Private Equity Continuation Funds: A Strategic Liquidity Solution in the Post-Pandemic Era

In the shadow of the pandemic's economic upheaval, private equity continuation funds have emerged as a quiet revolution in the world of institutional investing. These vehicles, once a niche tool for extending the lifecycle of underperforming assets, have evolved into a cornerstone of liquidity strategy for both general partners (GPs) and limited partners (LPs). By 2025, the secondary market for private equity had surged to $162 billion in transaction volume in 2024, with continuation funds accounting for nearly 90% of GP-led activity. This growth is not accidental—it reflects a calculated response to a market starved of traditional exit routes and a demand for smarter capital allocation.

The Alignment of Interests: A New Paradigm

The post-pandemic landscape has forced a reevaluation of how private equity capital is managed. For GPs, continuation funds offer a way to retain control over high-performing assets while generating liquidity for LPs. For LPs, these vehicles provide a structured exit without sacrificing exposure to assets with long-term upside. The key to this alignment lies in the structure of the deals themselves. Single-asset continuation funds, which now dominate the market, are priced at 87% of net asset value (NAV) on average—compared to 71% for multi-asset vehicles—because they focus on concentrated, high-quality holdings. This pricing premium reflects investor confidence in the transparency and specificity of the assets being transferred.

Consider the case of New Mountain Capital's $3.1 billion SRC Continuation Fund, which extended ownership of Real Chemistry, a digital health innovator. By rolling over 100% of its GP commitment and carry into the new vehicle, New Mountain demonstrated a rare level of alignment with LPs. This structure ensured that GPs and LPs shared the risks and rewards of the asset's future performance, a stark contrast to traditional fund models where GP incentives often diverge from LP interests.

Risk Mitigation: Beyond the Illusion of Liquidity

Critics argue that continuation funds create “artificial liquidity”—distributions to LPs without a true exit. But this critique misses the point. In a market where M&A and IPO activity remain subdued, these funds are a pragmatic solution to a systemic problem. The real risk lies not in the structure of the funds but in the lack of transparency around valuations.

To mitigate this, leading GPs now employ independent valuation advisors and disclose detailed asset performance metrics. For example, Inflexion Continuation Fund I, a £2.3 billion vehicle consolidating four portfolio companies, included quarterly performance reports and LP advisory committee oversight. Such practices address concerns about overvaluation and ensure that LPs are not disadvantaged in the transition. The SEC's recent retreat from proposed fairness opinion requirements has further shifted the onus onto market participants to self-regulate, making due diligence more critical than ever.

Market Dynamics: Dry Powder, Dry Exits, and Dry Horses

The post-pandemic market has been defined by three forces: abundant dry powder, constrained exits, and a shift in investor behavior. With $288 billion in dry powder reported by Jeffries as of 2024, GPs face intense pressure to deploy capital efficiently. Continuation funds allow them to recycle capital from mature assets into new opportunities, effectively extending the life of their most valuable investments.

Meanwhile, LPs—particularly pension funds and sovereign wealth funds—are prioritizing liquidity over returns. The average age of private equity assets in continuation funds is 6.6 years, a reflection of the extended hold periods necessitated by weak exit markets. This trend is further amplified by macroeconomic stability in late 2024, including interest rate cuts and a rebound in public markets, which have made private equity assets more attractive to institutional capital.

Case Studies: From Theory to Practice

The Avista Healthcare Partners CV II, LP, which extended ownership of GCM, a medical component manufacturer, exemplifies the strategic value of continuation funds. By retaining the asset, Avista could pursue operational improvements and M&A opportunities, while LPs received tailored liquidity options. Similarly, Arcline Double Eagle CV consolidated eight aerospace companies into a multi-asset vehicle, enabling the firm to pursue a range of exit strategies while maintaining asset control.

These examples underscore a broader trend: continuation funds are no longer just a stopgap. They are a strategic tool for capital recycling, value extension, and investor alignment.

The Road Ahead: A Call for Prudence and Innovation

For institutional investors, the lesson is clear: continuation funds are a compelling yet underappreciated opportunity. However, success hinges on rigorous due diligence. Investors must scrutinize valuation methodologies, GP incentives, and the terms of rollover agreements. The rise of AI-driven analytics in private equity—used to model asset performance and predict exit windows—will further enhance the appeal of these vehicles.

In a world where liquidity is both a necessity and a commodity, continuation funds offer a blueprint for the future. They are not a panacea, but in the right hands, they represent a powerful synthesis of flexibility, alignment, and long-term value creation. As the secondary market matures, the question is not whether these funds will endure—but how quickly they will become the norm.

For those willing to look beyond the headlines, the message is simple: in the post-pandemic era, liquidity is not just about cash—it's about strategy. And in that strategy, continuation funds are leading the charge.