Continuation Funds: Structuring Considerations for Sponsors

Continuation vehicles are now a routine tool in the sponsor playbook, used both for trophy assets and for orderly wind-downs. The structures that succeed share a common quality: they make the conflict explicit, price it through a real process, and give existing LPs a meaningful choice.

Lead investor terms, fairness opinions, and GP roll mechanics are the three levers that most often separate a clean closing from a contested one. Each is now scrutinized by LP advisory committees with the benefit of two years of market data and a much sharper view of what 'market' actually means.

On lead investor terms, the days of a single buyer setting the price unilaterally are largely over. LPACs and the more sophisticated secondary buyers expect a competitive process - at minimum a parallel-track exploration of a third-party sale, more often a real auction with multiple secondary bidders. The lead investor's economics (preferred return, catch-up, super-pro-rata co-invest rights) should be consistent with what the market is paying for similar assets at similar scale, and the disclosure to existing LPs should make those economics legible without specialist help.

Fairness opinions remain a debated topic. They are not legally required in most structures, but the trend is unmistakable: significant continuation transactions are now routinely supported by an opinion from an independent investment bank, and the LPACs we work with increasingly expect one. The opinion is most useful when it is commissioned early enough to inform - not just bless - the price negotiation, and when its scope reflects the actual economics being negotiated rather than a stylized version of them.

GP roll mechanics are where the conflict is most visible and the structuring choices most consequential. The market norm is for the GP to roll a meaningful portion of crystallized carry into the new vehicle, on the same economic terms as the lead investor where possible, with the remainder taxed and distributed in line with the existing LPA. The roll percentage should be high enough to demonstrate genuine alignment with the new vehicle's outcome but not so high that it strips meaningful realized economics from the existing fund's LPs.

Beyond the headline mechanics, three structural details deserve attention. First, the management fee and carry waterfall in the continuation vehicle should reflect the fact that the asset is more mature than a fresh buyout - typically a stepped-down management fee on invested capital and a tighter carry hurdle than the sponsor's flagship fund. Second, the governance package should give the new investor base a meaningful voice on a defined set of matters (additional follow-on investment, related-party transactions, exit timing) without recreating the operational drag that motivated the continuation in the first place. Third, the exit horizon and the realization mechanics should be specified with care; an open-ended hold is rarely the right answer.

The diligence package the lead investor receives is substantively the same as a primary M&A process - financial, legal, commercial, and operational diligence at full depth - and the representations and indemnification package needs to be calibrated to that reality. We routinely see continuation vehicles with a tailored RWI policy as the primary recourse, with a narrow set of seller-specific indemnities for matters that the policy will not cover.

The LPAC's role has matured. The strongest LPACs are now active participants in the design of the process, not just the gatekeepers of consent at the end. The transactions that close most cleanly are the ones where the GP engages the LPAC at the earliest stage, shares the strategic rationale before the price is fixed, and is prepared to adjust the process in response to LPAC input. The transactions that draw the most pushback are the ones presented to the LPAC as a fait accompli.

Done well, a continuation fund is one of the cleanest tools available to a sponsor for managing the timing mismatch between a fund's life and an asset's optimal hold. Done poorly, it can damage the GP's franchise for years. The structural difference between the two outcomes is rarely about complexity; it is about discipline at each step of the process.

What we are watching

We will return to this topic across the coming quarter. If you are actively negotiating a transaction where these issues are live, we'd welcome a confidential conversation.

Three takeaways

• The market is settling, but the diligence bar is rising.
• Preparation, not posture, is the source of speed.
• The right structure can move price more than another round of negotiation.