The continuation fund has become the buyout industry's favourite tool and its most awkward conversation. In a vehicle that lets a manager sell an asset from one of its funds to a new fund it also controls, the same firm sits on both sides of the table. The structure solves a genuine liquidity problem. It also creates a conflict that the industry has been slow to confront honestly.
The appeal is obvious. When exits are frozen, a continuation fund gives existing investors who want out a way to get liquidity, while letting the manager hold a prized asset longer. Done well, it aligns everyone. Done carelessly, it lets a manager mark its own homework, setting the price at which it sells to itself.
The conflict is structural
No amount of process fully removes the tension. The manager knows the asset better than any buyer, has an incentive to keep its best performers, and sets the terms of the new vehicle. Independent valuations and fairness opinions help, but they are commissioned by the very party whose conduct they are meant to police. Limited partners are right to ask harder questions.
The healthiest version of this market is one where continuation funds are reserved for genuine trophy assets, priced against real third-party interest, and offered to existing investors on terms that a sceptical outsider would accept. The unhealthy version is one where they become a dumping ground for assets that cannot be sold, repackaged to defer a reckoning.
What good practice looks like
Transparency is the floor. Investors deserve to see the competing bids, the basis for the valuation, and the economics the manager earns from the transaction. A real auction, with credible outside buyers, is the best discipline. Where no outsider will pay the asking price, that itself is information the seller should not be allowed to ignore.
The industry will keep using continuation funds because the liquidity problem they address is real and recurring. The question is whether it uses them with the candour the conflict demands. So far, too many managers want the tool without the scrutiny. That cannot hold.