The continuation fund model is a balanced response to open market uncertainty alongside high interest rates and volatility, according to Paul Smith, a partner at Stewart McKelvey, during a session at the Canadian Investment Review’s 2025 Alternative Investment Conference.
Under the traditional private equity fund model, the investment vehicle has a fixed life, typically between eight and 10 years with the option for limited extensions. “But generally, the fund reaches an end of life, at which point in time the assets have to be sold.”
In private equity, this forced liquidation isn’t the best or most effective outcome for the asset, but the continuation fund model provides general partners with a chance to extract further value. “Generally, [continuation transactions] fit in the same category. It was [that a] fund got to the end of life and there were some assets the manager couldn’t get rid of. They rolled them over to a continuation vehicle to allow them to wind up the fund.
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“From the point of view of the investors in the fund, that had an advantage because it closed off the fund and allowed things like the clawback or give-back period clock to start ticking and, eventually, to end the liabilities associated with the partnership.”
In 20 years of business, Smith had rarely seen continuation fund transactions, but now he’s recording about six every six months. The difference now, he said, is that GPs are in situations with a trophy asset they want to retain leading to a continuation transaction.
Under current market conditions, he said, GPs benefit from continuation funds because they can retain particular assets instead of the alternative — selling when it might not be the optimal solution with a competitor bidding for the asset. “From the limited partner’s point of view, they have the opportunity to stay invested in an asset where the value may not be optimized if it was forced to sell.”
However, the transactions can create conflicts of interest, since the sponsor is both sides of the transaction, added Smith. In addition, he noted, it requires transparency, with good information flow from the GP about the structure of the transaction and how it’s performed, while ensuring existing limited partners receive the same information as potential new investors.
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As original transactions become more complex in the space, the attempt to roll over to a continuation fund can become very complicated for all parties, with structures that could have deferred payments and earn out payments.
“If you’re a partner who’s considering rolling over into the new vehicle, you have to really think about the structure . . . and whether it’s going to be taxed differently than what you’re leaving.”
Read more coverage of the 2025 Alternative Investment Conference.