Private Equity’s New Exit Playbook

Private equity (PE) exit strategies have adapted and evolved beyond the times of smooth IPOs and quick M&A turnarounds to incorporate continuation funds. The backdrop of low funding costs that supported record transaction volumes, rapid fund rotations and regular exit opportunities has disappeared over the past five years. In today’s high rate of interest environment, exit options have grow to be narrower, financing has grow to be dearer and holding periods have lengthened. Last yr, average buyout holding periods rose from a two-decade average of 5.7 years to six.7 years, with the exit gap now wider than at any time since 2005. based on McKinsey research.

Enter the continuation fund, which has quickly moved from area of interest to mainstream, offering opportunities to many investors while inviting caution to others. The emergence of continuation funds reflects a structural evolution in private equity fairly than a short lived adjustment. A comparatively recent addition to the PE ecosystem, these funds enable liquidity in a world of limited capital while testing the boundaries of transparency and governance.

Understanding Continuation Funds

A continuation fund allows a PE firm to transfer a number of portfolio assets from an existing, expiring fund right into a recent vehicle, often managed by the identical general partner (GP). Existing limited partners (LPs) can either money out or bring them into the brand new structure, while recent investors can acquire shares in mature, high-performing assets with shorter holding periods.

The marketplace for continuation funds has grown rapidly. In 2024, 96 such vehicles were registered, a rise of 12.9% in comparison with the previous yr. This corresponds to 14% of all PE departures. Individual asset-carrying funds, corresponding to Alterra Mountain Company’s $3 billion deal, underscore their growing scale. Analysts at Greenhill & Co. predict that continuation funds could account for 20% of PE exits in the approaching years, driven by a maturing secondary market and a difficult exit environment.

Why the rise?

All of this has slowed down strategic mergers and acquisitions. In 2023, global M&A recorded its lowest level in a decadeunderscoring the slowdown in deal-making post-pandemic. Global The variety of PE exits fell from the height of 4,383 in 2021 to three,796. While it isn’t at full speed, The global share of PE dry powder continues to be around 2.5 trillion US dollars from mid-2025, and the pressure to offer capital stays high, whilst exit channels narrow. Several forces underlie the recent spread. Among them: the dearth of traditional exit routes, a looming maturity limit and the necessity for LPs to release money.

First, rising financing costs have limited leveraged buyouts and widened the bid-ask gap in M&A transactions. Continuation funds allow managers to retain assets they have faith in and supply investors with liquidity options. Another factor is the upcoming maturity limit. More than 50% of PE funds at the moment are six years old or older, with 1,607 funds set to shut in 2025 or 2026. Continuation funds enable firms to extend value creation without forced sales.

Ultimately, these funds reply to investor demand for flexibility. LPs may exit for immediate liquidity or switch to chase future uptrends. New investors gain access to proven assets with lower blind pool risk. Continuation funds boast a loss rate of 9% in comparison with 19% for buyouts that provide higher risk-adjusted returns.

The benefits: A win-win-win situation?

Proponents argue that continuation funds profit everyone involved: primary care physicians, existing LPs and recent investors. For GPs, this expansion means the power to proceed to administer high-performing assets and thereby proceed to generate management fees and carried interest.

LPs gain liquidity without sacrificing potential upside, while recent investors gain access to mature assets with a clearer path to return. Recent evaluation suggests that continuation funds have outperformed buyout funds in all quartiles by way of multiple-on-invested-capital (MOIC), while also having lower loss rates.

Empirical evidence supports their appeal. Morgan Stanley has found that continuation funds are in the highest quartile achieved an MOIC of 1.8x, in comparison with 1.6x for comparable buyout funds. Industry-specific examples corresponding to Lime Rock Partners’ use of continuation structures in energy investments illustrate how managers can increase value creation across market cycles. Companies have used continuation funds to expand their ownership of assets in disadvantaged catchment areas and bet on future market changes. This flexibility can turn a superb investment into a terrific investment, especially when market timing isn’t optimal.

Risks and governance challenges

Transparency in evaluation can be essential. LPs should be confident that the acquisition price for transferred assets reflects fair market value. Many firms address this problem by hiring outside financial advisors to offer unbiased opinions or conducting auctions to make sure fair market valuations. Still, LPs often lack the resources to thoroughly vet these deals, and the concentrated risk of single funds (versus diversified secondary funds) can discourage rollovers.

These concerns are further reinforced the Fifth Circuit’s 2024 decision overturning Portions of the SEC’s Private Fund Advisers Rule eliminated mandatory fairness opinion and disclosure requirements for continuation funds. This regulation reduces mandatory reporting requirements, potentially resulting in conflict risks as GPs are subject to less regulatory oversight, but additionally allows for faster transaction processing. It also increases the duty of investors to conduct thorough due diligence, highlighting the necessity for voluntary and robust governance.

Best practices for investors

For those using continuation funds, several best practices can mitigate risk and improve results:

1. Ensure an independent assessment: : Request third party reviews from reputable advisors like Houlihan Lokey or Evercoreto ascertain fair prices for assets and, where possible, pursue auction procedures. LPs should request detailed pricing methodologies and comparable transaction data.
2. Align GP and LP incentives: Require GPs to roll over 100% of their investments and negotiate carried interest and management fee structures that balance a long-term focus with investor protection.
3. Assess concentration risk: Single-asset continuation funds can result in increased exposure; Investors should compare their risk-return profiles with diversified secondary funds and stress test under adversarial market conditions.
4. Negotiate governance early: LPs should negotiate the terms of continuation funds when the fund is initially formed, setting clear expectations for pricing, governance and LP options. Establish LP veto rights or advisory roles on the initial inception of the fund to make sure influence over future continuation transactions.
5. Use the expertise of specialists: Engage advisors with experience in secondary and GP-led transactions to evaluate valuation methodologies, money flow models and regulatory implications.
6. Monitor post-transaction performance: Require transparent, regular reporting of operational and financial metrics to substantiate that longer holding periods add value.
7. Participate in energetic dialogue: Encourage open communication with primary care physicians to handle concerns about conflict or transparency. Participate in LP advisory committees to influence governance and ensure accountability. Active engagement can prevent self-dealing and promote fair outcomes.

The recent, recent PE normal

For investors, success on this environment depends less on the structural novelty of the vehicle and more on the strictness of its supervision. The lesson from each the zero rate of interest expansion and the present high rate of interest adjustment is obvious: value creation in private markets only continues if alignment, transparency and discipline endure.