Continuation Funds, Read From the GP's Side
A continuation fund puts the sponsor on both sides of a sale. With the SEC fairness-opinion rule vacated, the fiduciary duty, the LPA and ILPA's 2023 guidance govern the choice.
By Peleg Chevion, Managing Partner
12 min read · Growth Equity
In this note07 · 12 min
In a continuation fund transaction the sponsor sits on both sides of a sale, and since the Fifth Circuit vacated the SEC's adviser-led secondaries rule in June 2024, no federal rule requires a fairness opinion. What governs the sponsor's choice among holding, selling and continuing is the fiduciary duty owed to the selling fund, the partnership agreement, and ILPA's May 2023 guidance, read row by row.
01The Decision the Sponsor Owns
Every fund reaches the end of its term with assets that are not finished, and the sponsor has three choices for each. It can hold the asset, usually by extending the term. It can sell the asset to a third party through a merger, a sale to another sponsor or a public listing. Or it can move the asset into a new vehicle that it also manages, offer the existing investors cash or a roll into the new vehicle, and bring in secondary buyers to fund the cash.
ILPA defines the third option in exactly those terms: the general partner moves selected assets into a continuation vehicle "while giving Limited Partners (LP) the option to roll into the new vehicle, sell their interests and take liquidity or some combination of both options" (ILPA, Continuation Funds, May 2023). The same document states the structural problem in one line: these transactions are "conflicted by nature, with the GP sitting on both sides of the transaction." ILPA's April 2019 paper, GP-led Secondary Fund Restructurings: Considerations for Limited and General Partners, addresses the same subject.
The option is no longer marginal. Jefferies reports $240 billion of global secondary volume in 2025, of which GP-led transactions were $115 billion, up 53 percent year over year and 48 percent of the total, with continuation vehicles the majority of GP-led volume. It estimates that GP-led secondaries were approximately 14 percent of all sponsor-backed exit volume in 2025 (Jefferies, 2025 Global Secondary Market Review, February 10, 2026).
Read from the sponsor's side, the question is which of the three paths a fiduciary to the selling fund can defend for a particular asset, at a particular price, and what record it must build to defend it.
02The Decision Table
The table sets the three paths against the conflict each one carries and the ILPA 2023 recommendation that answers it. ILPA's guidance is voluntary market practice. It binds no one by its own force, but it is the most detailed public statement of what investors expect from a process.
| Path | The sponsor's case for it | The conflict, named | ILPA 2023 guidance mapped to the row | The record that defends it |
|---|---|---|---|---|
| Hold (term extension, asset stays in the existing fund) | The asset is short of its value inflection and the existing investors keep the full upside without a transaction discount. | Management fees and the sponsor's control continue while investors wait for distributions; the sponsor may prefer delay to marking a disappointing exit. | ILPA names "a fund extension" among the alternatives a sponsor should explain why it did not choose. ILPA's 2019 guidance notes that a no-transaction outcome is not typically offered in the election, but can result when the LPAC withholds a required conflict waiver. | The partnership agreement's extension mechanics followed to the letter; a dated plan to exit; disclosure of the fee basis during the extension. |
| Sell (third-party exit by merger, sponsor sale or listing) | A buyer with no relationship to the sponsor sets the price, and the selling fund receives cash it can distribute. | Timing: the sponsor may sell early to crystallize carried interest, or late to protect a headline multiple. The price itself is not conflicted. | ILPA names "a traditional exit" among the alternatives a sponsor should explain why it did not choose before proposing a continuation vehicle. | A competitive process run by an adviser whose engagement letter says it represents the fund. |
| Continue (single-asset or multi-asset continuation vehicle) | The sponsor keeps managing an asset it knows best, existing investors may take cash, and new capital can fund the next stage. | The sponsor sets or shapes the price on both sides; it may reset fees and carried interest, crystallize carry, receive a stapled primary commitment, or compress the election window so investors default to cash. | LPAC vote on all conflicts, never pre-cleared in the partnership agreement; a competitive process with third-party price validation; at least 30 calendar days or 20 business days to elect; non-electing investors treated as sellers; a status quo option with no fee increase, no lower hurdle and no carry crystallization; 100 percent of accrued carry rolled in almost all cases; full disclosure of stapled economics; LPAC access to independent counsel and a specialist adviser as a fund expense. | The written rationale presented to the LPAC; the bid record (number, range, winning bid and why); an independent price assessment; disclosure that meets Rule 206(4)-8; LPAC consent obtained after full disclosure. |
ILPA does not treat a continuation vehicle as a default; it asks the sponsor to explain why it chose a continuation fund over "a fund extension, a traditional exit, additional co-investment" for the same asset. It also tells sponsors and investors to avoid partnership terms that "pre-clear" conflicts associated with continuation transactions at the start of the fund, so a sponsor cannot rely on drafting done years earlier to dispose of a conflict that arises today.
03The Price Problem
The central conflict is price. The sponsor sets the net asset value of the selling fund, and the same sponsor will manage the asset, and earn fees and carried interest on it, in the buying vehicle. ILPA makes the point directly: an independent price assessment matters "as the NAV is determined by the GP, and typically, a trailing number will be used for discussion purposes during the solicitation process, which may or may not be relevant to the current valuation" (ILPA, May 2023).
ILPA's answer has three layers. The sponsor should engage an experienced adviser to solicit bids and should establish in the engagement letter that the adviser represents the interests of the fund and not solely the sponsor. The advisory committee should see the bid process, the number and pricing of bids, and whether any committee member bid. And investors as a group may ask the sponsor to commission a fairness opinion from a provider independent of the sponsor's own adviser.
ILPA treats a fairness opinion as one helpful tool among several, alongside "a partial disposition to a third-party or an arms-length transaction through a minority stake." The burden of proving price did not leave with the federal rule. It sits in the advisory committee room, where the sponsor's evidence decides whether the committee consents.
Structure also enters the price. Jefferies reports that deferred purchase price mechanisms and similar features appeared in approximately 29 percent of GP-led volume in 2025 (Jefferies, February 10, 2026). A price paid partly later is worth less to a selling investor than the same price paid at closing, so bids belong on a present-value basis.
04The Adviser-Led Secondaries Rule and Its Vacatur
On August 23, 2023 the Commission adopted its private fund adviser rules in Release No. IA-6383, published at 88 Fed. Reg. 63206 on September 14, 2023 (SEC, Release No. IA-6383). Among them, Rule 211(h)(2)-2, 17 CFR 275.211(h)(2)-2, would have required a registered adviser conducting an adviser-led secondary transaction to obtain, and distribute to investors in the private fund, "a fairness opinion or valuation opinion from an independent opinion provider," together with a written summary of any material business relationship the adviser or its related persons had with the opinion provider within the prior two years, in each case before the due date of the election form.
The rule defined an adviser-led secondary transaction as one initiated by the adviser or its related persons that offers investors the choice between selling all or a portion of their interests and converting or exchanging them for interests in another vehicle advised by the adviser or its related persons. A continuation vehicle with a sell-or-roll election fits that definition. The compliance date was 12 months after Federal Register publication for larger private fund advisers and 18 months for smaller ones.
Neither date arrived. On June 5, 2024 the Fifth Circuit, in National Association of Private Fund Managers v. SEC, No. 23-60471, vacated the final rule in its entirety (Fifth Circuit opinion, June 5, 2024). The court held that section 211(h) of the Advisers Act applies to "retail customers," so the Commission exceeded its statutory authority in relying on it, and that section 206(4) did not authorize the rules, in part because the Commission had largely failed to define the fraudulent acts the rules were designed to prevent. It concluded that "no part of it can stand."
The Commission's published notice lists Rule 211(h)(2)-2 (adviser-led secondaries) among the vacated rules, together with the quarterly statement, audit, restricted activities and preferential treatment rules, and states that the related amendments to Rules 204-2 and 206(4)-7 were vacated as well (SEC, Announcement Regarding Private Fund Advisers Rules). No federal rule therefore requires a fairness opinion or valuation opinion in a continuation fund transaction.
The Fiduciary Baseline That Remains
The vacatur removed a prescriptive rule. It did not remove the adviser's fiduciary duty. The Commission's 2019 interpretation of the standard of conduct states that under the duty of loyalty an adviser must "eliminate or make full and fair disclosure of all conflicts of interest" that might incline it, consciously or unconsciously, to render advice that is not disinterested, "such that a client can provide informed consent to the conflict" (SEC, Release No. IA-5248, June 5, 2019).
The Fifth Circuit's own reasoning sharpens who the client is. The court wrote that the duty "extends to the client alone, which is the fund, not the investors in the fund." In a continuation transaction the sponsor advises the selling fund and the buying vehicle at once, so it owes that duty to both parties to one sale. Consent on the selling fund's behalf typically runs through the advisory committee, whose mandate ILPA describes as "defined by the LPA but is generally understood to include the review of any conflicts associated with the transaction."
Disclosure to investors is separately governed. Rule 206(4)-8 makes it a fraudulent act for an adviser to a pooled investment vehicle to make an untrue statement of a material fact, or to omit a material fact necessary to make its statements not misleading, to any investor or prospective investor in the vehicle (17 CFR 275.206(4)-8). The election memorandum sent to investors in a continuation transaction is a statement to investors within the reach of that rule. The rule was adopted in 2007 and was not part of the vacated package.
The specific opinion requirement is gone. The obligation to disclose the conflict fully, obtain informed consent on the fund's behalf, and say nothing misleading to investors is not.
05The Economics of the Roll
ILPA's second general principle is that rolling investors "should be no worse off than if a transaction had not occurred." It makes that principle concrete as a "status quo" option that investors must be offered: no increase in the management fee rate, the same fee base as the existing fund at the time of the transaction, no increase to the carried interest rate, no decrease to the preferred return hurdle or other sponsor-favorable change to the waterfall, and no crystallization of carried interest for rolling investors. ILPA adds that the status quo option should not depend on a minimum roll participation threshold.
On carried interest, ILPA's position is that "in almost all cases, the GP should roll 100% of the carried interest accrued into the continuation vehicle." Where it does not, the sponsor should explain why, and ILPA accepts that no carry crystallizes where the existing fund uses a European waterfall and is not yet in carry. Where the sponsor clearly benefits from additional fee revenue or a stapled commitment, ILPA asks it to share a portion of transaction costs.
Timing is the economic term most often overlooked. ILPA reports election windows as short as 10 days and recommends no less than 30 calendar days or 20 business days, with non-responding investors treated as sellers, because "LPs should never be forced to roll their interests into a new vehicle." The advisory committee should receive at least 10 business days to review the transaction and an in camera session before it votes. Compressing these periods weakens the consent on which the sponsor's fiduciary defense rests.
For selling investors the transaction produces cash, which counts toward their distributions to paid-in capital in the period it closes. Jefferies ties venture and growth GP-led activity in 2025 to "continued liquidity pressures and prolonged distribution cycles" (Jefferies, February 10, 2026). That demand for cash is why a short election window is coercive: an investor that cannot re-underwrite the asset in time takes the cash by default.
06Application to Life Sciences and Healthcare
Life sciences assets reach value through discrete events: a clinical readout, a regulatory clearance, a reimbursement decision. Those events ignore a fund's term. A sponsor holding a device company months from clearance, or a therapeutics company between trial phases, faces the hold, sell and continue decision at exactly the moment when the asset's value is least settled and a trailing NAV is least informative.
ILPA asks the sponsor to present the amount of new capital required, the projected time to realization and an exit plan for the new vehicle. Where follow-on capital dilutes rolling investors, ILPA lists three dilution bases: the original transaction's entry valuation, a market value set by independent advisers at the time the capital goes in, or an alternative instrument that does not dilute the rolling investors' equity. The rationale should be "heavily scrutinized" where the existing fund has unfunded capital or is within its first five years.
For a binary-outcome asset, the price evidence ILPA describes is harder to produce and matters more. Few bidders may have the scientific depth to price a readout, and a third-party minority stake may be the best available test of value. A sponsor that cannot show a market-tested price for an asset whose value turns on a pending event should expect its advisory committee to prefer the hold row or the sell row.
LeverVenture reads a continuation proposal from the selling fund's position first: whether the record would survive the question a court or an examiner asks of any conflicted transaction, which is whether the client gave informed consent on full disclosure.
07Frequently asked questions
Is a fairness opinion legally required in a continuation fund transaction?
No federal rule requires one. The SEC's Rule 211(h)(2)-2, adopted in Release No. IA-6383 in August 2023, would have required a fairness opinion or valuation opinion in adviser-led secondaries, but the Fifth Circuit vacated the entire rule package on June 5, 2024 in National Association of Private Fund Managers v. SEC. The adviser's fiduciary duty, the partnership agreement and Rule 206(4)-8 still apply, and ILPA treats a fairness opinion as one way to evidence price.
What does ILPA's 2023 guidance require of a sponsor running a continuation fund?
ILPA's guidance is voluntary market practice. It recommends an advisory committee vote on all conflicts, a competitive process with third-party price validation, at least 30 calendar days or 20 business days for investors to elect, treating non-responding investors as sellers, a status quo option with unchanged economics, and rolling 100 percent of accrued carried interest in almost all cases.
Why is a continuation fund a conflict of interest for the sponsor?
The sponsor advises both the selling fund and the buying vehicle, so it influences the price on both sides of one sale and may reset its fees and carried interest in the new vehicle. ILPA describes these transactions as "conflicted by nature, with the GP sitting on both sides of the transaction."
Nothing in this piece is investment, legal, tax or accounting advice, and nothing in it is an offer to sell or a solicitation of an offer to buy any security.
Three decades of operational leadership across agriculture, pharmaceuticals, biotechnology, climate, food and defense. He has spent that career doing the work this seat requires: strategic partnerships, licensing and business development, executed transaction by transaction. He sits with a company as an operating partner and a growth strategist rather than as a name on its board. A corporate finance and intellectual property attorney, an INSEAD MBA, and a former Air Force officer in aerospace. He also brings strong private equity experience.