The Continuation Fund Myth: Good Returns Mean a Good Deal

Continuation funds are usually presented as a simple choice: take cash today or remain invested in a quality company for longer. Yet 80-90% of legacy LPs choose cash, according to the CFA Institute. The evidence suggests the issue is not necessarily whether the underlying companies are good or whether continuation funds perform worse. HEC Paris found little broad return difference by fund type or geography. The harder question is whether the transaction gives investors a genuinely tested price and fair new terms when the same manager sits on both sides of the sale. Research from the CFA Institute, NYPPEX, Berkeley Law and the 2025 game-theoretic work cited in the brief points to the same conclusion: optionality is not protection unless process, economics and governance withstand the standard of a third-party sale.

Between 80% and 90% of legacy investors choose cash rather than roll their money into a continuation fund, according to the CFA Institute.

That is an arresting number because continuation funds are sold as a choice. Stay invested in a business you know, with a manager you know, for a little longer. Or leave with cash. Simple.

Apparently, it is not simple at all.

In 2024, continuation-fund transactions reached an estimated $63 billion, according to the CFA Institute, against a backdrop of 29,000 unsold portfolio companies valued at $3.6 trillion. Trade sales and stock-market listings had slowed. Private equity managers needed another route to return money to investors while holding on to companies they believed still had room to grow.

The continuation vehicle became that route.

Yet the cash-out rate raises a more awkward question. If so many investors are offered the chance to stay, why do so many take the exit?

The answer is not necessarily that they dislike the company. They may need liquidity, want diversification, or have enough exposure to a particular manager. But the figure does puncture the comforting idea that a rollover election automatically means investor confidence.

A continuation fund is not merely a longer hold. It is a sale from an old fund into a new one, where the same manager is commonly central to both sides of the arrangement.

That is why its real test is not time. It is whether the sale would survive the scrutiny of an arm’s-length buyer.

The missing deal story matters

A proper investigation would normally begin with the moment a named company was transferred from one fund to another: the buyer, the seller, the valuation, the investors who stayed and the investors who left.

The supplied research does not identify a named continuation-fund transaction. It provides market evidence, regulatory analysis and performance research, but no verifiable company-level deal that can responsibly be inserted here. Inventing one, or importing one from outside the record, would make the story more colourful and less true.

So the documented transaction is the one repeated across the market.

A private equity manager, usually called a GP, manages capital for outside investors, usually called LPs. The GP believes an existing portfolio company should not yet be sold to an unrelated buyer. It arranges for a newly created vehicle to acquire that company. Existing LPs can sell for cash or roll their interests into the new vehicle. New investors may also come in.

At first glance, everybody gets something useful. The cashing-out LP receives liquidity. The rolling LP keeps exposure to a company it may like. The manager gets more time to build value.

Then look one layer deeper.

The old fund needs the highest defensible sale price. The new vehicle needs a sensible purchase price. A high transfer price can crystallise carried interest, the manager’s share of investment gains, in the old fund. The new vehicle can begin with a fresh set of management fees, the recurring charges paid to run it.

No accusation is required. The conflict is built into the architecture.

HEC Paris. Photo: DXR / Wikimedia Commons, CC BY-SA 4.0.

Good returns do not settle the argument

Here is the twist many critics miss. The available evidence does not show that continuation funds broadly produce worse outcomes.

HEC Paris, the French business school, examined continuation-fund performance in 2024 and found little return difference by fund type or geography. That is an important corrective to the easy claim that continuation vehicles are simply a way to keep weak assets alive.

They may not be.

A strong company can need more time. A hurried sale can destroy value. A continuation fund may allow investors to realise part of their investment while leaving a capable manager to continue a strategy that is working.

But performance parity is not a fairness certificate.

Imagine two house sales that end with the same eventual profit. In one, several buyers bid, an independent survey is available and the seller can walk away. In the other, the estate agent effectively represents both sides, sets the timetable and tells one buyer what the house is worth. The final profit might look similar. The process is plainly not.

That is the distinction HEC Paris’s finding cannot answer by itself. Its research says continuation funds have not shown broad underperformance relative to other exits. It does not prove that every transfer price was properly tested, that every rollover investor received equivalent terms, or that changed fees and governance were fair.

Put the performance study beside the CFA Institute’s process work and a pattern appears that neither source says outright: outcome data can tell you whether the journey ended acceptably. It cannot tell you whether the passengers were charged fairly at the gate.

The sale inside the sale

Berkeley Law, the University of California, Berkeley’s law-school platform, examined continuation funds in June 2026 through the lens of what it called the architecture of alignment.

Its focus was the reset hidden inside the word “continuation”. A transaction can crystallise DPI, meaning distributions paid back to investors compared with the money they originally committed. It can also reset economics in a new vehicle.

Cash comes out. A new investment begins. Those are two different events.

Berkeley Law examined how continuation funds can crystallise distributions while resetting economics and governance. Photo: Samuel Albillo / Senior Staff for The Daily Californian / Wikimedia Commons, 0BSD.

This is where most people stop looking. A distribution feels like proof that value has been created. Sometimes it is. But the cash distribution alone cannot establish whether the new vehicle paid the right price, whether rolling investors entered on fair terms, or whether the manager gained a more attractive fee and carried-interest arrangement than the old fund allowed.

The CFA Institute’s July 2026 work therefore placed unusual weight on process. Competitive bidding matters. LP advisory committee review matters. So do status-quo rollover economics: investors who remain should not be pushed into materially worse terms simply because they chose not to take the cash.

That standard is more demanding than it sounds.

A manager can offer an election and still leave investors with an unattractive choice. Cash may mean giving up a promising asset. Rolling may mean accepting a fresh valuation, revised fees and altered governance rights with less information than an outside buyer would demand.

Choice without comparable terms is not much of a choice.

GI Network's view: A continuation vehicle should pass two separate tests: would the old fund accept this as a sale, and would a new investor accept it as a fresh purchase? If either answer is no, the structure is not ready.

What the 2025 research actually warns about

The academic warning here deserves more context than a footnote.

The research brief identifies 2025 game-theoretic research by Jo et al. and Ivashina et al. The supplied material does not provide the authors’ institutional affiliations or the individual paper titles, so they should not be embellished. What it does establish is the subject of their work: how a GP’s information advantage affects continuation-fund valuation.

The models examine a familiar problem. The GP knows the company’s customers, pipeline, financing needs and weak points far better than its LPs. If a higher transfer valuation increases fees or crystallises carried interest in the old fund, the GP has a reason to prefer that valuation.

A model is not an allegation. It does not say every GP inflates every price.

It maps the pressure point.

Jo et al. and Ivashina et al. also identify forces that can reduce the distortion risk. One is meaningful participation by LPs that roll into the new vehicle. Another is a GP with strong future fundraising prospects. In plain English, a manager is less likely to risk damaging trust when informed existing investors remain exposed and when its next fund depends on a reputation for fair dealing.

That insight matters because it shifts the debate away from slogans. “Cash or roll” is not the key investor protection. The quality of the information, the credibility of the price and the consequences for the manager are.

A premium can be reassuring, up to a point

NYPPEX, a United States secondary-market firm that tracks private-market transactions, reported in mid-2026 that single-asset continuation funds often traded near or above NAV, the manager’s stated asset value.

That finding deserves to be taken seriously.

A premium to NAV is not automatically suspicious. It may indicate that a prized company attracted genuine demand. In a single-asset transaction, a concentrated group of buyers can focus closely on one business, run their own assessment and compete for it.

We expected the opposite conclusion from the conflict story. The evidence is messier. Some continuation funds can produce pricing that looks credible, even strong.

But NAV is a mark, not a verdict.

A price above the previous valuation does not answer whether outside bidders had a real opportunity to compete. Nor does it settle what happened to fees, carried interest, disclosure or investor control rights after closing. NYPPEX’s broader finding was more cautious: pricing patterns, especially for multi-asset vehicles, were less transparent.

So the lesson is not to distrust a premium. It is to ask what earned it.

Why venture capital held back

The continuation-fund boom has not been evenly spread across private markets.

Axios reported in 2024 that continuation funds remained rare in venture capital, partly because of regulatory complexity and investor hesitation. Venture capital investors may also be particularly wary of trying to value young companies whose eventual outcomes can remain uncertain for years.

That contrast challenges the assumption that continuation funds exist only because businesses need longer to mature. If time were the entire explanation, adoption would be more uniform.

Instead, scrutiny changes behaviour. Where investor hesitation is stronger and regulation is more difficult, continuation vehicles appear less common. Where exit markets are blocked and the structure is familiar, they have proliferated.

There is a useful historical parallel in management buyouts. Management can know more about a company than outside buyers and can influence both sides of a transaction. The conventional answer has been independent fairness opinions and approval by disinterested committees.

The legal forms differ. The underlying worry is the same: people with the best information should not also control the terms without meaningful checks.

What operators should ask before the paperwork arrives

Company management teams should resist the idea that nothing changes because the business, its leadership and its strategy remain in place.

Ask why the company is being transferred rather than sold to an unrelated buyer. Ask whether there was a competitive process. Ask what independent valuation work has been done. Then ask what changes after closing.

Who appoints directors? Who has consent rights over financing, acquisitions or a future sale? What new expectations are created by the incoming investors?

These questions are not technicalities. They determine who has power if performance stumbles.

The same discipline applies to the gap between reported and financeable revenue. A reported number may be real and still fail to meet the standard a hard-nosed capital provider needs in order to rely on it. A stated valuation works the same way. It may be plausible without being tested.

What investors should inspect first

An experienced LP does not begin with, “Is this a good company?” It begins with, “What am I now being asked to own, on what terms, and at what price?”

Start with price. Were credible outside bids invited? Is there independent validation? How does the proposed value compare with the prior mark, and what explains the difference?

Then examine the rollover. Can an investor remain on economics that are no worse than the status quo? Does it have enough information to treat the election as a fresh investment decision?

Next comes the reset. Follow the treatment of carried interest and management fees from old fund to new vehicle. A good company can still be transferred on terms that favour the manager too heavily.

Finally, inspect control. Board appointments and consent rights become especially important when the original investment does not go to plan. As GI Network has explored in hidden control rights in financing, the rights that matter most are often not the ones highlighted in the headline terms.

GI Network would assess a proposed continuation vehicle as two linked transactions rather than one: an exit for the legacy fund and a new underwriting decision for rollover and incoming capital. That means testing the valuation against bids and prior marks, tracing the fee and carried-interest reset, checking whether rollover terms preserve the status quo, and mapping every governance right that changes hands. The result is a record an investment committee can challenge before liquidity becomes irreversible.

The Four-Window Test

Before approving a continuation vehicle, look through four windows.

1. 1.Price: Has the transfer valuation been tested against credible bids, earlier marks and independent review?
2. 2.Choice: Can LPs sell or roll with enough information, and without materially worse economics for staying?
3. 3.Reset: What changes in carried interest, management fees and distribution economics between the old fund and the new one?
4. 4.Control: Who holds board appointments and consent rights after the transaction closes?

HEC Paris’s performance research gives continuation funds an important benefit of the doubt. They do not appear, in broad terms, to be a category of inherently inferior investments.

But that is not the same as saying every deal deserves trust.

If the four windows are clear, a continuation fund can offer sensible liquidity and valuable additional time for a strong asset. If one is opaque, do not confuse the structure with an ordinary exit.

It is a conflicted sale followed by a new investment. Judge both.