The Quiet Revolution in Private Equity: How Continuation Funds Are Reshaping Exit Strategies in a Stagnant IPO Market

In a world where IPOs have become as rare as a clear summer day in a storm, private equity managers are rewriting the playbook for exits. The traditional avenues—strategic sales, sponsor-to-sponsor deals, and public market debuts—have faltered under the weight of volatile equity markets, stubbornly high interest rates, and geopolitical headwinds. Enter continuation funds: the unheralded heroes of a liquidity-starved private equity landscape.

The Rise of Continuation Funds: A New Normal

Between 2023 and 2025, continuation funds have surged from niche tools to linchpins of private equity liquidity. In 2024 alone, these vehicles accounted for nearly 90% of GP-led secondaries volume, a staggering shift that reflects both necessity and innovation. Jefferies data reveals that the first half of 2024 saw $28 billion in transaction volume—a 56% jump from the same period in 2023—and this momentum accelerated in the second half to $47 billion, a 44% annual increase.

This growth is no accident. With IPO windows closed and M&A activity sluggish, continuation funds allow sponsors to extend the life of high-quality assets without selling at a discount. For institutional investors, they offer a hybrid solution: liquidity without full exit. Consider the case of New Mountain Capital's $3 billion continuation fund for Real Chemistry, where 80% of LPs cashed out at a premium while retaining partial exposure. This duality—capital recycling and value preservation—is reshaping how private equity portfolios are managed.

Implications for Institutional Investors: Flexibility vs. Caution

Continuation funds are a double-edged sword for institutional investors. On one hand, they provide flexible liquidity options in a constrained market. LPs can either roll their stakes into the continuation vehicle (maintaining upside potential) or exit for immediate DPI. This flexibility is critical for investors needing to rebalance portfolios or meet short-term obligations.

However, the allure of liquidity must be tempered with caution. The "artificial" nature of continuation fund liquidity—where assets are not truly sold but merely transferred—raises questions about valuation accuracy. Independent fairness opinions and transparent governance frameworks are now table stakes to avoid conflicts of interest. For example, GPs must ensure that rolling LPs are not disadvantaged compared to exiting ones, a challenge that has led to stricter legal scrutiny.

Navigating the Risks and Rewards

The risks of continuation funds are not insurmountable but require strategic navigation. First, valuation alignment is paramount. Assets transferred into continuation funds must be priced fairly, often through third-party appraisals. Second, capital recycling must be purposeful. Simply extending a fund's life for the sake of it can erode returns. Sponsors must demonstrate a clear value-creation thesis—whether through operational improvements, market expansion, or technological integration.

For institutional investors, the key is to ask the right questions:
1. What is the fund's exit strategy? A continuation fund should not be a permanent holding but a bridge to eventual liquidity.
2. How are conflicts of interest managed? Robust LP advisory committees and independent valuation processes are non-negotiable.
3. What financing structures are in place? Subscription lines, NAV-based facilities, and hybrid debt instruments can provide liquidity without overleveraging the fund.

The Road Ahead: A Structured Future

As 2025 unfolds, the role of continuation funds will only deepen. With IPO markets unlikely to rebound soon and institutional investors demanding more liquidity, these vehicles will become a standard feature of private equity portfolios. However, success hinges on execution. Sponsors must balance innovation with discipline, while investors must balance flexibility with due diligence.

For those seeking to thrive in this new era, the message is clear: adopt continuation funds strategically. They are not a silver bullet but a vital tool in a toolkit that must include patience, transparency, and a long-term lens. In a stagnant IPO market, the ability to adapt is the ultimate exit strategy.

Investment Advice: Institutional investors should allocate a portion of their private equity portfolios to continuation funds but with a focus on sponsors with proven track records in asset management and transparent governance. Diversify across sectors and fund structures to mitigate risks, and always demand rigorous due diligence on valuation and conflict management. The future of private equity liquidity is here—it's time to ride the wave.