Private for Longer: The Structural Shift Reshaping Private Equity and Secondary Markets

In the shadow of a constrained exit environment, private equity is undergoing a structural transformation. The rise of continuation funds and secondary market innovations has redefined how general partners (GPs) and limited partners (LPs) manage liquidity, extend value creation, and navigate capital deployment. As traditional exits—once the lifeblood of private equity—become scarcer due to macroeconomic headwinds and market volatility, the industry is pivoting toward tools that prioritize flexibility, strategic alignment, and long-term asset stewardship.

The Rise of Continuation Funds: A New Paradigm

Continuation funds, secondary vehicles established by GPs to extend ownership of assets beyond the original fund's lifecycle, have surged in popularity. In 2024 alone, GP-led secondaries reached $75 billion in transaction volume, with continuation funds accounting for nearly 90% of this activity. This represents a 56% year-over-year increase in the first half of 2024 and a 44% rise for the full year. The growth is driven by investor demand for liquidity, the need to adapt to extended value creation timelines, and the maturation of the secondary market.

For GPs, continuation funds offer a way to retain control over high-performing assets, optimize value, and avoid premature exits that might underprice long-term potential. For LPs, these vehicles provide liquidity without the need for a traditional sale, enabling them to roll their stakes into the continuation vehicle or exit selectively. This dual benefit has made continuation funds a cornerstone of modern private equity strategy.

Strategic Implications: Returns, Trust, and Systemic Risk

The proliferation of continuation funds has reshaped investor returns and trust dynamics. By extending holding periods, GPs can refine operational improvements and capitalize on market cycles, potentially enhancing returns. Secondary strategies, including continuation funds, have historically delivered attractive risk-adjusted returns, with lower loss ratios compared to primary strategies. For LPs, these tools mitigate the J-curve effect and accelerate cash flow breakeven, offering diversification across vintages and geographies.

However, the rise of continuation funds introduces complexities. Valuation transparency is critical, as GPs act as both sellers and buyers in these transactions. Independent valuation mechanisms and robust disclosure are essential to aligning interests and maintaining investor trust. Conflicts of interest, particularly in stapled primary transactions where investors commit to both the continuation fund and a new fund, must be carefully managed to avoid disputes.

Systemic risks also loom. The extension of holding periods and reliance on artificial liquidity could mask market inefficiencies, leading to over-optimistic valuations or misallocation of capital. If market conditions shift—such as a sudden rise in interest rates or a liquidity crunch—assets held for longer periods may become harder to monetize, increasing concentration risk.

Beyond Continuation Funds: Secondary Market Innovations

The secondary market's evolution extends beyond continuation funds. Subscription lines, NAV-based financing, and hybrid facilities now provide tailored liquidity solutions, enabling GPs to deploy capital efficiently across a fund's lifecycle. These tools are particularly valuable for continuation funds, which often have smaller investor bases and concentrated portfolios.

Innovations are also emerging in private credit, where continuation funds could address liquidity needs for seasoned loan portfolios. While private credit's fixed-income structure has historically limited such strategies, the growing secondary market for credit assets may drive adoption. Continuation funds could allow GPs to extend exposure to high-yield loans, offer yield-focused investors access to mature portfolios, and facilitate refinancing in high-cost environments.

The Long-Term Viability of Extended Holdings

The long-term viability of holding private assets for longer hinges on market dynamics and investor alignment. While extended value creation timelines can unlock greater returns, they require disciplined capital allocation and clear communication with LPs. GPs must balance the benefits of prolonged ownership with the risks of market overreach.

For investors, the key lies in due diligence. Assessing a GP's track record in managing extended holdings, transparency in valuation processes, and alignment of interests through co-investment or carried interest structures is critical. Investors should also consider the role of LP Advisory Committees (LPACs) in reviewing conflict waivers and ensuring governance standards.

Investment Advice: Navigating the New Landscape

For LPs, the rise of continuation funds and secondary market innovations presents opportunities and challenges. Strategic considerations include:
1. Diversification: Allocate to secondary strategies to access mature, de-risked assets with shorter liquidity horizons.
2. Transparency: Demand clear disclosure on valuation methodologies, conflict management, and fund economics.
3. Liquidity Planning: Use continuation funds to calibrate liquidity profiles, balancing long-term growth with exit flexibility.
4. Regulatory Awareness: Monitor evolving regulatory scrutiny, particularly from the SEC, which is increasingly focused on GP-led secondaries.

For GPs, the focus should remain on delivering value through extended stewardship while maintaining trust. This includes leveraging secondary market tools to recycle capital efficiently and engaging LPs in collaborative, long-term partnerships.

Conclusion

The shift toward private equity for longer is not merely a response to market constraints—it is a structural evolution. Continuation funds and secondary market innovations are redefining liquidity, returns, and risk management in an industry once anchored to traditional exits. As these tools mature, their success will depend on balancing strategic flexibility with transparency, ensuring that extended holdings enhance value rather than obscure risk. For investors and managers alike, the future of private equity lies in adaptability, alignment, and a willingness to rethink the lifecycle of capital.