Continuation funds move assets, not always cash

The record

On 11 May 2023, the Institutional Limited Partners Association released Continuation Funds: Considerations for Limited Partners and General Partners, guidance on a transaction structure in which a GP moves a portfolio company, or several, out of an aging fund and into a new vehicle it also manages, giving existing LPs the choice to roll their stake into the new fund or sell it for cash. ILPA's announcement quotes Neal Prunier, its senior director of industry affairs, describing how "LPs have grown increasingly frustrated with certain aspects of continuation funds, such as lack of a true status quo option and the unrealistic timeframes for making important roll or sell decisions."

What the sources establish

The guidance states why ILPA acted: these deals are conflicted by nature, "with the GP sitting on both sides of the transaction," and its overview records LPs sometimes given as little as 10 days to decide whether to roll or sell after a re-underwriting. Against that, the guidance recommends "no less than 30 calendar days or 20 business days," and that a genuine "status quo" option always be offered: no increase in the management fee rate or carried interest rate, no change to the fee base for rolling LPs, and no crystallization of carried interest for those who roll. It also recommends the GP present its rationale to the fund's LPAC, which should vote on any conflict waiver, and that a competitive process include third-party price validation.

Scope and revision

This is guidance, not a rule: ILPA has no authority over fund documents, and actual terms are set by the negotiated partnership agreement, which may or may not adopt ILPA's recommended timeline, status-quo option, or LPAC vote. The guidance does not report how many transactions have closed, at what value, or what share of LPs elect to roll versus sell — it addresses process and alignment, not market size. Cash returned to an LP electing to sell is a real distribution from that LP's view, but it is not evidence the company sold to an independent buyer at an arm's-length price, since the buy-side capital can include the same GP's own new fund alongside outside secondary buyers.

The decision in front of you

Editorially: an LP notified of a proposed continuation fund should use ILPA's checklist — status-quo alternative, at least 30 calendar days, price validation, documented rationale — as a baseline for whether the deal in front of it is run on comparable terms.

• Is a true status-quo option being offered, with no change to fees or carried interest for LPs who roll?
• How much time is being given to evaluate the re-underwriting before a roll-or-sell election is due?
• Has the GP documented its rationale and alternatives considered to the LPAC, and did the LPAC vote on any conflict waiver?

A continuation fund can return real cash to an LP that elects to sell, but the guidance exists precisely because the transaction is structured by the same GP on both sides of it, and neither ILPA's announcement nor its guidance document substitutes for an LP's own read of the specific deal.