THE EVOLVING THEORY OF CONTINUATION FUNDS

The utilization of continuation funds has become increasingly prevalent in the private equity realm. Historically, the use of continuation vehicles has generally evoked a negative connotation, but that theory has since pivoted with the realization of maximized potential. Previously, continuation funds strictly adhered to distressed assets and served as a mechanism to restructure underperforming portfolio companies.[1] However, this traditional theory shifted when sponsors realized that continuation funds can provide attractive means to high-performing assets (trophy assets) enduring unfavorable market conditions.[2] The resulting uprise in continuation fund usage is evident, as GP-led secondary volume reached a “record breaking level” of $75 billion in 2024.[3] Eighty-four percent of that volume was executed by continuation vehicles, which solidified continuation funds as an integral part of the modern day private equity ecosystem.[4]

BASIC MECHANICS OF A CONTINUATION FUND

In short, private equity funds constitute limited partnerships composed of general partners (GP) and limited partners (LP) that collaborate with the objective of acquiring, managing, and ultimately divesting portfolio companies.[5] The private equity firm serves as the GP (also known as the sponsor) and institutional investors or wealthy individuals serve as LPs.[6] Private equity funds have a limited duration, typically ten years, which ensures a motivated, transparent, and efficient approach.[7] However, the divesting of the fund’s assets upon the expiration of its contractual term may not necessarily align with optimal market conditions or value maximization.[8] Thus, in circumstances where a portfolio company demonstrates a significant growth potential extending beyond the lifespan of the initial fund, GPs may establish a continuation fund, which are typically structured to operate for an additional two to six years.[9] When a GP determines that the potential sale of a portfolio asset at expiration would fail to capture the full value potential, the GP may form a new fund purchasing one or more assets from the original fund at a price determined by non-conflicted third parties.[10] LPs of the legacy fund are given optionality between selling their interests and liquidating their positions, or rolling over all or part of the interest to the continuation fund.[11] This provides LPs with the opportunity to continue their investment into so called “trophy-assets” beyond the legacy fund’s original term of duration to capture potential long-term value.

WHY PRIVATE EQUITY SHOULD NOT TUNE OUT CONTINUATION FUND STRATEGY FOR AI

Organizations are still in the early stages of scaling AI, and most have yet to implement the technology.[12] A survey by McKinsey found that eighty-eight percent of organizations reported the use of AI in at least one business function, but only a third had begun scaling their AI programs.[13] Organizations are also experimenting with AI agents, which autonomously performs tasks and learns to adapt to business expectations over time.[14] However, AI agents are currently challenging to implement in a business context because it is difficult for them to demonstrate measurable value.[15] Creating these autonomous roles require consistent data systems, customer and employee engagement, and a foundational workflow tailored specifically to a certain business function.[16] This means that the development phase for specific performance AI tailoring has just begun, and that such systems will require extended durations before they are perfected. Accordingly, thirty-nine percent of organizations from the McKinsey survey indicated that they are beginning to experiment with AI agents.[17] Evidently, the world is currently navigating the pilot phase of AI adoption, where experimentation and refinement dominate over full-scale implementation. Therefore, the current statistics show that AI has yet to significantly impact EBIT.[18] Respondents of McKinsey’s survey reported that the largest cost benefits thus far have been from AI implementation in software engineering, manufacturing, and IT.[19] The AI market is beginning to blossom and with high-performing enterprises spending, on average, more than twenty percent of their budgets on AI technology, companies will begin to see healthier margins and increased profitability.[20] Exponential growth of EBIT is on the horizon, and it is vital that both GPs and LPs engage in deliberate long-term growth initiatives and potential continuation vehicle conversations to allow for the course of AI’s development.[21]

MY RECOMMENDATIONS

I recommend a disciplined approach that is narrowly construed to my phrase, “concentrate capital in the roots of fortitude.” Although this quote appears simple and pertains to many aspects of life, it rings especially true in industries positioned for structural and supply chain AI efficiency. I encourage investors to trust in the long-term process and potential usage of continuation vehicles for portfolio companies that both contribute to the infrastructural layer of AI or companies that receive positive externalities from AI implementation. Additionally, LPs should be hesitant to hastily liquidate their interest in a legacy fund with portfolios primarily formed of companies in AI implementation phases or companies that serve as “roots” (the AI ecosystem). The words “continuation fund” should not set off internal alarms. Continuation funds provide an effective mechanism to bring forth optionality for both GPs and LPs to preserve their exposure in foundational trophy assets in need of extended durations of AI scalability to compound value maximization.

[1] Madeleine Farman, PE zombie funds reinvented for ‘crown jewel’ strategy, S&P GLOBAL (Sept. 13, 2021), https://www.spglobal.com/market-intelligence/en/news-insights/articles/2021/9/pe-zombie-funds-reinvented-for-crown-jewel-strategy-66278877.

[2] Anthony Wong & Ilan Wong, Continuation funds emerge as attractive options for PE fund managers and investors, WHITE & CASE (Dec. 7, 2022), https://www.whitecase.com/insight-our-thinking/managing-volatility-considerations-taiwan-continuation-funds-emerge-attractive-options-pe.

[3] Global Secondary Market Review, JEFFERIES (Jan. 2025) https://www.jefferies.com/wp-content/uploads/sites/4/2025/02/Jefferies-Global-Secondary-market-Review-January-2025.pdf.

[4] Id.

[5] How Private Equity Funds are Structured, ALTERDOMUS (Aug. 7, 2025), https://alterdomus.com/insight/private-equity-fund-structure/.

[6] Kobi Kastiel & Yaron Nili, The Rise of Private Equity Continuation Funds, UNIV. CHI. (Jan. 2024), https://www.chicagobooth.edu/research/stigler/research/-/media/5d46328c68e0466b9787f42d98275f3b.ashx.

[7] Id.

[8] Id.

[9] Keith Button, The Rise of Continuation Funds, MIDDLE MARKET (March 7, 2022), https://www.themiddlemarket.com/feature/the-rise-of-continuation-funds.

[10] Greg Norman, Continuation Funds: What You Need To Know, SKADDEN (May 22, 2024), https://www.skadden.com/insights/publications/2024/05/continuation-funds-what-you-need-to-know.

[11] Jakub Kozlowksi, To Continue or Not to Continue: The Rise of Continuation Funds, NYUJLB, https://www.nyujlb.org/single-post/to-continue-or-not-to-continue-the-rise-of-continuation-funds\ (last visited Dec. 2, 2025).

[12] Alex Singla et. al., The state of AI in 2025: Agents, innovation, and transformation, MCKINSEY (Nov. 5, 2025), https://www.mckinsey.com/capabilities/quantumblack/our-insights/the-state-of-ai.

[13] Id.

[14] What are AI agents?, IBM, https://www.ibm.com/think/topics/ai-agents (last visited Dec. 2, 2025).

[15] Lareina Yee et. al., One year of agentic AI: Six lessons from the people doing the work, MCKINSEY (Sept. 12, 2025), https://www.mckinsey.com/capabilities/quantumblack/our-insights/one-year-of-agentic-ai-six-lessons-from-the-people-doing-the-work.

[16] Id.

[17] Singla, supra note 12.

[18] Id.

[19] Id.

[20] Id.

[21] Id.