Primer: Continuation Funds in Private Equity and Venture Capital

We are often asked about continuation funds – what they are, why they have moved from the outskirts of the secondary market to the center of private markets liquidity, and what a manager who is considering one should expect the process to involve. When we wrote our primer on carried interest, we deliberately set continuation funds aside as a “special situation” whose terms differ from the mainstream. The market has since made that setting-aside untenable: Continuation vehicles (CVs) are now one of the largest exit channels in private equity, and they have arrived – later, smaller and with distinctive complications – in venture capital. This primer is our attempt to treat them properly.

First, a scope note, because the vocabulary in this corner of the market is used loosely. In this post, we are speaking of the general partner-led transaction in which a fund sponsor forms a new vehicle – the continuation fund – to purchase one or more portfolio investments from a fund the sponsor already manages, with the existing investors typically given a choice between taking cash at the transaction price and rolling their exposure into the new vehicle. We are not speaking of the older and still-enormous market in which a limited partner (LP) sells its fund interest to a secondary buyer without the sponsor doing anything at all; that is an LP-led secondary, and while it shares a marketplace and a buyer universe with our subject, it presents none of the structural questions this primer is about. Nor are we speaking, except by way of comparison, of the other liquidity tools a sponsor might reach for – tender offers, strip sales, net asset value-based facilities – though we will place each of them on the map below.

A second scope note, and really the thesis of this primer: Everything distinctive about a continuation fund flows from a single structural fact. The same manager stands on both sides of the transaction. The sponsor is the fiduciary for the selling fund, the sponsor of the buying fund, the party that selected the asset, the party with the most information about it and the party with its own economic outcomes riding on the terms. Every process feature, market convention, industry guideline and regulatory intervention we describe below is, at bottom, machinery built to make that conflict tolerable – to let a genuinely useful transaction happen without asking anyone to simply trust that the manager negotiated fairly against itself. Managers who internalize this design principle run good processes almost automatically. Managers who treat the machinery as friction to be minimized tend to discover, at their next fundraise, that the market was watching.

The scale is worth pausing on. Continuation funds were a curiosity a decade ago and a workout tool for troubled sponsors before that. Today, by the leading secondary advisors’ annual counts, GP-led secondary volume has been setting records year after year – more than $100 billion in the most recent full year, roughly half of all secondary market activity, growing at rates north of 50% annually – and CVs make up the substantial majority of it. CVs now account for a meaningful share of all private equity sponsor exits – by various counts, somewhere between one exit in eight and one exit in five. A substantial majority of the very largest sponsors have now used one. Average deal sizes approach a billion dollars, and the count of billion-dollar-plus vehicles sets a new record each year. Venture and growth are a small but unmistakably growing slice: Several marquee venture firms have completed or explored CVs in the last few years, and the structural pressures pushing them there – which we describe below – are not going away. For many sponsors, it has become a question of “when” and not “if.”

At a high level, three questions determine almost everything else about a continuation fund transaction:

1. Why is this asset staying with this manager? Is the honest answer a genuine belief in what comes next, or is it that the asset cannot be sold on acceptable terms and the fund is out of time? Conviction, importantly, does not require a trophy. While trophy assets are the easy ones to structure for, in some cases a perfectly appropriate transaction can be built around a company that has struggled, so long as there is demonstrable upside and the real constraint is the clock – there is simply not enough time left in the existing fund to capture the opportunity. The problem case is different: A company showing no room for future growth, no acceptable exit price and a sponsor kicking the can down the road on a flyer funded with fresh capital. Both happen. Only one supports a good transaction, and every sophisticated counterparty will be probing which one is true.
2. Who sets the price, and how is it validated? The sponsor cannot simply name a number; the entire architecture of the modern continuation fund – competitive processes, lead investors, reference dates, fairness opinions, advisory committee clearance – exists to answer this question in a way third parties can rely on.
3. What are the existing investors actually being offered? The election between cash and continuation sounds simple. The terms on which each option is offered – and the time and information investors are given to choose – are where most of the negotiation, and most of the controversy, actually live.

These questions are related, but they are not the same. A transaction can have a superb answer to the first and a defective answer to the third. We will build up to all three, but first, some terminology.

Note on terminology

A few terms recur throughout this post, and it is worth pausing to define them, because this corner of the market has developed a dialect of its own.

A continuation fund (or continuation vehicle – the market uses “CV” constantly, and we will too) is a new fund formed by an existing sponsor for the specific purpose of acquiring one or more assets from a prior fund managed by the same sponsor. A single-asset vehicle holds one portfolio investment; a multi-asset vehicle holds several, sometimes drawn from more than one prior fund. Single-asset deals – unthinkable concentration a decade ago – now represent something like half of the GP-led market.

A GP-led secondary is any secondary market transaction initiated by the sponsor rather than by an investor. Continuation funds are the dominant species, but the genus also includes tender offers (the sponsor arranges a buyer who offers to purchase fund interests directly from any investor who wishes to sell, with the fund itself left untouched) and various structured solutions. An LP-led secondary, by contrast, is an investor selling its own fund interest into the market, with or without the sponsor’s active involvement beyond consent.

The lead investor is the secondary buyer (or small club of buyers) that underwrites the transaction. It diligences the asset, negotiates the price and terms, typically writes the largest new check and effectively sets the deal that everyone else – syndicate investors and rolling existing investors alike – participates in. Pricing is typically expressed against a reference date – the quarter-end net asset value (NAV) as of which the deal is struck – and the market talks in percentages of that NAV.

The election is the choice offered to the existing fund’s investors: Sell (take cash at the transaction price) or roll (exchange their interest in the old fund for an interest in the CV, or, in a venture-flavored variant taken up below, remain in the original fund in a reclassified interest), or in most deals some combination. A status quo option – a term of art from the leading industry guidance, discussed below – is a roll option on economic terms no worse than the investor’s existing deal: no fee increase, no waterfall degradation and no crystallization of carry with respect to the rolling investor.

Crystallization means the conversion of the sponsor’s accrued, unrealized carried interest into a realized amount by virtue of the sale to the CV – the CV transaction is, after all, a disposition at a price. What the sponsor then does with that crystallized carry – takes it in cash or rolls it into the new vehicle – turns out to be one of the most scrutinized terms in the entire market. (For carry mechanics generally, see our primer on carried interest in private equity and venture capital funds; everything there is background to this post.)

A fairness opinion or valuation opinion is a third-party opinion – from a bank or valuation firm not otherwise conflicted – that the price is fair from a financial point of view (fairness) or that the asset’s value falls within a stated range (valuation).

A stapled transaction is one in which participation in the secondary deal is connected, formally or practically, to a commitment to the sponsor’s next primary fund – a structure the market treats with suspicion, for reasons that will be obvious by the end of this primer.

Finally, two adjacent tools we will use for contrast. A strip sale is the sale of a portion – a “strip” – of a fund’s positions in multiple portfolio companies to a secondary buyer, with the fund remaining the seller and the proceeds distributed to all investors ratably. No new sponsor vehicle, no election, no continuation. A NAV facility is borrowing at the fund level (or just below the fund) against the value of the portfolio, which can fund distributions, but is leverage, not a sale. Each solves a piece of the liquidity problem; neither does what a continuation fund does.

Why continuation funds exist at all

Start with the structural mismatch that has been latent in the closed-end fund model since its invention: The fund has a term; the company does not. A private equity or venture fund is typically built to live 10 years, plus a couple of one-year extensions. Companies do not read partnership agreements. The best asset in a 2014-vintage fund may, in year 11, be mid-compounding – growing, well managed by a sponsor who knows it intimately and worth demonstrably more with three or five more years of the same. The traditional model offers that situation only bad answers: Sell a great company on the calendar’s schedule rather than the company’s, distribute illiquid securities in kind, or limp along on extensions with a shrinking fee base, no capital for follow-ons and investors of divergent patience. The continuation fund is, at its best, a clean answer. The asset gets a new vehicle, new time and new money – not just a new holder of its stock, but fresh capital for the company itself, which lead investors frequently provide at closing or stand ready to provide through unfunded commitments reserved for continued growth. The investors who want out get cash at a market-tested price; the investors who share the conviction stay in.

That is the timeless rationale. The cyclical one explains the timing. The exit environment from 2022 onward – a thin IPO window, subdued strategic M&A and a repricing hangover from the 2021 peak – left sponsors sitting on aging portfolios and investors starved for distributions. In an era when allocators repeat that “DPI is the new IRR,” a mechanism that converts unrealized value into actual distributions, without forcing the sale of the underlying company to a stranger, was going to get used. It got used at record scale. It is fair to observe – and investors do observe – that liquidity generated by a sponsor selling to itself at a price the sponsor’s process produced is not quite the same accomplishment as liquidity generated by a third-party exit. That observation is not a reason the tool is illegitimate; it is the reason the process matters as much as it does.

The history explains the market’s lingering ambivalence. CVs descend from the fund restructurings of the early 2010s, in which sponsors of expiring, underperforming funds, often unable to raise a next fund, moved leftover assets into new vehicles to buy time. Those deals carried a stigma: the tool of the troubled. Somewhere in the late 2010s, the polarity flipped. Elite sponsors began using the same structure not for the assets they could not sell but for the assets they did not want to sell – the trophy in the portfolio – and a few very large, very successful single-asset transactions made the structure respectable, then fashionable, then routine. Today the same instrument spans both motivations, which is precisely why the first of our three questions – why is this asset staying? – has to be asked deal by deal. The structure no longer answers it for you.

The alternatives, briefly

A continuation fund is never the only option, and the discipline of comparing it against the alternatives – explicitly, in writing, early – is both good governance and good optics, because it is the first thing a skeptical advisory committee member will ask for. The menu, roughly in ascending order of intervention:

• Run the clock. Use the fund’s built-in extensions, negotiate more if needed and exit on the market’s schedule. Cheapest and least conflicted, but extensions expire, fee bases shrink, reserves run dry and investor patience is not a renewable resource.
• Sell or list anyway. Accept the market’s price today. Sometimes the honest comparison shows this is the right answer, and a sponsor who cannot articulate why a third-party sale is inferior should not be running a continuation process.
• Strip sale. Sell a slice of many positions; every investor gets ratable liquidity, no one has to make an election and the fund keeps managing what remains. Venture firms in particular have used this – one storied venture firm’s sale of minority stakes in nearly a dozen portfolio companies to secondary buyers, for something more than half a billion dollars, was among the transactions that normalized the category – because it requires no new vehicle and creates no cash-or-roll fork. The trade-off is that it monetizes the good with the bad, at portfolio-level pricing, and surrenders upside ratably.
• Tender offer. Individual investors who want liquidity sell their interests to an arranged buyer; the fund itself is untouched. Elegant where the liquidity need is concentrated in a subset of investors, but useless for extending the fund’s life or funding follow-ons.
• NAV facility. Borrow against the portfolio to fund distributions. Fast and election-free, but it is leverage – the exposure stays, plus interest – and investors have grown pointed in asking whether distributions funded by debt are distributions at all.
• Continuation fund. The only tool on the menu that simultaneously delivers cash to those who want it, continued exposure to those who do not, fresh capital to the asset and more time to the sponsor. It is also, not coincidentally, the only tool on the menu in which the sponsor sets up shop on both sides of a sale. Everything has a price.

Anatomy of a transaction

Because the conflict is structural, the market has converged on a process architecture designed to be legible from the outside. A well-run continuation fund transaction tends to move through recognizable phases.

The rationale. Before anything else, the sponsor should be able to write down – because it will eventually have to say out loud – why this asset, why more time, why this structure rather than the alternatives above and what the new capital will do. The transactions that go wrong tend to be the ones where this memo could not have been written honestly.

The advisor and the auction. The sponsor engages an experienced secondary advisor to run a competitive process among prospective lead investors. The competitive tension is the first and most important price-validation mechanism: The number is not the sponsor’s number, it is the number sophisticated third parties bid after diligence, against each other. The advisory committee of the selling fund is, under the prevailing industry guidance, appropriately consulted even on the advisor’s selection and compensation – an early signal of how thoroughly the conflict machinery now reaches.

The lead investor and the terms. The winning bidder (or club) negotiates the purchase price against the reference-date NAV and, simultaneously, the terms of the CV itself – management fee, carried interest, governance, follow-on capital, term. This simultaneity is worth noticing: The lead investor is pricing the asset and the sponsor’s go-forward deal as a package, and it will trade one against the other. The single term the market prices most heavily is alignment – how much of the sponsor’s crystallized carry and prior-fund proceeds roll into the new vehicle. The strong market expectation, embedded in the industry guidance, is that the sponsor rolls all or substantially all of it. A sponsor proposing to take its accrued carry in cash while asking investors to fund the next chapter is making a statement about its own conviction, and everyone in the room can read it.

The conflict clearance. The selling fund’s partnership agreement almost certainly treats a sale to a sponsor affiliate as a conflicted transaction requiring advisory committee consent (and, if it does not, counsel will treat it that way anyway). The committee is engaged early, walked through the rationale and the process, shown the competing bids, and asked to approve the conflict – not the commercial wisdom of the deal, which remains each investor’s own call, but the fairness of the process by which it was struck. In current market practice, a fairness or valuation opinion is frequently obtained and shared as part of this package; we take up its curious regulatory history below.

The election. The full investor base then receives the election package: the price, the process that produced it, the opinion if there is one, the CV’s terms in detail, the sponsor’s economics old and new, and the options – sell, roll or a combination and on what terms. The prevailing industry guidance calls for an election period measured in weeks, not days – at least 20 business days is the benchmark – in recognition of the uncomfortable truth that the election asks investors to re-underwrite a private asset on a timetable, with committee calendars of their own. Closing mechanics then follow the familiar M&A-plus-fund-formation pattern: a purchase agreement between old fund and new, the new vehicle’s own partnership agreement and subscription process, and the transfer, consent and regulatory workstreams the particular asset requires.

Who the buyers are. The capital on the other side has institutionalized. Dedicated secondaries funds at very large scale, several of the mega-platforms’ strategic solutions arms and – a newer development moving prices and check sizes – evergreen and retail-adjacent vehicles that give lead investors deeper pockets between fund cycles. Secondary dry powder measured in the hundreds of billions is a standing bid under this market, which is part of why sponsors keep finding it there when they need it.

The conflict and the machinery built around it

We promised that everything in this market traces back to the both-sides problem, so let us assemble the machinery in one place and be candid about what each piece does and does not do.

Competition does the heavy lifting. An auction among informed, adverse bidders is the best price evidence available in private markets, which is why a genuinely competitive process – real bidders, real diligence, real tension – is the nonnegotiable core of a defensible transaction. Its limits are equally real: The bidders are pricing the deal the sponsor structured, on the information the sponsor assembled, for an asset the sponsor will continue to control. Competition validates the price of that package.

Why process matters as much as price. Competitive tension remains the market’s best available pricing mechanism, but it is not the same thing as a deep public market. In many continuation transactions, the universe of credible buyers is necessarily limited, and the resulting price reflects competition among a relatively small number of sophisticated investors rather than broad market participation. That reality makes process, not just price, critical. An auction that reaches multiple plausible bidders, provides substantially equivalent information and permits genuine competitive tension is often as important as the valuation it produces.

Opinions corroborate; they do not absolve. For a period of about 10 months, a fairness or valuation opinion would have been legally required: The SEC’s 2023 private fund adviser rules included an adviser-led secondaries rule obligating registered advisers to obtain one in any transaction offering investors the sell-or-roll election, with disclosure of the opinion provider’s material business ties to the sponsor. In mid-2024, a federal appeals court vacated the private fund adviser rules in their entirety, and the secondaries rule with them, before the rules reached their compliance dates, on the ground that the agency had exceeded its statutory authority. The legal requirement is gone. The practice has largely stayed – lead investors, advisory committees and the industry guidance keep asking for opinions, and prudent sponsors keep obtaining them – which tells you the requirement was tracking a genuine market demand rather than creating one. Understand the instrument’s actual weight: An opinion is a professional judgment that a price falls within a defensible range, purchased by a party to the deal. It is corroboration and process evidence. It is not a substitute for competition, and no one in the market treats it as one.

Fairness is tested at signing, not in hindsight. Continuation fund transactions are often judged with the benefit of hindsight, but the relevant question is not whether the asset ultimately proves worth more or less than the transaction price. The question is whether the sponsor employed a process reasonably designed to discover a fair price at the time the transaction was negotiated. A well-run process can produce a fair transaction even if subsequent events make the valuation appear conservative or optimistic in retrospect.

The sponsor’s own committees are joining the machinery.Larger sponsors increasingly supplement these external safeguards with internal governance mechanisms of their own. Dedicated conflicts committees, valuation committees or independent investment committees may review a proposed continuation transaction before it is presented to the advisory committee, testing both the commercial rationale and the integrity of the process. These bodies do not eliminate the underlying conflict (the sponsor still occupies both sides of the transaction), but they can improve internal discipline, ensure that alternatives were genuinely considered and create a more robust contemporaneous record of the decisions that shaped the transaction. Like fairness opinions, they are process protections rather than substitutes for investor judgment.

The advisory committee is the conflicts forum, not a merits guarantor. The committee’s role – early engagement, process visibility, conflict waiver under the partnership agreement – is genuinely important and genuinely limited. Its members are volunteers with day jobs and their own institutional interests, they act for the investor base as a whole rather than any investor individually, and their approval of the conflict is not advice to anyone about the election. Well-advised sponsors are scrupulous about this distinction in their materials, because blurring it invites exactly the resentment the committee process exists to prevent.

The industry guidance is the de facto rulebook. The leading LP trade association published detailed continuation fund guidance in 2023 – advisory committee engagement from the earliest stage, a competitive process run by an experienced advisor, full transparency into the sponsor’s economics on both sides, the 20-business-day election benchmark, a true status quo option for rolling investors, existing side letters honored in the new vehicle, and the sponsor rolling substantially all of its crystallized carry. None of it is law. All of it is diligence. Institutional investors now ask, in primary fund due diligence, how a sponsor’s past continuation processes measured against it. And the guidance is being tightened as we write – a revised draft, with a standardized disclosure template and a sharpened focus on evidenced rationale and defensible pricing, is in public comment as this primer goes to press. The direction of travel is unmistakable: more disclosure, more process, more paper.

Most failed continuation transactions fail because of process, not structure. Contentious continuation fund transactions attract criticism not because investors object to the structure itself, but because they conclude the process did not adequately protect against its inherent conflicts. The rationale may be poorly articulated, alternatives insufficiently explored, pricing inadequately tested, disclosures incomplete or investors asked to make a consequential election on an unreasonably compressed timetable. Any one of these shortcomings may be manageable. Taken together, however, they can erode confidence in a transaction whose commercial merits might otherwise have been accepted. That, more than any single term, explains why experienced sponsors devote so much attention to the process itself.

What existing investors are actually offered

Now to the election itself, which is where the structure’s elegance meets its practical strains.

The choice, in principle. Sell, in a taxable transaction, and receive cash at a third party-validated price for an asset that had no liquid market yesterday, or roll, typically on a tax-deferred basis, and keep the exposure on stated terms. Optionality is real value, and it is worth remembering that no other exit route offers it. A sale to a strategic buyer gives every investor the same forced outcome.

The choice, in practice. The empirics are striking. Across the market, the overwhelming majority of existing investors take the cash. Rollover rates that ran as high as a quarter or more of investors in the market’s early years have compressed dramatically – recent academic work puts the roll rate in the mid-single digits and falling. Some of that is exactly what the structure intends: Investors with liquidity needs, denominator problems or portfolio construction reasons to exit, exiting. Some of it is capacity. The election asks a resource-constrained investor to re-underwrite a single private company with a fresh investment horizon in a few weeks, and abstention-into-cash is the rational default for an institution that cannot staff the analysis.

Moreover, many investors are structurally unable to underwrite a fresh multi-year hold at all – their own vehicles are winding down, or their mandates cap remaining duration – and must elect cash regardless of their view of the asset. Sponsors should internalize what this means: The default outcome of a continuation fund is that your longtime investors leave the asset. Read correctly, a sale election is usually a statement about the investor’s own portfolio and process constraints, not a verdict on the asset. But a sponsor who wants its existing investors to stay must earn that outcome with time, information and terms, not assume it.

The status quo option. The industry guidance’s signature ask is that rolling investors be offered terms no worse than their existing deal – same fee rate and base, same waterfall, no carry crystallization as to them, side letters carried over. Sponsors sometimes offer the status quo option alongside a second roll option on the new money terms (typically with the new vehicle’s fresh capital features attached). Investors then sort themselves. Worth knowing, too, is the middle path many sponsors have actually taken: a modified “status quo” in which the going-forward terms genuinely hold – same fee, same waterfall – but the accrued carry crystallizes at closing even as to the rollers. The sponsor’s case for the modification is real: The crystallized carry is typically rolled into the new vehicle rather than pocketed, so the alignment story survives, and the whole vehicle runs on a single carry computation rather than a legacy waterfall operating alongside the new one.

But the rolling investor should understand what it gave up. Crystallization banks the gain to date for the sponsor, so the protection of the original waterfall – under which tomorrow’s disappointment would have offset today’s paper profit before any carry was earned – is gone. A sponsor offering the modified version should say so in exactly those terms, rather than borrowing the status quo label for something the guidance would not recognize as one. The true status quo option costs the sponsor little in most deals and buys a great deal of goodwill and defensibility, and we struggle to construct the fact pattern in which omitting a roll option on legacy terms entirely is worth the fight.

The default mechanics. In most transactions, an investor who does nothing is cashed out. There is a respectable argument that this is the right default. It converts inertia into liquidity rather than into a new 10-year commitment nobody affirmatively chose. And a respectable counter is that it converts inertia into a taxable disposition nobody affirmatively chose either. What is not respectable is burying the consequence of silence. Say it on page one.

Co-investors. A wrinkle multiplying in current deals: Investors holding the same asset through co-investment vehicles – often on no-fee, no-carry terms – increasingly negotiate, at the time of the original co-investment, for the same cash-or-roll optionality the fund’s investors will get if a CV ever appears. The roll they are offered is rarely fee-free, which makes the election imperfect; but optionality beats a forced outcome, and co-investment documentation is being drafted with this ending in mind. Sponsors should assume sophisticated co-investors will raise it.

Taxes, in one paragraph. For selling investors, the election is a disposition, with the consequences dispositions have. For rolling investors, whether the roll is tax-deferred, a taxable exchange despite the label or an explicit sale followed by an after-tax reinvestment depends entirely on how the transaction is structured, and structures vary. The difference is large (particularly for taxable investors). It does not announce itself in the term sheet, and it belongs on the short list of questions every electing investor’s advisors ask first. For the sponsor, crystallized carry has its own timing and character questions (not least of which is the need for a three-year holding period for long-term capital gain treatment), on which our carried interest primer’s discussion of holding periods is directly relevant. Although there are numerous issues to navigate in such a transaction – allocating taxable gain to the right parties, tax basis planning, withholding obligations, reporting, successor tax liabilities – we flag one venture-specific landmine below, because it gets little attention elsewhere and happens to travel with a regulatory wrinkle: qualified small business stock. Bring the tax advisers in at the whiteboard stage; this is a transaction whose economics can be materially rearranged by structuring choices that look like plumbing.

The economics of the new vehicle

The CV’s terms are a genuine negotiation with the lead investor, and the market that has emerged looks like the primary fund market’s vocabulary rearranged around one idea: The sponsor is being paid to finish a job, not to start one.

Management fee. Typically below primary-fund rates – the market clusters around 1%, give or take a quarter – and typically charged on invested capital or NAV rather than commitments, often with step-downs over the vehicle’s life. There is no portfolio to construct and no team to build; the fee reflects it. (For the primary market baseline, see our primer on management fees in private equity and venture capital funds.)

Carried interest. Two moving parts. First, the treatment of the sponsor’s existing accrued carry: crystallized by the sale, and – per the alignment expectation discussed above – rolled entirely or almost entirely into the new vehicle. The expectation has one large and well-accepted carve-out: the carry of departed partners. A fund old enough to need a CV is usually old enough to have alumni, and if, come year nine, former partners hold, say, 13% of the carry, taking that slice off the table in cash is common and uncontroversial. The logic is the alignment logic itself, applied honestly: Rolled carry exists to keep the people doing the work invested in the outcome, and there is no prospective incentive to purchase with respect to people who are gone. (Departed partner carry has mechanics all its own – see our recent primers on planning for and handling senior partner transitions and departures.) Second, the new carry on the CV’s own performance, where the market has converged on tiered structures that pay modestly for modest outcomes and richly only for genuine additional value creation – for illustration, a structure that pays 10% carry up to a 1.5x multiple on the new money, 15% from 1.5x to 2.0x and 20% (occasionally more) above that. The tiers do real work: They answer the objection that the sponsor is getting paid twice on value it already created, by making the second payment contingent on value it has not created yet.

A worked example, because the numbers make the logic legible. Suppose the old fund holds a position carried at $400 million against $80 million of cost, and the fund is comfortably past its preferred return. A CV purchases the position at the reference NAV. The sale crystallizes roughly $64 million of carried interest on the $320 million gain at a classic 20% rate. The market’s alignment expectation is that the sponsor rolls that $64 million – all of it, absent an explanation – into the CV alongside the lead investor’s new money, where it sits at risk, subject to the same outcomes the new investors are underwriting. If the vehicle then doubles the asset over its term, the sponsor earns the tiered carry on the new gain; if the asset goes sideways, the sponsor’s rolled $64 million went sideways with it. That – not the fee rate, not the opinion, not the process letter – is the term a lead investor prices first, because it is the term that makes the sponsor’s stated conviction expensive to fake.

The rest of the stack. A defined amount of unfunded capital for follow-ons (a point developed at length in the venture discussion below); a term of three to seven years with short extensions, built around an articulated exit thesis rather than an open-ended hold; an advisory committee; and – conspicuously – no reinvestment and no recycling beyond the stated purpose. One familiar primary fund fixture, meanwhile, is often conspicuously absent: the key person provision. The omission is principled, not sloppy. The classic key person remedy suspends or terminates the investment period for new investments – and a CV makes no new investments. Its only deployable capital is follow-on capacity, which is exactly the spigot investors would never want switched off in a moment of team disruption, and which key person mechanics traditionally leave running in any event. With nothing for the remedy to shut down, the clause becomes a hollow ritual, and many CVs simply omit it and explain why, addressing the underlying concern where it actually has teeth in this structure – the sponsor’s rolled capital at risk, governance and information rights, and removal provisions. The CV is a vehicle for finishing, and its documents should read like it.

Who pays for all of it

A continuation fund generates professional costs on a scale that surprises first-timers – two funds’ worth of documents, a competitive process and the fees of the secondary advisor, an election apparatus, opinions, regulatory work, transfer mechanics – and the allocation of those costs is a genuine deal term, negotiated with the lead investor and disclosed to everyone, not an afterthought for the closing statement. The organizing principle the market has converged on is simple to state: Costs follow the constituency the work protects. The conflict-clearance machinery – advisory committee disclosure and consent, the fairness or valuation opinion – exists to protect the existing partnership as a whole, and so is borne by the existing fund’s partners ratably, sellers and rollers alike, the GP’s interest included. The election apparatus – the materials, disclosures, solicitation process – is allocated the same way, for the same reason. And where the transaction uses the restructuring-in-place architecture described below, the amendment of the existing fund’s own partnership agreement is the existing fund’s cost on the same logic: It is the existing partnership rebuilding its own house.

The new vehicle’s costs run the other way. The continuation fund’s organization, its fundraising and the negotiation with its incoming investors belong entirely to the new vehicle’s investors and the sponsor; the legacy fund’s partners did not order that work and should not fund it. That leaves the core transaction costs in the middle – structuring, the purchase and contribution agreements, disclosure memorandum, data room, regulatory clearances and approvals, transfer taxes – which the market typically splits between the sell side and the buy side, frequently down the middle by reference to transaction value. Even that tidy split conceals one genuinely debatable seat assignment: Rolling investors are economically on both sides of the deal, and whether they share the buy side’s half alongside the new money, or sit only with the sellers, is negotiated – and defensible – in both directions. A companion question is best settled before it is ever live: Who bears the costs of a process that launches and dies? Broken-deal expenses in a transaction the sponsor initiated, for a sale that never happened, are fought over deal by deal; the only indefensible allocation is the one nobody discussed in advance.

The venture wrinkles

Everything above describes the market that private equity built. Venture-flavored CVs inherit all of it and add complications – and structuring innovations – of their own, and they deserve specific treatment. We will be specific.

Valuation is harder, and everyone knows it.A buyout CV prices against earnings before interest, taxes, depreciation and amortization (EBITDA), comparables and leverage math. A venture CV prices a company whose last objective data point may be a financing round from a different market era, whose 409A valuation exists for a different purpose and whose fair-value mark reflects the sponsor’s own judgment more than any observable market. This does not make venture CVs unpriceable – competitive tension among sophisticated bidders remains the mechanism, and late-stage companies with real revenue are increasingly legible – but it widens the honest uncertainty band around any reference NAV, which in turn raises the stakes on process quality and disclosure. (On the underlying marks themselves, see our primer on reporting, valuation and information rights, which is effectively a prequel to this section. It also explains the market’s revealed preference for venture CVs built around late-stage, revenue-generating companies rather than early-stage optionality.)

The company has a vote – and, usually, a favorable opinion. This is the venture wrinkle that most surprises private equity practitioners. A buyout sponsor moving a control position generally needs no one’s permission but that of its own investors. A venture position lives inside a lattice of company-level agreements – transfer restrictions, rights of first refusal, co-sale rights, board consent requirements – negotiated by parties (the company, founders, other investors on the cap table) who are not parties to the fund’s continuation plans and whose cooperation the transaction genuinely needs. Buyer diligence runs on company information and management time, and consents and waivers run on company counsel’s calendar. A right of first refusal discovered in week nine is a transaction redesign, not a closing mechanic; the company-side workstream should be scoped on day one.

But do not mistake the mechanics for the mood. In our experience, founders frequently welcome a well-explained CV, and for entirely sensible reasons. The partner they know keeps the board seat, the firm they chose stays on the cap table, fresh reserves arrive behind the position and the end-of-fund pressure to sell the company on the fund’s calendar rather than the company’s visibly recedes. Measure the alternatives from the founder’s chair: an end-of-life sale process, a strip sale that hands their investor’s stake to a secondary buyer they have never met or a supportive but tapped-out holder with no capital for the next round. Against that menu, continuity is usually the founder’s preferred outcome, not a concession extracted from one.

The founder-side questions that do come – and well-advised founders increasingly ask them – are about what changed. The new vehicle has its own clock and an articulated exit thesis; its follow-on capacity is finite and its deployment priorities pre-agreed; and new institutional investors now sit behind, and sometimes at, the board table, making governance more crowded than it was. One caution cuts the other way: Founders read signals like everyone else, and a CV that looks like the sponsor buying time rather than expressing conviction will be read exactly that way inside the boardroom too. The unforced error, in every version of this story, is surprise; the winning move is treating the company as a participant to be enlisted early rather than an asset to be conveyed.

Reserves are the point, not a feature. In buyouts, follow-on capital is nice to have. In venture, the ability to fund the next round – to defend ownership, to signal, to bridge – is much of why the position is valuable in the sponsor’s hands at all. The CV’s unfunded capacity, and the priority rules for deploying it, deserve first-order attention in venture deals, and the death-by-dilution of a CV that rolled a position without reserving for it is a known failure mode.

The exemption problem. Here is a regulatory wrinkle specific to venture managers, and it is consequential. The venture capital fund adviser exemption – the reason most venture managers are exempt reporting advisers rather than registered ones – requires each fund to hold no more than 20% of committed capital in nonqualifying investments, with “qualifying investments” generally limited to equity acquired directly from the portfolio company. A continuation fund, by construction, acquires its centerpiece position from the prior fund. That is a secondary acquisition, and therefore nonqualifying – and unlike an ordinary fund with a stray secondary purchase, the CV cannot dilute the problem away. The acquired position is the portfolio; there is no incoming 80% of fresh, direct-from-company investing to rebalance the math; the vehicle simply will not be a “venture capital fund” under the rule. The manager has to house it somewhere else – inside the separate exemption for advisers managing less than $150 million of private fund assets (a ceiling measured across all of the manager’s funds, and one that successful managers outgrow quickly) or under full registration. It is no coincidence that several of the largest venture firms – the ones most active in secondaries, restructurings and continuation strategies – became registered investment advisers in recent years, for this among other reasons. For a manager whose regulatory posture is built on the exemption, the continuation fund conversation and the registration conversation are the same conversation, and it should happen early.

Qualified small business stock (QSBS). The tax problem rhymes with the regulatory one. Venture investors may have been quietly accruing QSBS benefits in a position for years – benefits that live and die with the original-issuance holding chain. A classic continuation sale breaks the chain: The new vehicle buys the stock secondhand, rolling investors’ exclusions can be forfeited or their clocks disturbed, and none of it announces itself in the headline terms. The dollars at stake – for individuals and family offices especially – are large enough to drive structure … which brings us to the venture market’s characteristic answer to both of the last two problems at once.

The venture answer: Restructure the fund, don’t move the stock. The exemption problem and the QSBS problem share a root cause – the asset leaving the fund that originally bought it – and so they share a solution: Don’t make it leave. In the restructuring-in-place variant, the existing fund’s partnership agreement is amended to create a new class of interests attributable to the continuing asset, carrying the continuation economics. Selling investors are cashed out, funded either by a CV formed for the new money, which purchases only the portion of the position corresponding to the sellers, or, in a variant that dispenses with the second vehicle entirely, by new investors subscribing directly into the new class of the existing fund. The rolling investors and the GP never leave; their interests are reclassified where they sit, the gain on the sold portion is specially allocated to the selling investors (partnership-tax engineering with real conditions attached – tax preparers in the room from the start), the original-issuance chain stays intact for everyone who stayed, and the fund remains the same qualifying venture fund it always was. The “roll,” in this architecture, is not an exchange into a new vehicle at all; it is a reclassification in place. The elegance has a price, and it should be stated as plainly as the benefit. The legacy fund becomes administratively more complicated for the rest of its life. The new-money investors will demand assurances that the legacy fund and the new vehicle are managed pari passu with respect to the shared asset; new investors asked to subscribe into a decade-old partnership agreement will have comments; and the amendment itself requires a consent process that must be mapped, structure by structure, and built into the election mechanics from the beginning rather than discovered inside them.

Assembled as a menu, a venture manager designing the roll is really choosing among three postures toward QSBS:

1. Preserve it – The restructuring-in-place just described, in either flavor.
2. Spend it – Let investors sell, harvest the exclusion on today’s accrued gain and reinvest after-tax proceeds into the CV as effectively new money; attractive where the benefit is ripe, and a matter of indifference to tax-exempt institutions either way.
3. Forfeit it for simplicity – The classic tax-deferred roll into a conventional CV: Streamlined, familiar to the secondary market and QSBS-destructive.

Cutting across all three is a disclosure point with the both-sides flavor this primer keeps returning to: The GP can often preserve its own QSBS position – through the new class, or by participating in the asset directly alongside the new vehicle – even in structures where rolling investors cannot. Differential treatment of that kind is sometimes the right commercial answer; it is never the right thing to leave undisclosed.

The market is younger here, and it shows.Venture continuation vehicles (VCVs) are newer, smaller and less standardized than their buyout cousins, and the early record includes cautionary tales alongside successes – most instructively, a proposed transaction in which a seed-era firm sought to move essentially its entire remaining portfolio into a CV at a steep discount to its own marks, and its investors voted it down. The lesson is not that VCVs fail; it is that the machinery this primer describes is not optional equipment, and a transaction that reads as the sponsor solving the sponsor’s problem, at the investors’ expense, on the sponsor’s numbers, will be received as exactly that.

The regulatory map, in plain English

The regulatory story here is short, recent and somewhat less linear than the headlines suggest. The baseline has always been the Investment Advisers Act’s fiduciary duty and anti-fraud provisions, which apply to registered and exempt advisers alike: A manager on both sides of a transaction owes its client fund full and fair disclosure of the conflict and must deal on terms consistent with its duty – principles old enough that nothing about continuation funds required new law to make a badly run one actionable. The brief life of the purpose-built regime – the 2023 adviser-led secondaries rule and the 2024 court decision that vacated the rulemaking whole – we have already told above, in the discussion of fairness opinions, and the chronology matters less than the residue.

The regulatory signals since then have been mixed. The Division of Examinations expressly identified adviser-led secondary transactions in its fiscal 2025 examination priorities as one example of a practice warranting review of conflicts, controls and risk disclosures, but did not specifically identify them in its fiscal 2026 priorities. That omission does not place CVs outside the examination program: valuation, disclosure, interfund transactions and financial conflicts remain ordinary examination subjects. It does mean, however, that CVs are no longer a separately announced examination priority. Form PF currently requires Securities and Exchange Commission-registered advisers that are required to file Form PF to report adviser-led secondary transactions involving their private equity funds within 60 days after quarter-end, but that requirement may also be short-lived. In April 2026, the SEC and Commodity Futures Trading Commission proposed eliminating the entire private equity quarterly-event reporting section. The proposing release stated that, based on more than two years of filings, the reported private equity events had proved less impactful for investor-protection efforts and systemic-risk monitoring than anticipated. It also observed that continuation funds may be formed for reasons that do not signal systemic risk, including maximizing the value of a high-performing asset or providing existing investors liquidity while attracting new investors. The proposal is not final, so the existing reporting requirement remains in effect.

Separately, Reuters reported in June 2026, based on unidentified sources, that SEC Enforcement staff had been reviewing a number of CVs, focusing on potential conflicts, valuation practices and whether investor disclosures were sufficient and consistent. The SEC has not publicly announced a CV investigation or industrywide enforcement initiative, and Reuters could not identify the funds or assets involved. It is therefore too early to know whether the reported activity represents a broader enforcement effort or a limited number of matter-specific inquiries.

Either way, the applicable legal framework is not the vacated 2023 rule but the long-standing fiduciary and anti-fraud baseline. The practical lesson is correspondingly familiar: A sponsor should be able to explain why the transaction was undertaken, how the price was tested, what investors were told and how their election was conducted – and should preserve the file supporting each of those judgments. It is worth noticing what fills the space the government keeps vacating. With the rule gone, the examination priority de-listed and the reporting line proposed for elimination, the standards that govern these transactions day to day are increasingly the industry guidance and lead-investor expectations described throughout this primer – private rulemaking doing public rulemaking’s old job.

For exempt reporting advisers, which is to say, most venture managers, the formal overlay is lighter still. No Form PF and generally less intensive examination exposure, although the SEC retains authority to examine exempt reporting advisers (ERAs), together with the same fiduciary and anti-fraud baseline. The exemption’s qualifying investment problem discussed above is, for venture managers, the regulatory tail that actually wags the dog. And a housekeeping point that trips up communications teams exactly as it does in every other fund context: A CV raising new money is conducting a securities offering, private placement discipline and all, and the celebratory announcement should be reviewed like the offering document it legally flirts with being.

How the market judges these deals

It may seem odd to close the substantive discussion with perceptions and scorekeeping. It is not. A continuation fund is a transaction a sponsor runs inside its most important long-term relationships, and the verdict gets rendered where sponsors feel it most: the next fundraise.

Start with the performance evidence, which is more reassuring than the structure’s critics might expect. Studies of completed CVs find median outcomes comparable to or better than conventional buyout benchmarks, with tighter dispersion, consistent with the intuition that these are, disproportionately, known assets in experienced hands. Recent academic work examining the question of adverse selection – are sponsors keeping the lemons? – finds that assets moved into CVs do not systematically underperform the assets left behind. And marketwide pricing has run at high-80s to mid-90s percentages of reference NAV in recent years, with premium deals above par for genuine trophies – levels difficult to square with the theory that these transactions are systematically mispriced against the sellers.

The critiques deserve equally direct statement, because sophisticated investors make them and sponsors should be able to answer them.

• The sponsor is marking its own homework. The reference NAV is the sponsor’s mark, the process is the sponsor’s process and the “market test” is a market for a package the sponsor assembled.
• The DPI is manufactured. Distributions generated by selling to yourself at your own validated price are real cash but a softer achievement than third-party exits, and allocators increasingly split the two in their analysis.
• The economics reset. A new fee stream and a fresh carry schedule on an asset the sponsor already harvested carry from has an obvious optics problem, which the tiered-carry and full-rollover conventions exist to answer but do not erase.
• The election burdens the investor. The sell-or-roll fork transfers a hard underwriting decision, on a short clock, to the party with the least information.

Every one of these critiques is answered – to the extent it can be answered – by process integrity, disclosure quality and alignment, which is why those three themes have recurred in every section of this primer. There is no drafting trick that substitutes for them.

Sophisticated investors increasingly evaluate continuation funds through another lens as well: the sponsor’s incentives around fundraising and performance presentation. A successful CV can accelerate distributions, extend ownership of a marquee asset and reshape the timing of realized performance in ways that influence how an existing fund (and, by extension, the sponsor’s broader track record) is perceived in the market. None of those consequences is inherently problematic; they often accompany transactions that are genuinely beneficial to investors. But they are additional reasons why LPs ask whether the transaction would still make sense if fundraising considerations were removed from the equation, and why sponsors are well advised to articulate the investment rationale independently of any benefit to the franchise.

And the feedback loop is real. Institutional investors now diligence a sponsor’s continuation fund history when underwriting its next primary fund: how the process ran, how the election was handled, how the rolled investors fared, whether the guidance was honored. A CV is many things – an exit, a fundraise, a conflicts exercise – but it is also, unavoidably, a public demonstration of how the sponsor behaves when its interests and its investors’ interests point in different directions. Sponsors should assume the demonstration is being graded.

Practical market observations

Pulling the threads together, a few observations from the field.

The honest answer test comes first and settles most cases. If the truthful rationale is conviction – this specific asset, this specific team, demonstrably more value with more time and more capital – the rest of this primer is execution. If the truthful rationale is that the fund is out of time and the asset is out of buyers, a CV does not transform the situation. It relocates it, at considerable expense, into a structure with your name on both signature blocks. Some of the most valuable advice in this market is don’t.

Run the process as if the buyer were a stranger, because economically that is what the rolling and new investors are. The competitive auction, the early advisory committee engagement, the opinion, the full election package, the 20-plus business days – none of it is legally compelled today, and all of it is what separates the transactions that enhance a sponsor’s standing from the ones that quietly tax the next fundraise.

Alignment is the product. Lead investors price the sponsor’s rolled carry before they price the asset, and they are right to. It is the one term that makes conviction costly to counterfeit. A sponsor tempted to take meaningful chips off the table should reread the section above on what that communicates and should expect to pay for the privilege in price, terms or both.

The status quo option is cheap insurance. Offer it.

In venture, budget from day one for the second front: company-level consents and cooperation, early founder engagement (usually a welcome conversation, never a safe one to skip), and the exemption and QSBS architecture decisions that have no buyout analog. Settled early, they are structure; discovered late, they are redesign. The fund-side process is the same movie private equity has been running for a decade; the company-side and structuring workstreams are where venture deals actually slip.

A continuation fund is a fundraise, with everything that implies: offering discipline, marketing rule care, subscription mechanics and a closing dynamic that depends on a lead investor who can retrade like any other buyer. Sponsors who staff it like a distribution event rather than a capital raise get the staffing wrong in both directions.

And movement through this market is normal in both directions. Some sponsors will run a CV once, learn what it costs and go back to selling companies. Others will make serial, disciplined use of the structure a genuine part of their model. Neither posture is inherently right or wrong; unconsidered ones are.

Conclusion

The continuation fund is the closed-end fund model amending itself in real time – a market-built answer to the oldest structural tension in private funds, between assets that compound on their own schedule and vehicles that expire on a fixed one. Done well, it is a genuinely elegant transaction: Liquidity for those who want it, continuation for those who do not, new capital for the company, more time for the manager, all at a price tested by real competition. Done carelessly, it is a conflicted asset shuffle at the sponsor’s own marks, and the market has developed both the vocabulary and the memory to say so.

The structuring questions, in the end, are the ones we opened with. Why is this asset staying with this manager – and would we say so in writing? Who sets the price, and what machinery lets everyone else rely on it? And what, exactly, are the existing investors being offered – on what terms, with what information and with how much time? These questions are related, but they are not the same, and the sponsors who thrive in this market are the ones who treat the conflict machinery not as friction but as the product – because for the investors on the other side of the table, it is.