Is the growth of continuation vehicles good for asset owners?
The use of continuation vehicles, which involve private equity managers selling expiring assets to themselves in a new package, has been soaring and some asset owners have been buying into it. What are the risks?
2025 was a record year for secondary transactions, with activity up 48 per cent on the year before, according to Jefferies data.
This includes growth of continuation vehicles, which accounted for 89 per cent of the global asset owner-led deal volume.
In 2024, continuation vehicle volume accounted for $102bn in total, according to Jefferies. In 2020 it was $25bn.
These vehicles allow private asset managers to sell assets from an existing, expiring fund into a new package, giving their investors the option of taking liquidity or rolling over their investment.
This trend is being fuelled by what Schroders Capital calls a “cyclical downturn” in private equity exits brought about by a more uncertain economic environment and volatile public equity markets.
These have in turn dampened demand for M&A, reduced the volume of available debt financing and led to a fall in the number of IPOs.
“As CVs have become mainstream over the past decade, they have […] attracted a broad base of sophisticated institutional investors and asset managers beyond the traditional lead buyers,” says Coller Capital partner David Jolly.
Souter Investments, the £500mn single family office of Stagecoach founder Brian Souter, is positive on the prospect of continuation activity in its portfolio in the coming year.
But managing director John Berthinussen said: “We’ve seen cases where our analysis has been that there is not a compelling new plan or uplift in risk-adjusted equity returns generated to justify the ‘new' investment, and so we’ve decided not to participate.”
“Frankly, [continuation vehicles] have been one of the few forms of exit in the last few years,” says the £39.9bn Wellcome Trust’s head of buyout investments Robert Coke. “A lot of [asset owners] need liquidity, and so they’ve been necessary.”
“Historically, it was allowing you to hold onto your best investments, allowing [them] to compound,” says Coke. And by putting additional capital to work, outside of the original fund’s concentration constraints, there’s the opportunity to supercharge growth.
According to Coller Capital’s latest global private capital barometer, four in five surveyed investors use continuation vehicles to access liquidity while one in five uses them to remain invested.
Pieter-Jan Buyse, associate director at WTW, tells AOX that for those who roll over, the CV offers “a second bite at the apple”.
But a second bite is only appetising if the apple is good, and not all continuation vehicles are created equal.
“Given that in a CV transaction, the [manager] acts as both buyer and seller, there is inherently a conflict of interest,” Buyse points out. Since the manager stands to gain a boost in AUM, a fresh fee cycle and an acceleration of carry from the deal, investors choosing to sell might hesitate to rely on the advice of their partner.
Tellingly, while Wellcome “really [likes] the idea behind continuation vehicles”, the charity is yet to enter into a traditional continuation transaction. In practice, Coke finds that “the fees are too high” and some of the deal architecture can be “very questionable”.
“CVs usually aren’t market tested, or sometimes they are market tested and the [manager] doesn’t like the price the market offers them, so [they] execute the CV at a higher price,” he says. “It doesn’t always happen, but I’ve certainly heard that it has happened.”
In an ideal world, the continuation vehicle is designed to hang onto the manager’s star assets and keep compounding returns for investors.
In the real world, they are as often employed to solve the liquidity challenge amid a lack of other exit options. Which doesn’t necessarily highlight the strength of the investment.
But as David Jolly observes: “Continuation vehicles have now firmly entered the mainstream”.
He said there is now “growing adoption” in the private credit space.
This means for investors it will be vital to know the difference between a good apple and a bad one.
In the years ahead, Coke predicts something of a baptism of fire in the continuation transaction market, in which some will fail. “We’ve already seen a few [cases] where the CVs have gone to zero,” he says.
For example, car parts manufacturer Wheel Pros filed for bankruptcy in 2024 with $1.7bn of debt and left its investors with losses. Private equity firm Clearlake had effectively sold the company to itself as part of a continuation vehicle.
Coke said: “I would like to see a shake-up, certainly in the fees and… in the discrimination among [asset owners] about which to support.” For example, he adds: “We like it when CVs are priced by other [managers] and then we can co-invest alongside them.”
A continuation vehicle would need to offer “much lower fees” and involve “a company that we really like” before an investor like Wellcome would be ready to sink its teeth into it.