Beyond the Exit: How Continuation Vehicles Are Changing Private Equity

In the world of private equity, a successful exit is the ultimate goal for General Partners (GPs) and Limited Partners (LPs) alike. Traditionally, once GPs have executed their growth plan and positioned a business at a more profitable level, they aim to sell it to provide returns for investors and move on to new opportunities. However, lately, traditional exits have been far and few in between due to a combination of economic and regulatory factors, so a newer tool is gaining traction in the industry: continuation vehicles (CVs). Once seen as a last-resort option, CVs are now an increasingly popular choice for liquidity and reinvestment, especially post-COVID. 

What Are Continuation Vehicles (CVs)?

In simple terms, continuation vehicles allow GPs to “sell” an asset to a newly created entity that they also control. This gives LPs in the original fund the option to cash out or reinvest in the asset through the new vehicle. With this approach, the GP effectively resets the asset’s holding period, bringing in additional growth capital if needed and keeping a valuable asset under their management. For LPs, CVs offer an exit option, or alternatively, a chance to stay invested and benefit from future growth.

Why GPs Are Turning to CVs Post-COVID

Before the pandemic, CVs were often used as a last-ditch option for assets that couldn’t attract third-party buyers, giving CVs a somewhat negative reputation. But market conditions have shifted: rising interest rates, increased market uncertainty, increased regulatory scrutiny, and a widening price gap between buyers and sellers. Valuation expert Tim Montgomery says, “There’s just few exit opportunities right now. Typically, private equity and venture capital invest in a company with the idea that they’re going to monetize that investment via an IPO or an acquisition... but in the last few years, there just hasn’t been any.” In fact, S&P Global indicates that “private equity exit value is on track to decline to its lowest annual total in at least five years…”
Now, GPs are taking a fresh look at CVs, using them not to offload struggling assets but to hold on to their “crown jewels”—top-performing companies they want to continue managing. This shift has led to a broader acceptance of CVs, especially as GPs find ways to structure these deals to meet LPs’ evolving needs. For LPs, the appeal lies in the option to either cash out or stay in, all while enjoying a distribution from the sale of the asset to the new vehicle.

Conflicts of Interest and Fiduciary Duty

The transaction of assets from the existing fund to the continuation fund creates inherent conflicts of interest—and the GPs have a fiduciary duty to both the existing fund and the continuation fund, which may have LPs with opposing interests. Selling LPs want to maximize the price at which they sell their interests to the continuation fund. New investors in the continuation seek to minimize their entry price for the assets to maximize potential future gains. Meanwhile, rolling LPs, who move from the existing fund to the continuation fund, prioritize maintaining the same terms and value in the transaction. These competing priorities demand careful structuring and transparency.

That’s why industry bodies such as the LP Advisory Committee (LPAC), the Securities and Exchange Commission (SEC), and the Institutional Limited Partners Association (ILPA) strongly recommend engaging an independent third party, such as Redwood, to perform valuations. In such high-stakes scenarios, independent valuations ensure fairness, mitigate conflicts of interest, and promote smoother negotiations and regulatory compliance—particularly when determining the value at which assets move from the existing fund to the continuation fund.

Redwood Is Your Trusted Partner 

With unparalleled expertise rooted in real-world experience, a proven track record, and a deep understanding of the unique dynamics and priorities of all stakeholders involved, Redwood is the premier valuation provider to help. Our team’s extensive experience as private equity and venture capital CFOs, COOs, GPs, and LPs gives us insider insight into the nuances of CV transactions. We specialize in valuing assets at the point of transfer, a critical step that directly impacts stakeholders and requires precision and objectivity. Redwood ensures valuations are fair, transparent, and defensible, instilling confidence and trust in the process. Learn more about how Redwood can help here. 

Conclusion

Continuation vehicles have emerged as a vital tool in today’s challenging private equity landscape, offering opportunity, flexibility, and liquidity for both GPs and LPs. However, their complexity underscores the need for precise and impartial valuations. Redwood is uniquely equipped to navigate these transactions, ensuring trust at every step.