USA - Nationwide: An Investment Funds: Investor Representation Overview

The Rise of the Continuation Fund: Opportunity and Risk for Limited Partners

General partner (GP)-led secondary transactions have moved from the margins of the US private funds market to its centre. Once a niche tool used mainly to manage troubled or tail-end assets, the continuation fund – now the dominant form of GP-led secondary, accounting for the large majority of such deals – is a mainstream liquidity and asset-management strategy deployed by many of the largest and most sophisticated sponsors in the industry. As traditional exits have slowed and hold periods have lengthened, sponsors have increasingly turned to continuation vehicles to retain prized “trophy” assets beyond a fund’s natural life while offering existing limited partners a choice between cash and continued exposure. The scale of this shift is striking: according to secondaries-market advisers including Jefferies and Lazard, GP-led secondary volume reached approximately USD115 billion in 2025 and now represents roughly half of all secondary market activity, up from about a third in 2019. Moreover, as of June 2025, continuation vehicles made up 19% of sponsor-backed exits per KPMG. For the investors these transactions are designed to serve, this growth has created both opportunity and a distinctive set of risks.

The Structural Conflict at the Core of Every Deal

The reason continuation funds occupy so much of investor counsel’s attention is simple: they generally present an inherent and unavoidable conflict of interest. In a conventional sale, a sponsor negotiates at arm’s length against a third-party buyer, and the discipline of that adversarial process protects selling investors. In a GP-led secondary, the same sponsor sits on both sides of the table – negotiating the sale price as a fiduciary to the selling fund while simultaneously sponsoring, and standing to benefit from, the acquiring continuation vehicle. The sponsor sets the timeline, selects the assets, influences the valuation, and shapes the terms on which it will continue to manage the very assets being sold.

This dynamic does not make continuation funds improper. When executed with rigour and transparency, they can deliver genuine value: liquidity for investors who want it, continued upside for those who roll, and additional capital and runway for high-conviction assets. However, the conflict means that process integrity is everything. The central question for investor counsel may no longer be whether continuation funds are acceptable, but whether a particular transaction has been structured and run in a way that adequately protects the economic and governance interests of existing investors.

Where Investors Are Focusing

Several protective levers have emerged as the focal points of investor-side negotiation and diligence.

The first is genuine optionality. Existing investors should have a true and well-communicated choice of cashing out, rolling over on substantially the same terms (status quo rollover), and, where offered, rolling into new terms. A meaningful status quo option – one that does not penalise rolling investors with materially worse economics – is the clearest indicator that a transaction is being run fairly. Investor counsel scrutinise whether the rollover option preserves prior fee and carry arrangements or quietly resets them in the sponsor’s favour. Often, terms that appear on their face to preserve existing economics by maintaining the same fee and carry percentages actually increase the management fee base and disaggregate the asset from the selling fund waterfall.

The second protective lever is valuation and price discovery. Because the sponsor is conflicted, investors look for independent validation of price. Fairness opinions have become common, but their quality and the rigour of the underlying process vary widely, and a fairness opinion is not a substitute for genuine market testing. The most investor-protective transactions feature a competitive process, meaningful third-party lead investor involvement, and pricing benchmarked to recent independent marks rather than to a valuation that the sponsor itself controls. Ideally, a competitive process to fully dispose of the subject assets is conducted prior to or in parallel with the marketing of the continuation vehicle.

The third pillar of a well-run process is conflict governance and consent. Limited partner advisory committee (LPAC) approval of the conflict has become standard practice, and investor counsel devote significant attention to ensuring that the LPAC receives complete, timely and comprehensible information before blessing a transaction. The adequacy of disclosure – on the rationale for the deal, the process to establish pricing, the reinvestment of crystallised carried interest, and the economic and governance terms offered to rolling investors – frequently determines whether a transaction is perceived as legitimate.

The fourth factor is the treatment of sponsor economics. Investors increasingly probe how carried interest is crystallised and reinvested, whether the sponsor is “rolling” its own carry alongside investors, how management fees are reset in the continuation vehicle, and whether the deal resets return hurdles in ways that disadvantage continuing investors. Alignment – real, demonstrable, financial alignment between sponsor and investors in the new vehicle – has become a touchstone of investor-side analysis.

The Regulatory Backdrop

Although there has been increased regulatory scrutiny of these transactions over the past few years, governance and oversight remain largely in the hands of the investors. The Securities and Exchange Commission (SEC)’s Private Fund Adviser Rules, adopted in 2023, would have imposed direct requirements on GP-led secondaries – most notably a mandate to obtain an independent fairness or valuation opinion in adviser-led secondary transactions, together with disclosure of certain material business relationships with the opinion provider. However, the Fifth Circuit’s June 2024 decision in National Association of Private Fund Managers v SEC vacated those rules in full before they took effect, removing that federal baseline and leaving the protections the rules would have codified to be secured through negotiation rather than regulation.

The practical consequence is that investor protection now depends decisively on the negotiating table rather than the regulator. Many of the practices the vacated rules sought to mandate – independent valuation support, robust conflict disclosure, and meaningful investor consent – have nonetheless become market standard, not because they are legally required but because sophisticated investors and the leading secondary buyers generally demand them. Industry guidance, including the Institutional Limited Partners Association’s 2023 Continuation Funds guidance, has helped consolidate these expectations into a recognisable set of best practices around timelines, disclosure, fairness opinions and the status quo option. For investor counsel, this means that the work of protecting clients is increasingly bespoke, transaction-specific and dependent on negotiating leverage rather than on a uniform regulatory floor.

The Next 12 Months

Several developments seem likely over the coming year. In late June 2026, the SEC’s enforcement division confirmed that it is homing in on continuation vehicles and the inherent conflicts of interests in these transactions. Continuation fund volume is expected to continue to grow as the liquidity pressures. Single-asset continuation funds, used for sponsors’ highest-conviction “trophy” assets, became the dominant structure within the GP-led market in 2025, accounting for more than half of continuation-vehicle volume for the first time according to Lazard and Campbell Lutyens data. On current trajectories, market advisers see annual secondary volume potentially nearing USD300 billion within the next year or two. We expect continued convergence around process norms, with a status quo rollover option, GP-commitment rollover, and full LPAC disclosure increasingly treated as non-negotiable rather than aspirational.

We also anticipate growing investor sophistication in negotiating these transactions in advance, with more limited partners seeking to address continuation-fund mechanics directly in fund governing documents and side letters at the time of their original commitment, rather than reacting to each transaction as it arises. Additionally, investors are putting in place processes to enable participation in rollover options. While traditionally the vast majority of existing investors have elected to “cash out” in any continuation vehicle process, we anticipate an uptick in investor rollover as governance terms come into alignment with investor expectations. Finally, while federal rulemaking in this area appears unlikely in the near term, investor expectations – reinforced by increased regulatory scrutiny coupled with the expectations of the leading secondary buyers, whose own diligence imposes de facto discipline – may continue to function as the most effective form of investor protection.

For investors and their counsel, the message is clear: continuation funds are likely here to stay, and the value that an investor ultimately realises may depend less on whether such a transaction occurs than on the quality of the process behind it and on the strength of the representation at the table.