Liquidity in Private Equity: The Growing Importance of the Secondary Market
Traditional exit strategies have become increasingly unpredictable in today’s market. Faced with valuation uncertainty and prolonged holding periods, private equity managers are relying more heavily on GP-led secondary market solutions, particularly continuation funds. These structures not only help alleviate LP liquidity pressures but also serve as strategic tools for extending high-performing assets, adjusting investment timelines, and reshaping fund governance.
When Continuation Funds Redefine GPs’ Strategies
Continuation funds have evolved beyond simply extending the life of an asset. They are now core mechanisms for value maximisation and portfolio optimisation. Instead of waiting passively for ideal market exit windows, GPs can proactively design transactions to move target assets into new vehicles that offer existing LPs the choice to exit or continue.
Continuation fund structures vary but are typically designed to accommodate either a high-conviction single asset or a thematically aligned portfolio. These setups are supported by third-party valuation processes and fairness opinions, ensuring pricing integrity and mitigating potential conflicts. On the governance front, independent committees are often formed to oversee the transaction, enhancing transparency and investor confidence.
Growth Drivers of Continuation Funds
The rise of continuation funds reflects a convergence of structural and market-driven forces. It is the result of several converging forces.
Pressure on Exits: The Primary Market Under Stress
Volatility across global capital markets and valuation compression have significantly delayed traditional exit routes such as IPOs and M&A. Many funds are holding strong-performing assets that are not yet ripe for exit within their original timelines. This trend is especially visible in technology and consumer sectors, where businesses may take longer to mature after early-stage growth.
LPs Facing Increasing Liquidity Constraints
The capital reallocation pressures facing LPs. It’s driven by rising rates, liquidity needs, and asset markdowns which have made continuation funds a flexible alternative to traditional exits. Continuation funds offer a middle ground between full exit and long-term lock-up, allowing LPs to maintain exposure while partially liquidating positions.
The Professionalisation of the Secondary Market
The maturity of the secondary market has laid the foundation for more institutionalised and scaled continuation fund deals. Many secondary buyers now conduct deep due diligence and valuation modelling, and actively contribute to transaction structuring. As a result, continuation funds are no longer temporary solutions but integrated elements of long-term asset management plans.
A More Stringent Regulatory Framework
Lastly, changes in regulatory and accounting standards have indirectly encouraged this growth. Under frameworks like AIFMD and IFRS, stricter asset valuation and disclosure rules have incentivised GPs to plan exit structures earlier and adopt standardised continuation processes to avoid compliance risks later on.
Continuation Funds: Strategic Levers and Governance Challenges
Extended Applications Beyond Buyouts
Continuation funds are increasingly used not only in buyout funds but also across growth equity and venture capital. Industries such as technology, healthcare, education, and infrastructure often involve companies requiring sustained capital and governance. These vehicles offer GPs more flexible capital and control, enabling them to guide businesses through their next stage of growth.
Unified Governance for Strategic Assets
In some cases, GPs use continuation funds to consolidate star assets across fund vintages into a single structure, centralising oversight and resource allocation while refreshing performance trajectories—especially when legacy fund returns are dragged by tail-end assets.
Valuation: Between Credibility and Transparency Requirements
Valuation fairness remains a core issue. While third-party valuation reports and fairness opinions provide a baseline, lack of competitive bidding or insufficient disclosure can prompt LP scepticism. Some LPs now demand auction-based pricing processes or minimum participation thresholds to protect legacy capital interests.
The design and execution of governance arrangements is paramount. Successful continuation funds require clearly defined rights and roles for both existing and rolling LPs. In some cases, GPs have established independent investment committees within the new vehicles to prevent decision-making conflicts from spilling over into other funds.
Simplifying Continuation Fund Transactions with ScaleX Invest
Multi-Asset Valuation Engine
ScaleX enables valuation across a wide range of instruments—including equity, debt, convertibles, and options. It supports waterfall modelling to simulate capital distribution scenarios, which helps GPs clearly communicate expected returns and aligns stakeholder expectations.
Real-Time Monitoring and Reporting
ScaleX offers dynamic portfolio tracking and automated report generation that complies with IFRS, IPEV, and other global valuation standards. This ensures consistent, regulator-ready documentation throughout the continuation fund lifecycle.
Secure API Integration and Compliance
The system supports seamless API integration with internal CRMs and data environments. It is certified for SOC2 and GDPR compliance, ensuring enterprise-grade data security and privacy protection across all user interactions.
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FAQs
1. What is a continuation fund in Private Equity?
A continuation fund is a secondary vehicle that allows the transfer of assets from an existing fund to a new one, giving LPs the option to exit or remain invested.
2. Why are continuation funds gaining popularity?
They offer flexibility and liquidity solutions in response to extended holding periods and valuation uncertainties.
3. How do continuation funds address the liquidity needs of LPs?
They allow LPs to sell all or part of their shares while maintaining exposure to future performance.
4. What role do independent committees play in governance?
They ensure transparency, prevent conflicts of interest, and maintain integrity in decision-making processes.
