In 2024, there were 96 reported continuation fund deals, representing a 12.9% increase from 2023 and a remarkable 14% of all private equity exits. At Houlihan Capital, we know that continuation funds remain a popular option into 2025, as many of our general partner clients look to circumnavigate challenges associated with traditional exits, retain high-performing assets (or those at an inflection point – where the investment thesis has yet to fully materialize), and provide liquidity to limited partners. Below we outline these and other drivers of this GP-led secondaries trend, before summarizing the best practices for those facilitating such deals.
Key Drivers (1)(2)(3)
- Exit Market Conditions: PE-backed IPOs, a preferred route to liquidity historically, remain well below pre-pandemic levels because of weak investor appetite, volatile public markets, and new regulatory hurdles (e.g., the SEC’s new SPAC rules), particularly for high-growth, unprofitable companies. Continuation funds address this challenge by offering liquidity to existing investors while allowing asset managers to retain and further grow high-potential companies, keeping the door open for a future IPO or strategic exit when market conditions improve.
- Private Equity Maturity Wall: A typical PE fund lifecycle lasts 10 years, a contractual obligation generally outlined in the fund's limited partnership agreement (LPA) and other founding documents. Most PE funds are now approaching the end of their lifecycle, with over 50% aged six years or more. Consequently, GPs are being forced to aggressively explore options for near-term exit. In fact, Pitchbook estimates 1,607 funds will need to be wound down in 2025 or 2026 alone. Continuation funds take on assets as part of a fund’s dissolution process.
- Evolution of Continuation Funds: The maturation of the marketplace for continuation funds has been another contributor to the GP-led secondaries trend. Notably, the past year saw a landmark $3 billion single-asset continuation vehicle for Alterra Mountain Company, highlighting the scale that these transactions can now achieve. While single-asset continuation funds have dominated historically, multi-asset continuation vehicles are gaining traction, allowing GPs to extend ownership across larger portfolios and providing investors with diversified exposure. This shift is reinforced by a surge in fundraising for secondary strategies, with over $97.5 billion raised in the trailing 12 months as of Q3 2024 – representing a 30.9% year-over-year increase.
- Liquidity as an Option for LPs: Many wind-down mechanisms, such as forced asset sales or fund extensions, leave LPs with limited flexibility and uncertain exit outcomes. In contrast, continuation funds offer LPs a choice—they can cash out at a set price or roll over their investment into the new vehicle. This means a structured liquidity path that aligns the interests of both exiting and remaining investors.
- Maximizing Value: Continuation funds are particularly useful when the original fund’s investment thesis has not yet had the opportunity to fully bear out but portfolio companies may be gaining traction. In many cases, these assets are approaching an inflection point – whether it’s scaling operations, achieving profitability, or capitalizing on strategic growth opportunities – but the original fund’s term constraints force a premature exit. Rather than selling before the full value creation potential is realized, GPs can use continuation funds to extend their hold period and proceed further along the J-Curve with an investment. This structure benefits both GPs and investors by preserving exposure to assets poised for significant appreciation while also offering liquidity options for LPs who prefer an earlier exit.
Best Practices
The combined influence of the factors above is cementing continuation funds as a mainstream liquidity strategy, with PitchBook predicting that GP-led secondary transactions will surpass 100 in 2025. However, while continuation funds are an increasingly utilized solution, executing these transactions requires careful navigation.
Not all deals succeed. GP-led secondaries remain a contentious area, with approximately one-third of such transactions failing in 2023 due to LP resistance. Many LPs remain skeptical, particularly when they perceive misalignment between the sponsor’s interests and their own, or when deal terms lack sufficient transparency. To mitigate these risks, GPs must prioritize clear communication, offering compelling rationales for extending the asset’s holding period and ensuring that pricing mechanisms withstand scrutiny.
Regulatory uncertainty persists. While the current landscape appears momentarily favorable, it remains fraught with evolving legal and compliance challenges. The SEC’s initial rule requiring third-party valuations or fairness opinions for continuation fund transactions – introduced to enhance pricing transparency and mitigate conflicts of interest – was overturned by the 5th U.S. Circuit Court of Appeals on June 5, 2024. Despite this reversal, the scrutiny surrounding these transactions has not subsided, with regulators and LPs alike continuing to call for stronger governance practices. As a result, GPs must proactively adopt best-in-class valuation methodologies and governance frameworks to build credibility and ensure that transactions meet the highest fiduciary standards.
Fairness opinions are a safeguard. Given the potential for deal failure and ongoing regulatory scrutiny, fairness opinions have emerged as a critical tool in structuring successful continuation fund transactions. These independent assessments help address LP concerns by providing an objective evaluation of whether the transaction terms are fair from a financial standpoint. By reinforcing transparency and mitigating perceived conflicts of interest, fairness opinions can increase LP confidence and reduce resistance.
Partner with a trusted advisor. In an environment where transparency and governance are paramount, working with experienced, independent valuation providers and other trusted advisors is essential. For example, as mentioned above, fairness opinions and third-party valuations play a critical role in enhancing GP credibility and ultimately mitigating tort risk; however, opinions are only as good as the experts standing by them. Only advisors with deep expertise in secondary market transactions and a commitment to objective, data-driven analysis can provide the insights necessary to structure continuation fund transactions with integrity and precision.
About Houlihan Capital
Houlihan Capital is a leading, solutions-driven, valuation, financial advisory and investment banking firm committed to delivering superior client value and thought leadership. The firm has extensive experience in providing objective, independent and defensible fairness opinions and other opinions of value that meet accounting and regulatory requirements. Our clients include some of the largest asset managers around the world, and ’40 Act funds, private equity funds, hedge fund advisors, fund administrators, and other asset management firms benefit from Houlihan Capital’s comprehensive valuation and financial advisory services. Houlihan Capital is SOC-compliant, a Financial Industry Regulatory Authority (FINRA) and SIPC member, and committed to the highest levels of professional ethics and standards.
For questions or inquiries regarding valuation assistance for continuation funds, please contact:
info@houlihancapital.com
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(1) Pitchbook 2024 Annual US PE Breakdown: https://pitchbook.com/news/reports/2024-annual-us-pe-breakdown
(2) Pitchbook 2025 US Private Equity Outlook: https://pitchbook.com/news/reports/2025-us-private-equity-outlook
(3) Q3 2024 PitchBook Analyst Note: Exit Alternatives for US VC: https://pitchbook.com/news/reports/q3-2024-pitchbook-analyst-note-exit-alternatives-for-us-vc
