Continuation Vehicles and GP-Led Secondaries
Instead of selling a prized portfolio company at the end of a fund's life, a manager can move it into a brand-new fund it also controls and keep managing it — a deal that lets existing investors cash out while raising an obvious conflict of interest that independent fairness opinions exist to police.
Prerequisites: LP Secondaries and Pricing to NAV
A traditional LP secondary sale (see LP Secondaries and Pricing to NAV) happens between two outside investors, with the manager simply approving the transfer. A GP-led secondary is different: the fund's own manager initiates the deal, moving one or more portfolio companies out of an aging fund and into a brand-new vehicle — a continuation vehicle — that the same manager also controls, often keeping the company for several more years rather than selling it to an outside buyer.
Why managers do this
Toward the end of a fund's contractual life, a manager may believe a star portfolio company still has significant growth ahead but feel pressure to sell it anyway just to close out the fund on schedule. A continuation vehicle solves that by letting the manager keep running the asset it knows best, while giving existing investors in the old fund a choice: cash out at the deal's agreed price, or roll their stake into the new continuation vehicle and stay invested alongside fresh capital raised from new investors.
Why this is a real conflict of interest
The manager sits on both sides of the transaction — it is effectively selling the company to itself, deciding both the valuation the old fund's investors receive and the terms the new vehicle's investors pay, while also standing to earn a fresh round of management fees and carried interest on the same asset in its new vehicle. Because of this, standard practice now requires an independent fairness opinion from a third party on the transaction price, and existing LPs are typically given a genuine option to sell out at the deal price rather than being forced to roll into the new vehicle on the manager's terms.
A continuation vehicle can be a legitimate way to hold onto a strong asset longer while giving existing investors liquidity — but because the manager sets terms on both sides of the trade, an independent valuation and a real cash-out option for existing LPs are the two safeguards that separate a fair GP-led secondary from a self-dealing one.
Don't assume a continuation vehicle deal is automatically favorable to existing investors just because they're offered the choice to roll over. The manager has an obvious incentive to set a transfer price that resets the clock on fresh carried interest — which is exactly why LPs and their advisors scrutinize the independent fairness opinion closely rather than taking the manager's proposed price at face value.
Related concepts
Practice in interviews
Further reading
- ILPA Guidance on GP-Led Secondary Fund Restructurings