Continuation Funds Outlook - 2025

It wasn’t long ago that continuation funds (a fund set up by a private equity (PE) firm to acquire assets from an existing fund) were considered a niche solution in private equity—but that’s no longer the case. In recent years, they’ve moved firmly into the mainstream as more PE firms look for creative ways to hold onto prized assets and navigate tricky exit environments. It’s difficult to tell exactly how many such vehicles were set up in 2024; however, estimates are between 100 and 200, representing billions of dollars in transactions.

While past statistics are important, what is the outlook for 2025?  

If the first three months of the year are any indication, uncertainty remains the only constant. Wild swings in the stock markets, geopolitical instability, inflation pressures, and simmering global trade tensions are proving to be very challenging for both public and private markets. A recent estimate states that there may be as few as 150 IPOs this year, clocking a fourth consecutive year of declines, proving how market turmoil is hitting both the private and public markets. For PE firms, that’s a strong signal: Continuation funds may be poised for yet another breakout year.

Although just one way for a PE firm to exit a holding, the decline of IPOs highlights what could be yet another banner year for the establishment of continuation funds. Rather than risk tricky market conditions, many firms may opt to move valuable assets into continuation vehicles, effectively buying more time in the hope of achieving stronger returns down the line.

With changing market conditions come changing valuations. A valuation that may have looked attractive in 2024 might feel underwhelming in 2025. Rather than forcing an exit, a holding firm may choose to hold on a little longer and move the asset to a continuation fund as a “wait and see” strategy to extract as much value as possible for them and their investors.

Still, continuation funds can present many operational and reputational concerns:

• Investor appetite: What is investor appetite to commit capital to yet another illiquid deal that could take years to recoup and could potentially lose value in the long run?
• Complexity and cost: Adding another legal structure in the mix comes with legal costs, operational issues, and accounting/audit requirements.
• Valuation questions: How does one properly value an asset that is moving from one fund to another? Third-party involvement is often needed, but valuations can be subjective and sensitive to market swings.

When all is said and done, PE firms have a fiduciary duty to maximize returns for their investors. Exiting at the right time is a decision that PE firms can struggle with, and the use of a continuation fund is just one of several tools in a PE firm’s toolbelt. My guess, however, is that we will hear more about them over the course of 2025 than in years past if current conditions persist.