In the last year, markets have been volatile, to say the least. Global M&A has been stagnant, IPOs have been hit and miss, and pressure has been put on one industry in particular: private equity. Private equity firms are sitting on a backlog of unsold assets as traditional exit routes have become tougher to execute. As a result, a new controversial alternative has become increasingly popular: continuation funds. These deals involve PE firms selling assets to themselves via new funds, which is having strategic benefits while also raising ethical concerns.
In today’s blog, we explore what continuation funds are, why they’re becoming so popular, and both the benefits and concerns associated with them. Let’s get started.
Private Equity Recap
Last week we covered the basics of how private equity works, and we highly recommend you read that blog so you’re fully versed in the fundamentals of the asset class. (Check out ‘Private Equity 101: Everything You Need to Know’ on our home page!)
However, we’ll do a quick recap here. Private equity refers to a PE firm raising capital from investors to create an investment fund. This fund is then used to acquire companies, often with the aim of improving operations, streamlining costs, or accelerating growth. The goal is to increase the company’s value and eventually exit the investment through a sale or IPO. The profits from this exit are then distributed to investors, while the PE firm earns management and performance fees for its role.
What Are Continuation Funds?
So, what actually are continuation funds? Continuation funds are a type of deal structure where a private equity firm sells an asset from an older fund to a new fund (both managed by the same PE firm). Essentially, they are selling assets to themselves at the current fair market value. The purpose? To give the firm more time with a company it still sees potential in, especially when traditional exit routes aren’t viable.
In these deals, existing investors are typically given two options: they can
- Cash out their stake and exit the investment, ideally realising gains if the asset has appreciated.
- Roll over their investment into the new fund, staying involved in the hope of higher returns through a future exit.
Not only does this strategy allow investors to exit, but it also benefits the private equity firm. Continuation funds allow the firm to realise performance fees from investors who cash out, continue charging management fees on those who roll their investment over, and retain control of a valuable asset they believe has further upside.
Why Continuation Funds Are Thriving in 2025
In 2025, continuation funds have soared in popularity, and with good reason. Amid heightened economic uncertainty, private equity firms have had to grapple with a prolonged downturn in traditional exit routes like IPOs and corporate takeovers. US investment bank Jefferies reported that continuation funds accounted for a record $41 billion in exits in the first half of 2025 alone. That’s up 60% from last year and accounts for 19% of all PE sales this year.
Private equity firms are currently sitting on more than $3 trillion in unsold assets. Combine that with the underwhelming returns the industry has provided in recent years, and it’s easy to understand why continuation funds have become a new go-to strategy. They allow investors, who are becoming increasingly impatient with PE’s subpar returns, to exit investments and take their money elsewhere. Meanwhile, they also allow PE firms to generate their sought-after fees and extend ownership of prized portfolio companies.
With major players like Vista Equity Partners, Inflexion, and New Mountain Capital embracing this model, continuation funds are no longer a niche solution but a mainstream strategy.
“Now this is a bona fide exit route for every [fund manager] out there. We expect most sponsors will plan to do one or two of these out of every fund they raise, it’ll be a regular exit that they underwrite.” – Scott Beckelman, global co-head of secodary advisory at Jefferies.
A sign of how embedded continuation funds have become in the private equity playbook. (Image: Getty Images)
The Concerns and Controversies
Despite their growing popularity, continuation funds have not been without critics within the finance community. The biggest concern surrounding the topic is conflict of interest. Since the PE firm is both the seller and the buyer, questions arise over whether the deals actually reflect the asset’s true market value. While many firms do use third parties to value their assets, some investors remain uneasy.
Capital recycling is also an issue. Critics argue that deals using continuation funds don’t represent true exits but are more a reshuffling of money within the same ecosystem. Effectively saying that they allow firms to report activity without actually bringing in fresh capital and investments.
Recently, U.S. management consultant Bain & Co. released a report that found nearly two-thirds of private equity fund investors still prefer traditional exit strategies. Only one in six favoured continuation funds. As these deals become more popular, the pressure for better governance, transparency, and investor representation is going to build.
The Continuation Question
To wrap up, continuation funds have quickly become a go-to tool for private equity firms navigating a tough exit environment, and they don’t seem to be going away any time soon. While they offer flexibility and liquidity, they also raise valid concerns about transparency and governance. As this industry continues to rapidly evolve, the real test will be whether this strategy serves investors as well as it serves the fund managers.
How would you feel as a private equity investor? Would you be comfortable rolling over into a continuation fund, or would you take the exit?
