Continuation funds – once derided as “zombie funds” but now marketed as holding “trophy assets” – surged to an estimated US$63 billion in transactions in 2024, according to a new report.

Growth is expected to continue, propelled by an exit overhang in private funds of 29,000 unsold portfolio companies valued at US$3.6 trillion, while distributions to investors fell to just 11% of net asset value in 2024, the lowest level in more than a decade, the CFA Institute Research and Policy Centre says in the first of a three-part research series on ethics in private markets.

The report, Continuation Funds: Ethics in Private Markets, looks into the fast-growing market for continuation funds and sorts out issues concerning liquidity, alignment, and conflicts of interest.

Liquidity boost

A continuation fund is a private fund that acquires one or more assets from a pre-existing private fund. The manager of the older fund manages the new fund, gaining an expanded investment timeline and the opportunity to reset key economic terms.

In addition, the transaction usually brings in fresh capital for the new fund. Investors in the older fund can either gain liquidity by selling their interests or roll them into the new fund. An estimated 80%-90% of legacy investors choose to cash out and are replaced by a new investor base.

“Continuation funds are designed to give investors choice: Those who want liquidity can cash out, and those who want to continue their investment can roll over into the new continuation fund. Many investors are happy to take the money, but some dismiss continuation funds as merely a transfer of economic benefits to the fund managers,” comments Stephen Deane, CFA, senior director, capital markets policy, at CFA Institute and lead author of the report.

“The GP ( general partner ) sits on both sides of the deal, stands to reset carry and extend fees if successful, and may even improve the track record of the legacy fund – all factors that can give rise to conflicts of interest. Continuation vehicles make for a central case study in how liquidity, alignment, and governance come together in private markets.”

Mary Leung, CFA, senior advisor, capital markets policy, Asia-Pacific, at CFA Institute, adds: “While continuation funds have gained prominence in North America and Europe, their growing relevance in Asia‑Pacific cannot be underestimated. As private markets in the region gain more traction, regulators and market participants will need to address the same questions of liquidity, alignment, and governance highlighted in this report. The region has a unique opportunity to shape policies, practices that balance investor protection with long‑term market development.”

Competitive bidding

The report highlights the need to establish a fair process in establishing a continuation vehicle ( CV ), which is critical for its legitimacy.

This process involves competitive bidding to determine a lead investor and negotiations between the GP and the lead investor to determine the price. Limited partners ( LPs ) in the older fund can choose to cash out or roll their interests into the new fund. Rolling LPs should be, but often are not, given a status quo option to retain the same economic terms of their investment, says the CFI Institute Research and Policy Centre.

Continuation funds raise heightened conflicts of interest for the GP, according to the report. The GP serves as the fiduciary for both sides of the same transaction – the continuation fund ( the buyer ) and the legacy fund ( the seller ).

In addition, the GP has strong financial incentives to launch a CV, including the opportunity to prolong management fees, reset economic terms, and raise its equity stakes in what it believes are high-performing assets. Conflicts of interest also can arise among different LPs, illustrating their differences in size, resources, negotiating clout, and investment objectives.

Governance mechanisms exist to address the conflicts, including requirements for the GP to obtain a conflict-of-interest waiver from the LPs’ advisory committee of the legacy fund.

Nonetheless, some of the investment professionals interviewed for the report voiced skepticism about CVs, maintaining that they serve the interests of the GP and not those of the LPs. Other LPs, however, seem happy to take the liquidity that CVs offer.