid transactions where the process appears compromised, reinforcing procedural rigor.

Valuation and Disclosure

Valuation is the most sensitive element of a continuation fund transaction. The sponsor must demonstrate that assets were priced fairly, typically through a competitive bid process led by an independent financial adviser and a fairness opinion or valuation report covering the transferred assets. The fairness opinion or valuation report provider's independence is imperative, and any conflicts should be disclosed.

Information Parity

A recurring concern is informational asymmetry between sponsors and investors. Sponsors possess detailed knowledge of portfolio company operations that may not be fully reflected in materials provided to existing investors making sell-or-roll decisions. Recent litigation has alleged instances where confidential information memoranda for prospective buyers contained more favorable assessments than disclosures to existing LPAC members.

All investors, not just LPAC members, should receive the same material information at the same time. Selective disclosure or providing materially different information to prospective buyers than to existing limited partners undermines the election process and may expose sponsors to breach of fiduciary duty claims. Transaction prices should be clearly articulated relative to the most recent Net Asset Value (NAV), with any discount or premium transparently disclosed.

Sponsors should provide a consolidated disclosure document covering:

• The rationale for pursuing a continuation fund rather than alternative exit paths;
• A description of assets being transferred, including investment thesis, performance, current valuation, and projected returns;
• The details of the competitive bid process and basis for selecting the winning bidder (if any);
• The economic terms, including management fees, carried interest, preferred return, and any differences among investor classes;
• The sponsor's economic interest, including carried interest treatment and any GP commitment;
• Any stapled commitments or ancillary relationships between the acquirer and sponsor;
• The timeline for the LP election period and transaction closing; and
• The allocation of transaction-related expenses.

Key Economic Terms

Management Fees and Carried Interest

Industry data shows continuation fund management fees converging toward 1 percent or lower, with the share of vehicles charging fees below 0.5 percent roughly doubling in recent periods. ILPA endorses a "status quo" option under which rolling investors retain the original fund's fee rate and fee base.

Approximately three-quarters of recent continuation funds use tiered carried interest structures, with roughly half employing both Internal Rate of Return (IRR) and Multiple on Invested Capital (MOIC) return thresholds. ILPA guidance provides that there should be no crystallization of carried interest for rolling investors, and that sponsors should roll all accrued carry into the new vehicle to preserve alignment.

Sponsor Commitment and Expenses

Sponsor commitments as a percentage of total continuation fund capital have trended downward, with nearly half of recent vehicles in the 0.10 percent – 5.00 percent range. However, lower percentages may still represent significant dollar figures in large transactions, and sponsors may demonstrate alignment through other channels such as deploying capital from a flagship fund.

Organizational expense caps vary, with a growing share of vehicles setting caps above 0.75 percent of total commitments. Transaction costs should be allocated transparently in proportion to who benefits: formation costs generally should be borne by the rolling investors and the acquirer, sale-related expenses should be borne by selling investors, and sponsors often absorb a portion of the costs where they derive meaningful benefits.

Governance Provisions

More than 30 percent of recent continuation vehicles do not include a key person provision, reflecting that the primary investment decision has already been made. Where included, a triggering event typically results in suspension of investment or divestment activity rather than automatic termination. The appropriateness of such provisions depends on deal-specific factors, including the nature of the underlying asset and anticipated follow-on activity.

A growing majority of continuation funds, now exceeding 80 percent, use undrawn commitments to fund follow-on investments, a notable shift from earlier practice where pro rata co-investment opportunities were more common.

Lessons from Recent Litigation

Although investor-initiated litigation over continuation fund transactions remains uncommon, a recent Delaware Court of Chancery case offers instructive lessons.⁵ The case alleged that a sponsor pursued LPAC approval on a compressed timeline, restricted communication among LPAC members, provided disclosures inconsistent with information shared with prospective buyers, and set a cash-out price at an unjustified discount to internal valuations.

The court approved a stipulation halting the transaction pending independent review. While the sponsor ultimately received a favorable outcome in arbitration, several practical observations emerge:

• Pacing matters: Allow multiple substantive touchpoints with investors over a reasonable period.
• Transparency is protective: Forthcoming and consistent communication reduces legal and execution risk.
• Information parity is non-negotiable: Existing investors should have access to the same data room and quality of information as prospective acquirers.
• The LPAC process must be genuine: A vote held after inadequate disclosure may be challenged as procedurally deficient.
• Selective engagement invites scrutiny: Approaching LPAC members individually or providing different information to different investors raises fiduciary concerns.

Practical Recommendations

For Sponsors

• Engage the LPAC early with a clear rationale for why a continuation fund is optimal relative to other exit alternatives.
• Retain an independent financial adviser to lead a competitive solicitation and procure a fairness opinion from a conflict-free provider.
• Ensure all investors receive symmetrical, timely disclosures, including data room access.
• Offer rolling investors a "status quo" option preserving the existing fee rate, fee base, carried interest percentage, and preferred return.
• Roll substantially all accrued carried interest into the continuation vehicle to demonstrate alignment.
• Afford investors at least 30 calendar days for diligence and governance processes.
• Default nonelecting investors to the sell option rather than involuntary rollover.

For Investors

• Develop standing procedures for evaluating continuation fund transactions before they arise, including approval workflows and underwriting frameworks.
• Set timing and disclosure expectations with the sponsor early, particularly where institutional governance requires investment committee review.
• Request access to the full data room and demand information parity with incoming buyers.
• Scrutinize the proposed valuation, including fairness opinion assumptions and the relationship between transaction price and NAV.
• Review all governing documents, including side letters, to understand how the transaction affects existing rights.
• When negotiating new fund commitments, consider provisions addressing continuation fund disclosure protocols, LPAC approval requirements, minimum election periods, and expense allocation.

Continuation fund transactions, when properly structured, offer genuine benefits to sponsors and investors by providing liquidity options, extending value-creation timelines, and attracting fresh capital. However, the inherent conflicts demand rigorous attention to governance, transparency, and procedural fairness. Sponsors that invest in running a well-documented, inclusive process will satisfy their fiduciary obligations while producing better commercial outcomes and stronger investor relationships.

Baker Donelson's Fund Formation and Investment Management team regularly advises sponsors and investors on structuring and executing continuation fund transactions. Please contact Paul J. Foley or Cole Beaubouef if you have questions about how these developments may affect your fund or investment portfolio.

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¹ Securities and Exchange Commission, Final Rule, Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews available at Final Rule: Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews (last accessed on 8/7/2026)

² See Nat'l Ass'n of Private Fund Managers v. SEC, 103 F.4th 1097 (5th Cir. 2024).

³ See "Continuation Funds Considerations for Limited Partners and General Partners," available at https://ilpa.org/resources-tools/resource-library/continuation-funds-considerations-for-limited-partners-and-general-partners/.

⁴ See Abu Dhabi Inv. Council Co. PJSC v. The Energy & Minerals Group LP, C.A. No. 2025-1389-NAC (Del. Ch. Dec. 3, 2025).

⁵ See Abu Dhabi Inv. Council Co. PJSC v. The Energy & Minerals Group LP, C.A. No. 2025-1389-NAC (Del. Ch. Dec. 3, 2025).