Continuation funds: The CFO's operational playbook

What is a continuation fund?

A continuation fund is a new investment vehicle created by the general partner (GP) of a private equity (PE) or venture capital (VC) firm to acquire one or more assets from an existing fund. The primary purpose is to extend the holding period for an asset beyond the original fund lifecycle, which often lasts a decade or more. This strategy is a type of GP-led secondary transaction that has become a significant force in alternative investments, with firms achieving 89 exits totaling $47.3 billion via continuation funds in 2024 alone.

On Carta’s platform, dollars transacted in the secondary market rose significantly in recent years, climbing from $2.2 billion in 2020 to $7.4 billion in 2021. While the market cooled from that peak, activity is rebounding; combined value of liquidity programs on Carta in the first half of 2023 was $377 million, with a 69% increase from Q1 to Q2 and a 39% increase in average deal size, signaling renewed momentum in company‑sponsored secondaries and cementing their role as a vital liquidity solution.

Why GPs use continuation funds

For a GP, the decision to use a continuation fund is a strategic one, but for the fund's chief financial officer (CFO), it marks the beginning of a complex operational process that requires the finance team to manage dual workstreams: simultaneously winding down the legacy asset's position and standing up a new legal entity with its own banking, compliance, and reporting infrastructure. The GP's motivations are typically twofold, each with significant implications for the finance team.

• Providing liquidity: In an exit market shaped by volatility and challenging market conditions, continuation funds offer a way to return capital to the fund's investors—a pressing need when traditional exits have narrowed. The IPO market, once a primary exit route, saw proceeds take a staggering 95% plunge from the highs of 2021. As a result, cash distributions to limited partners are in short supply; for the 2021 fund vintage, only 9% of funds had returned any capital to LPs after three years, compared to 25% for the 2017 vintage.

• Maximizing value: This strategy allows the asset manager to retain ownership of high-performing assets that they believe offer significant upside potential rather than selling it prematurely to a competitor.

How a continuation fund transaction works

While the concept of a continuation fund is straightforward, its execution involves a multi-step process that the fund CFO must oversee from start to finish. The transaction moves underlying assets from an old fund to a new one, providing a liquidity option for some investors while allowing others to continue their investment.

The typical lifecycle of a continuation fund deal unfolds in several stages:

1. The GP identifies a promising asset in a fund that is nearing the end of its life.

2. A new continuation vehicle is legally formed to act as the buyer.

3. A fair price for the asset is determined through a process of portfolio valuation that is conducted by an independent third-party firm to ensure objectivity and mitigate conflicts of interest.

4. Existing LPs in the original fund are given a choice in an election process: either sell their stake for cash or roll their interest into the new fund in a rollover equity transaction.

5. The GP handles fundraising for the continuation fund from new investors, including a lead secondaries investor who helps set the price and terms, to finance the purchase of the asset and provide additional follow-on capital for its growth.

6. The transaction closes, the asset is transferred to the new fund, and cash proceeds are distributed to the selling LPs, which improves the fund's distributions to paid-in (DPI) metric.

Single-asset vs. multi-asset vehicles

Continuation funds can be structured to hold one or more assets, a decision that impacts the fund's strategy and operational complexity.

• A single-asset continuation vehicle is a fund focused on one "crown jewel" company, often structured as a special purpose vehicle (SPV). These vehicles are designed to invest in a single asset, unlike traditional funds with large portfolios. While most SPVs are small, the largest deals command a significant portion of the market; though just 2.6% of SPVs manage $50 million or more, these supersized vehicles account for over 30% of all capital raised in such structures between 2016 and 2023.

• A multi-asset continuation vehicle bundles several portfolio companies, a structure that has seen significant growth, rising to nearly 59% of overall continuation fund transaction volume in 2023. From the CFO's perspective, this multi-asset structure multiplies the operational complexity of fund management, including valuation, accounting, and reporting across several companies at once.

The continuation fund playbook: A step-by-step guide

For a fund's finance team, executing a continuation fund transaction is a significant undertaking that requires careful planning and precise execution. This practical, step-by-step guide outlines the core operational responsibilities a CFO must manage to ensure a smooth and successful deal.

Step 1: Establishing a fair valuation

The CFO's role in overseeing the valuation process is vital, and establishing a clear fund valuation policy is the cornerstone of managing the conflicts of interest inherent in these deals. Specifically, the conflict arises because the GP is effectively on both sides of the transaction—setting the price for an asset they are selling from one fund while simultaneously buying it for another—which creates an inherent incentive to favor one set of investors over the other. A common practice is to obtain a fairness opinion from a third-party firm, which is a formal report that assesses the financial fairness of the transaction price and terms. This independent assessment is crucial for building trust with all stakeholders.

For firms specializing in secondary transactions, having a reliable valuation partner is essential. As David Tom, co-president at VCFA Group, noted about his firm's experience, shifting the valuation process to a trusted partner provides a valuable outside perspective. "We recently had two companies sold. The valuations the Carta team provided were surprisingly close to the sale price," Tom says. Leveraging a provider with deep expertise in private market data and audit-defensible methodologies is critical for establishing a price that can withstand scrutiny from LPs, auditors, and regulators like the Securities and Exchange Commission (SEC).

Step 2: Managing the LP election and closing

The LP election process carries a significant administrative burden, as the decision to participate demands attention to detail that can be difficult for LPs to evaluate within the timeframes provided. The CFO's team must distribute detailed election packages, track responses from every LP, and field numerous questions about the transaction. For new investors and rollover LPs, this process is equivalent to a new fund closing, requiring the execution of subscription documents and completion of anti-money laundering (AML) and know your customer (KYC) checks for the new vehicle.

A modern fund administration software can transform this process. A secure, centralized LP portal streamlines communication by giving LPs a single place to access documents, review terms, and make their elections. For Kapor Capital, Carta’s "easy-to-use layout" was a key factor in improving the LP experience. Automating the subscription workflow with a closings management tool is a key part of modern fund administration that reduces the administrative burden on the CFO's team, allowing them to focus on strategic priorities instead of manual paperwork.

Step 3: Administering the new vehicle and legacy fund

Executing a continuation fund creates a dual accounting challenge: the CFO's team must manage two separate general ledgers (GL). One is for the legacy fund to record the asset sale and distribute proceeds, and a new one is for the continuation fund to record the asset purchase and manage its ongoing operations. This also involves the fund formation process of setting up the new legal entity and its banking and administrative infrastructure.

This process can be complex, but the right partner can simplify it. For emerging managers, an operational planning model can help make fund structures more tangible. As Eduardo Zaldivar of Mosaic ETA explains, having a streamlined fund formation process is essential for scaling. "Carta has done a great job of helping us rinse and repeat without taking a bunch of time," he says. "We’re really excited about subsequent funds." An integrated fund administration platform provides a single source of truth for both entities, eliminating the risks of manual, spreadsheet-based accounting.

Step 4: Navigating reporting and compliance

The transaction also creates dual reporting requirements. The CFO must deliver final reports and Schedule K-1s to the selling LPs of the old fund, while also establishing new, ongoing quarterly reporting for all investors in the new continuation fund. Throughout this process, it is essential to maintain a clear, comprehensive audit trail for the entire transaction to prepare for the annual fund audit, from the initial valuation to the final cash distributions.

Giving auditors direct, permissioned access to a single source of truth for all transaction documents and ledger entries transforms the annual audit from a painful, manual exercise into a streamlined, collaborative review. As Brian Montgomery of Legalist points out, consistency is key. "With Carta, if your inputs are correct, your outcomes are consistent. If we catch something in Carta, it’s extremely quick to fix. We can see a new cut in hours. In a manual system, it can take days."

How to manage conflicts of interest

The core conflict in a continuation fund transaction is that the GP is on both sides of the deal, acting as both the seller (on behalf of the old fund) and the buyer (on behalf of the new fund). This dynamic requires a carefully managed process to ensure fairness and transparency for all parties involved. "The fund CFO plays a key role in implementing the risk-mitigation strategies outlined in the best practices below to protect the firm and its investors.

Ensuring a fair and transparent process

Process integrity is paramount to navigating the inherent conflicts in a GP-led deal. Adhering to industry best practices is the best way to build trust and ensure a fair outcome for all investors.

Key best practices include:

• Running a competitive bidding process to select the lead investor who will anchor the deal

• Providing all LPs in the legacy fund with the same level of information given to new investors

• Giving LPs adequate time to make their election decision, as recommended by industry bodies like the Institutional Limited Partners Association (ILPA)

• Seeking approval from the fund's Limited Partner Advisory Committee (LPAC)—and potentially obtaining a waiver if required—as outlined in the limited partnership agreement (LPA)

Achieving sponsor and investor alignment

New investors in a continuation fund need to see that the GP's financial interests are aligned with theirs. The most common method for achieving this alignment of interests is through a carry rollover, and industry best practices recommend that the GP roll 100% of the carried interest accrued into the new vehicle to ensure alignment. The CFO's role is to accurately calculate this crystallized carry and ensure the mechanics of the rollover are correctly documented and reflected in the new fund's distribution waterfalls. 

As Carta’s Anubhav Srivastava explained during the VC Masterclass: Setting a Target Fund Size webinar, LPs are accustomed to standard fund structures. "It's great to be innovative, but be innovative in your investment selection process... Try not to innovate in portfolio construction and waterfall strategies." Structuring the carry rollover in a clear and standard way is essential to gaining LP confidence.

Key economic considerations for the fund

From the CFO's perspective, a continuation fund introduces unique economic terms that must be modeled, executed, and reported with precision. These terms differ from a traditional private equity fund and add layers of complexity to the fund's administration.

Structuring fees and carried interest

The economic terms for a continuation fund are a key point of negotiation. These structures typically include management fees based on invested capital—a practice used by nearly 90% of all SPVs when calculating management fees—and a new carried interest waterfall. For larger SPVs, these fees are often standardized; among those formed in 2023 with over $10 million in assets, half charged a management fee between 1.4% and 2%, according to recent data on PE SPV fees.

Adding to the complexity, some deals offer a status quo option to rollover LPs. This election allows them to maintain the economic terms of the original fund, which requires the CFO's team to track multiple sets of economic terms to accurately calculate fund performance metrics within a single vehicle. As Evan Epstein of Pacifica Global explained during Carta’s Building Lasting LP Relationships webinar, non-standard terms raise the bar for LPs: "Lately, I've seen numerous seed funds with 30% carry out a 3X with full catchup. I just can't do it."

Allocating transaction expenses

The allocation of deal expenses—such as legal fees, valuation costs, and insurance premiums—is another heavily negotiated point in the deal flow process between the GP, the selling fund, and the lead investor. The fund's accounting system must be robust enough to handle these complex, non-pro rata allocations and provide a clear audit trail to justify them to LPs and auditors. Clear documentation and transparent reporting are essential to maintaining trust with all investors.

Partnering with Carta for continuation funds

Executing a PE continuation fund transaction using disconnected spreadsheets, emails, and multiple legacy service providers creates significant operational risk and inefficiency. The complexity of managing valuations, LP elections, dual accounting, and compliance demands a modern, integrated solution. A unified platform that combines expert services with purpose-built fund administration software allows a CFO to manage the entire transaction lifecycle in a single, auditable system.

This partnership model allows the fund's managers to focus on their core competency: investing. As David Tom explains, "We view our fund administration team as an extension of our firm because they intimately understand the needs and complexities of our funds’ structures and investment strategies." 

A strong fund administrator acts as a strategic partner, not just a software vendor. Request a demo to see how Carta can help you form, close, and administer your next continuation fund.

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Frequently asked questions about continuation funds

How does a continuation fund provide liquidity?

The new fund raises capital from new investors, often via a capital call, to buy an asset from the old fund, which generates cash proceeds that are then distributed to the old fund's limited partners who choose to sell their stake.

What is a status quo election for a rolling LP?

This is an option for an existing investor to roll their interest into the new fund while keeping the original fee and carried interest terms from the legacy fund, instead of adopting the new terms of the continuation fund.

How long do continuation funds typically last?

Continuation funds have a shorter lifespan and a different performance trajectory than traditional funds, which typically operate on a fund term of about 10 years. Because continuation funds are often structured as special purpose vehicles, they are designed to operate on much shorter timelines to generate quicker returns for investors.