Continuation funds, commonly coined as continuation vehicles (CVs), have rapidly expanded their presence in European secondary private markets. Once seen as a niche tool for salvaging struggling and distressed assets post-financial crisis, they have become a staple in modern private equity secondary transactions, completely revamping their original purpose.
Overview of Continuation Funds Structure
Continuation vehicles are creative investment solutions that allow GPs to extend ownership of select assets beyond the fund’s initial lifecycle. Instead of liquidating the assets to third parties, the General Partners (GPs) establish a new fund (continuation fund) that acquires the assets of the legacy fund. When the CV is formed, the Limited Partners (LPs) of the legacy fund can either i) roll their interest in the existing fund into the continuation fund, ii) liquidate their interest and receive their share of the purchase price, or iii) utilize a combination of both strategies.
LPs deciding to roll over their interest can do so on a reset or status quo basis. On a reset basis, LPs receive updated economic terms and may even be required to deepen their capital commitments in the fund. Similarly, after harvesting the surplus profits from the legacy fund, the GPs receive new terms for managing the acquired assets, which include new carried interest and management fees. However, on a status quo basis, LPs transfer their interest without alterations to their terms, yet the carried interest of GPs is not fully defined.
Continuation funds fall under the growing GP-led transaction umbrella in the PE secondary market and are divided into single-asset and multi-asset funds. Single-asset funds transfer a single portfolio company into the new fund and are typically reserved for high-performing or “crown jewel” assets. The increased focus on a single asset brings a more specialized strategy, and asset valuation provides fewer hurdles in the transfer process. On the other hand, multi-asset funds offer investors higher diversification, leading to smoother returns and greater risk spread. Nonetheless, it becomes more complex to price and structure such a fund.
Continuation vehicles are creative investment solutions that allow GPs to extend ownership of select assets beyond the fund’s initial lifecycle. Instead of liquidating the assets to third parties, the General Partners (GPs) establish a new fund (continuation fund) that acquires the assets of the legacy fund. When the CV is formed, the Limited Partners (LPs) of the legacy fund can either i) roll their interest in the existing fund into the continuation fund, ii) liquidate their interest and receive their share of the purchase price, or iii) utilize a combination of both strategies.
LPs deciding to roll over their interest can do so on a reset or status quo basis. On a reset basis, LPs receive updated economic terms and may even be required to deepen their capital commitments in the fund. Similarly, after harvesting the surplus profits from the legacy fund, the GPs receive new terms for managing the acquired assets, which include new carried interest and management fees. However, on a status quo basis, LPs transfer their interest without alterations to their terms, yet the carried interest of GPs is not fully defined.
Continuation funds fall under the growing GP-led transaction umbrella in the PE secondary market and are divided into single-asset and multi-asset funds. Single-asset funds transfer a single portfolio company into the new fund and are typically reserved for high-performing or “crown jewel” assets. The increased focus on a single asset brings a more specialized strategy, and asset valuation provides fewer hurdles in the transfer process. On the other hand, multi-asset funds offer investors higher diversification, leading to smoother returns and greater risk spread. Nonetheless, it becomes more complex to price and structure such a fund.
Rationale of Continuation Funds
The underlying rationale of continuation funds is enhancing flexibility for investors. They allow fund managers to circumvent the traditional private equity model by enabling GPs to maintain control over assets, from which future economic value can be extracted, while still providing liquidity options for those LPs wishing to exit. Consequently, it facilitates a window of opportunity both for those wishing to realize further monetary gains from their prior investment and those wishing to exit to increase their liquidity.
Continuation funds generate exciting opportunities for GPs and LPs, which are absent in the standard private equity model. They avoid the famed J-curve effect of negative returns upon asset acquisition, allowing the fund to immediately generate positive returns. Legacy LPs can roll over their investment in a familiar asset and entrust their resources to the same GPs that secured their initial capital growth. Moreover, the exit of LPs stimulates new LP entrants who are more likely to be enticed by the prospect of a more mature asset with a lower risk profile. Subsequently, it grants the opportunity for GPs to expand the investor base and garner additional capital for value creation. Finally, CVs expand profile management flexibility by allowing GPs to optimize exit timing and strategy for individual assets
The underlying rationale of continuation funds is enhancing flexibility for investors. They allow fund managers to circumvent the traditional private equity model by enabling GPs to maintain control over assets, from which future economic value can be extracted, while still providing liquidity options for those LPs wishing to exit. Consequently, it facilitates a window of opportunity both for those wishing to realize further monetary gains from their prior investment and those wishing to exit to increase their liquidity.
Continuation funds generate exciting opportunities for GPs and LPs, which are absent in the standard private equity model. They avoid the famed J-curve effect of negative returns upon asset acquisition, allowing the fund to immediately generate positive returns. Legacy LPs can roll over their investment in a familiar asset and entrust their resources to the same GPs that secured their initial capital growth. Moreover, the exit of LPs stimulates new LP entrants who are more likely to be enticed by the prospect of a more mature asset with a lower risk profile. Subsequently, it grants the opportunity for GPs to expand the investor base and garner additional capital for value creation. Finally, CVs expand profile management flexibility by allowing GPs to optimize exit timing and strategy for individual assets
History of Continuation Funds
The early days of continuation funds generated considerable negative press. In the aftermath of the global financial crisis, CVs were predominantly employed for distressed assets to bestow additional time to squeeze out any remaining economic value, earning the monocle “zombie assets”. Consequently, the vehicle was heavily unfavored by LPs, resulting in either the liquidation of their interest at a discount or accepting new adverse investment terms. Henceforth, it predominantly operated as a tool for GPs attempting to minimize their losses during the recession.
The early days of continuation funds generated considerable negative press. In the aftermath of the global financial crisis, CVs were predominantly employed for distressed assets to bestow additional time to squeeze out any remaining economic value, earning the monocle “zombie assets”. Consequently, the vehicle was heavily unfavored by LPs, resulting in either the liquidation of their interest at a discount or accepting new adverse investment terms. Henceforth, it predominantly operated as a tool for GPs attempting to minimize their losses during the recession.
Figure 1: Continuation funds exit value and count in the US (source: Pitchbook)
However, around 2015, the perspective on CVs shifted as sponsors began to acknowledge their utility not only for struggling but also for high-performing assets that they wished to hold for longer during unfavorable market conditions. Moreover, it allowed for increased capital infusions when GPs could no longer secure funding from legacy investors. The most substantial turning point for CVs proved the COVID-19 pandemic when market volatility provided less-than-ideal exit conditions. This served as a paradigm shift in the utilization of CVs and their perception in the PE secondary market.
Rise of Continuation Funds
Though the initial wave of flagship CVs occurred approximately five years ago, there have yet to be any signs of slowing for the adoption of this secondary structure.
Though the initial wave of flagship CVs occurred approximately five years ago, there have yet to be any signs of slowing for the adoption of this secondary structure.
Figure 2: Secondary market transaction volume in the US (source: Evercore)
As seen in Figure 2, the secondary market has become increasingly active within the past ten years, and the past three have shown significantly greater transaction volume than previously. Looking at 2024 specifically, an Investec survey found that 68% of secondary managers expect to see deal activity increase in 2024 by 10-25%. The numbers paint an even more positive picture: H1 2024 YoY total transaction volume growth stands at an impressive 58%.
The same survey also found that 75% of managers anticipate being more active in GP-led deals in the following 12 months, a testament to the general trend of GP-led transactions making up a larger proportion of secondary transactions over the last ten years (shown in the graph above). This is incredibly relevant as continuation funds made up 90% of GP-led transaction volume in H1 2024, providing an attractive alternative while sponsor-backed exits continue to lag.
Within Europe, continuation funds have dominated secondary fundraising. As of May 2023, the three largest secondaries funds since 2018 were all continuation funds. The largest of which was Triton’s Triton IV Continuation Fund, a continuation vehicle for four companies in the firm’s 2013 Triton IV Fund, raising €1.63 billion in 2023. Other European industry leaders, such as AnaCap and EQT, have also embraced continuation vehicles with open arms (Figure 3).
Figure 3: Largest PE secondaries funds in Europe since 2018 (source: Pitchbook)
Another key trend to highlight is the growing shift towards single-asset continuation vehicles (SACVs), with single-asset continuation funds making up 64% of total continuation fund volume in H1 2024.
The rationale behind the trends
The aforementioned benefits of CVs have become increasingly relevant within the past few years. Challenging market conditions for traditional exits have made CVs all the more attractive in comparison, and the exit backlog generated has been dramatic, with buyout funds now sitting on 4x more unrealised capital than during the 2008 financial crisis. These challenging, uncertain conditions have also made liquidity even more important for LPs, increasing the appeal of the secondaries market.
It is, however, clear that these are not the only factors at play, given the volume of continuation funds in 2021 ($66bn in GP-led transactions) despite active M&A dealmaking. One contributing factor is the maturation of the PE market, a factor particularly strong in Europe. Compared to its early days, the understanding and acceptance of CVs as a legitimate alternative to M&A has increased considerably. GPs better understand the strategic potential that the vehicle unlocks, beyond distressed assets, and the increasingly sophisticated investor base is more open to innovative structures like CVs. Moreover, PE firms with deeper sector specialisation and greater focus on long-term asset management see increasing appeal for CVs.
The nature of the investments is also a contributing factor. A key benefit of CVs is the opportunity to have more time to realise further value, which is especially important given the increasingly complex nature of investments. Industries like technology and renewables, facing longer development cycles and regulatory challenges, often require more time to fully realise value. CVs facilitate this.
The aforementioned benefits of CVs have become increasingly relevant within the past few years. Challenging market conditions for traditional exits have made CVs all the more attractive in comparison, and the exit backlog generated has been dramatic, with buyout funds now sitting on 4x more unrealised capital than during the 2008 financial crisis. These challenging, uncertain conditions have also made liquidity even more important for LPs, increasing the appeal of the secondaries market.
It is, however, clear that these are not the only factors at play, given the volume of continuation funds in 2021 ($66bn in GP-led transactions) despite active M&A dealmaking. One contributing factor is the maturation of the PE market, a factor particularly strong in Europe. Compared to its early days, the understanding and acceptance of CVs as a legitimate alternative to M&A has increased considerably. GPs better understand the strategic potential that the vehicle unlocks, beyond distressed assets, and the increasingly sophisticated investor base is more open to innovative structures like CVs. Moreover, PE firms with deeper sector specialisation and greater focus on long-term asset management see increasing appeal for CVs.
The nature of the investments is also a contributing factor. A key benefit of CVs is the opportunity to have more time to realise further value, which is especially important given the increasingly complex nature of investments. Industries like technology and renewables, facing longer development cycles and regulatory challenges, often require more time to fully realise value. CVs facilitate this.
LPs: a nuanced view
The benefits of CVs as a strategy in private equity are undeniable, but it would be remiss of us not to acknowledge the very real (and growing) concerns from LPs. A report found that 90% of the time, LPs did not roll their exposure to the continuation fund, and that number (approximately) remains for 2024. The big question is why.
One component is the unfavourable nature of the process for LPs. LPs point to the limited time and information given, alongside the volume of requests, to make decisions that originally GPs were supposed to (i.e. the decision on when and how to sell). This requires a substantial amount of resources, due diligence, and time – time that is often not given. Communication with existing LPs on the idea of a continuation fund is often delayed; LPs are asking for transparency and involvement in the decision to ease the process, as well as the status quo option being adopted more often. This divide could be reflective of an inherent conflict of interest, that is, the fact that having too many LPs roll into the continuation fund would defeat its purpose entirely, and the asset should have simply been held onto.
Another key concern is the actual reason underlying the decision to pursue a continuation fund. LPs deem companies needing more time and capital to grow as an appropriate reason, whereas reasons that only benefit GPs, such as manufacturing DPI, are not. The question of whether the GP is the right firm to continue to grow the asset further also arises: are they able to add more value in new ways?
All in all, these questions provide for a much more nuanced story.
The benefits of CVs as a strategy in private equity are undeniable, but it would be remiss of us not to acknowledge the very real (and growing) concerns from LPs. A report found that 90% of the time, LPs did not roll their exposure to the continuation fund, and that number (approximately) remains for 2024. The big question is why.
One component is the unfavourable nature of the process for LPs. LPs point to the limited time and information given, alongside the volume of requests, to make decisions that originally GPs were supposed to (i.e. the decision on when and how to sell). This requires a substantial amount of resources, due diligence, and time – time that is often not given. Communication with existing LPs on the idea of a continuation fund is often delayed; LPs are asking for transparency and involvement in the decision to ease the process, as well as the status quo option being adopted more often. This divide could be reflective of an inherent conflict of interest, that is, the fact that having too many LPs roll into the continuation fund would defeat its purpose entirely, and the asset should have simply been held onto.
Another key concern is the actual reason underlying the decision to pursue a continuation fund. LPs deem companies needing more time and capital to grow as an appropriate reason, whereas reasons that only benefit GPs, such as manufacturing DPI, are not. The question of whether the GP is the right firm to continue to grow the asset further also arises: are they able to add more value in new ways?
All in all, these questions provide for a much more nuanced story.
Case Study: The Wheel Pro and Clearlake Capital Saga
The Wheel Pro and Clearlake Capital Saga case study highlighs some of the benefits and risks of continuation funds.
Wheel Pros was founded in 1995 and is headquartered in Colorado, USA. The company has historically designed, marketed and distributed aftermarket branded wheels. In 2018, Wheel Pros, owned at the time by Audax Private Equity Group, was acquired by the Los Angeles-based PE firm Clearlake Capital. The transaction was a buyout worth more than $400mn, of which $130mn came from equity through two of their funds. After the acquisition, the company was integrated into Clearlake Capital’s Partners V fund. In 2018, Wheel Pros borrowed more than $800mn to fund a $150mn dividend distributed to Clearlake Capital.
Three years later, in 2021, Clearlake Capital, through a continuation fund, sold the company to themselves for a profit of $1bn. This was Clearlake Capital’s most prominent asset sale since 2021, worth over five times the initial invested capital. The vehicle created to acquire Wheel Pros was called Icon Partners III. This vehicle purchased Wheel Pros for around $2.4bn and consisted not only of Clearlake Capital but also of ICG, Pantheneon and Blackstone. From 2021 to 2024, Wheel Pros tried growing inorganically through acquisitions some of which include: Driven Lighting Group, Throttle, TeraFlex and Transamerican Auto Parts. Furthermore, in October of 2023 the company rebranded to Hoonigan.
In September 2024, Wheel Pros filed for Chapter 11 bankruptcy protection due to its substantial debt reaching over $1.7bn. Due to this development, investors will not be able to recover their money marking an important development on the history of continuation funds. This is the second case continuation fund to fail in 2024, with the other being Riverstone’s Enviva Continuation Fund. The increase in interest rates, lower consumer spending and already high leverage are the main factors that led to the fund’s demise.
The Wheel Pros and Clearlake Capital case exemplifies both the potential advantages and risks of continuation funds. On one hand, these funds can offer a strategic way for private equity firms to continue supporting and profiting from assets, as seen when Clearlake Capital realised a significant profit from the sale of Wheel Pros to themselves through Icon Partners III. On the other hand, this case also underscores the risks inherent in high-leverage strategies and market fluctuations. Despite attempts at growth through acquisitions and rebranding, Wheel Pros ultimately succumbed to the pressure of rising interest rates, a strained consumer market and heavy debt, leading to its Chapter 11 bankruptcy. This outcome, along with the recent failure of Riverstone’s Enviva Continuation Fund, marks an important turning point for continuation funds and signals the need for caution in navigating their complexities amidst changing economic conditions.
The Wheel Pro and Clearlake Capital Saga case study highlighs some of the benefits and risks of continuation funds.
Wheel Pros was founded in 1995 and is headquartered in Colorado, USA. The company has historically designed, marketed and distributed aftermarket branded wheels. In 2018, Wheel Pros, owned at the time by Audax Private Equity Group, was acquired by the Los Angeles-based PE firm Clearlake Capital. The transaction was a buyout worth more than $400mn, of which $130mn came from equity through two of their funds. After the acquisition, the company was integrated into Clearlake Capital’s Partners V fund. In 2018, Wheel Pros borrowed more than $800mn to fund a $150mn dividend distributed to Clearlake Capital.
Three years later, in 2021, Clearlake Capital, through a continuation fund, sold the company to themselves for a profit of $1bn. This was Clearlake Capital’s most prominent asset sale since 2021, worth over five times the initial invested capital. The vehicle created to acquire Wheel Pros was called Icon Partners III. This vehicle purchased Wheel Pros for around $2.4bn and consisted not only of Clearlake Capital but also of ICG, Pantheneon and Blackstone. From 2021 to 2024, Wheel Pros tried growing inorganically through acquisitions some of which include: Driven Lighting Group, Throttle, TeraFlex and Transamerican Auto Parts. Furthermore, in October of 2023 the company rebranded to Hoonigan.
In September 2024, Wheel Pros filed for Chapter 11 bankruptcy protection due to its substantial debt reaching over $1.7bn. Due to this development, investors will not be able to recover their money marking an important development on the history of continuation funds. This is the second case continuation fund to fail in 2024, with the other being Riverstone’s Enviva Continuation Fund. The increase in interest rates, lower consumer spending and already high leverage are the main factors that led to the fund’s demise.
The Wheel Pros and Clearlake Capital case exemplifies both the potential advantages and risks of continuation funds. On one hand, these funds can offer a strategic way for private equity firms to continue supporting and profiting from assets, as seen when Clearlake Capital realised a significant profit from the sale of Wheel Pros to themselves through Icon Partners III. On the other hand, this case also underscores the risks inherent in high-leverage strategies and market fluctuations. Despite attempts at growth through acquisitions and rebranding, Wheel Pros ultimately succumbed to the pressure of rising interest rates, a strained consumer market and heavy debt, leading to its Chapter 11 bankruptcy. This outcome, along with the recent failure of Riverstone’s Enviva Continuation Fund, marks an important turning point for continuation funds and signals the need for caution in navigating their complexities amidst changing economic conditions.
Future Outlook
Looking ahead, we can expect an auspicious future for CVs in Europe’s PE landscape as these tools expand out of their initial use case. Initially used to take care of distressed or badly performing assets, CVs have transformed in a key tool for PE firms, particularly due to their flexibility. This adaptability enables GPs to keep high-performing assets well beyond their traditional fund lifecycle, providing opportunities to capture future gains and enabling GPs to delay sales in unfavorable market conditions bypassing constraints of traditional exit windows.
The flexibility of CVs proved particularly advantageous for SACVs, while a rising use of multi-asset CVs also signals a broader trend toward diversified investment opportunities, meeting the needs of investors and LPs seeking both growth potential and stability. This diversification has already encouraged increased participation from secondary market investors, further enhancing liquidity options for LPs and expanding the pool of capital available to CVs, also contributing to its continued growth.
In the future, the evolution of CVs is also expected to be accompanied by regulatory developments. The Wheel Pros case clearly highlighted the risks of exaggerated or even inappropriate usage of CVs via aggressive debt levels or unchecked growth strategies within certain economic conditions or cyclical industries. As such, European regulators may be forced to implement heightened scrutiny laws regarding transparency, risk disclosure, and alignment of interests between GPs and LPs. Enhanced guidelines in Europe could not only establish clearer standards for CV structuring but also address LP concerns over risk and information disclosure, ultimately strengthening investor confidence and encouraging wider adoption.
While examples like Wheel Pros clearly show the need for prudent structuring and strict criteria regarding the application of CVs, GPs and LPs can leverage these lessons to develop more robust CV structures and profit from this new tool. As the European PE market continues to mature and develop in uncertain economic conditions, CVs are in position to grow to a central element, offering a highly flexible yet structured approach to PE investing, aligning with investor needs in uncertain times.
Looking ahead, we can expect an auspicious future for CVs in Europe’s PE landscape as these tools expand out of their initial use case. Initially used to take care of distressed or badly performing assets, CVs have transformed in a key tool for PE firms, particularly due to their flexibility. This adaptability enables GPs to keep high-performing assets well beyond their traditional fund lifecycle, providing opportunities to capture future gains and enabling GPs to delay sales in unfavorable market conditions bypassing constraints of traditional exit windows.
The flexibility of CVs proved particularly advantageous for SACVs, while a rising use of multi-asset CVs also signals a broader trend toward diversified investment opportunities, meeting the needs of investors and LPs seeking both growth potential and stability. This diversification has already encouraged increased participation from secondary market investors, further enhancing liquidity options for LPs and expanding the pool of capital available to CVs, also contributing to its continued growth.
In the future, the evolution of CVs is also expected to be accompanied by regulatory developments. The Wheel Pros case clearly highlighted the risks of exaggerated or even inappropriate usage of CVs via aggressive debt levels or unchecked growth strategies within certain economic conditions or cyclical industries. As such, European regulators may be forced to implement heightened scrutiny laws regarding transparency, risk disclosure, and alignment of interests between GPs and LPs. Enhanced guidelines in Europe could not only establish clearer standards for CV structuring but also address LP concerns over risk and information disclosure, ultimately strengthening investor confidence and encouraging wider adoption.
While examples like Wheel Pros clearly show the need for prudent structuring and strict criteria regarding the application of CVs, GPs and LPs can leverage these lessons to develop more robust CV structures and profit from this new tool. As the European PE market continues to mature and develop in uncertain economic conditions, CVs are in position to grow to a central element, offering a highly flexible yet structured approach to PE investing, aligning with investor needs in uncertain times.
By Roberts Rancans, Paul Hartenfels, Ettore Marku, Maya Doyle
Bibliography
- Ascension Advisory
- Chicago Booth Stigler Center for the Study of the Economy and the State
- Clearlake Capital Group
- Evercore
- Financial Times
- HarbourVest
- Investec
- Jefferies
- Moonfare
- PitchBook
- Private Equity International
- Real Deals
- Riverstone Energy Limited