Continuation Fund

A continuation fund is a new fund that acquires a company from an expiring fund managed by the same manager. This allows the manager to hold a promising investment for longer instead of having to sell it at the end of the fund's term. Existing investors can cash out or roll over into the new fund. The trigger is structural: a fund's life is limited, while a portfolio company has not yet completed its value creation plan or the market environment for a sale is unfavourable.

The new fund is financed by secondary market investors, often supplemented by capital from the manager's current fund and an increased commitment from the manager itself. The obvious conflict of interest is that the same manager stands on both sides and sets the price for a company it is selling to itself. Several process elements can help manage that conflict: an independent advisor runs the process, a market price is established through third-party bids, a fairness opinion is obtained and the investor advisory committee is involved.

Investors who exit obtain liquidity, those who roll over gain a longer horizon in a company they already know. What began as a niche has become an established part of the secondary market and is now regarded as an exit route in its own right alongside trade sale, secondary buyout and initial public offering. For the investors involved the decision is demanding in practice, because they must choose between cashing out and rolling over within a limited period, without the depth of information available to the manager. Industry guidance therefore recommends an adequate deadline, a comprehensible presentation of the valuation basis and the option to roll over on unchanged terms. For the manager new obligations arise towards the secondary investors, whose return expectations may differ from the original ones.