Continuation funds provide liquidity to limited partners (LPs) by acting as GP-led secondary transactions. In these structures, a general partner (GP) establishes a new fund vehicle to hold assets from an existing fund that is approaching the end of its term.
LPs receive liquidity through the following mechanisms:
- The Cash Exit Option: When a GP initiates the transfer of assets into a continuation vehicle, existing LPs are offered a choice. They can opt for a cash exit, allowing them to realize gains and receive immediate liquidity based on a reset valuation of the assets.
- Secondary Market Sales: The GP facilitates the sale of existing LP interests to new institutional investors. This process effectively replaces the capital of exiting LPs with that of new investors who wish to participate in the assets’ future growth.
- Asset Valuation: To ensure LPs receive a fair price during the liquidity event, the process typically involves independent third-party valuations and fairness opinions. This protects stakeholders by establishing a fair market price for otherwise illiquid assets.
- Flexible Exit Timing: Rather than being forced into a binary outcome or a premature asset sale at the end of a traditional fund’s life, LPs gain the flexibility to recycle capital while the GP continues managing high-performing assets.
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