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Unmatched Expertise in Continuation Fund Administration

Authored by: Merryn Rosewall, Principal, Risk & Quality Control
Updated on: February 11, 2025

The private equity fund secondaries market has exhibited substantial growth in recent years, with GP-led transactions being a major driver. Of these transactions, continuation funds have been a significant component.  

Historically, a continuation fund acquired underperforming investments held by an affiliated legacy fund upon expiration of its term. More recently, continuation funds have been employed to acquire one or more high-potential investments, sometimes relatively early in the legacy fund’s lifecycle. The greater frequency of this strategy creates new challenges for firms’ overall fund administration.

Accounting and reporting on the transaction between the associated investment vehicles and structures, and the various investor classes (e.g. Selling Investors, Rollover Investors, New Investors and the GP), and maintaining the ongoing accounting records, including capital allocations and fee calculations, can be complex:  

  • Typically, the costs associated with the transaction, including formation fees for the new fund entities, are specifically allocated between investor classes as stipulated within the legal agreements.
  • New Investors and Rollover Investors may be subject to different LPA terms and economics.
  • If carried interest on Rollover Investors is not crystallized in the legacy fund at the time of the transaction, LPA provisions typically incorporate contributions and distributions across the legacy and continuation / rollover fund, maintaining the original economics.
  • Alternatively, the carried interest model may reset, with rates that step up with increasing investment return based on invested or contributed capital, including the fair value of investments contributed. 
  • The continuation fund is created to hold the investment and the related equity interests of the New Investors; however Rollover Investors may participate in the continuation fund, a newly established rollover vehicle or remain in the legacy fund. 
  • Accounting considerations include recognizing non-cash (in-kind) distributions and contributions between the legacy fund, the Selling and Rollover Investors and the continuation and rollover funds.  
Potential Benefits of Continuation Funds:

  • Existing legacy fund investors have the option to liquidate all or part of their proportionate interest in the portfolio investment (Selling Investor), or retain or rollover all or part of that interest (Rollover Investor)
  • New Investors get to participate in the economics of a specified investment with which the manager already has considerable experience
  • The GP gains additional time and/or capital to optimize the investment return for the benefit of the Rollover and New Investors and earn additional compensation via performance and management fees or allocations.

In short, these GP-led transactions are bespoke and require bespoke solutions.

At Gen II we have considerable experience with the review and interpretation of purchase and sale agreements, new and/or revised legacy fund, rollover fund and continuation fund agreements and structure charts. We also have deep understanding of the appropriate accounting treatment and disclosure to facilitate the production of legacy fund, rollover fund and continuation fund financial statements, partner capital account statements, and capital call and distribution notices, and performance reporting, where applicable. In addition, our IT infrastructure is designed to handle complex allocations and calculations, while delivering the transparency and real-time data access you need.

To learn more about how Gen II can leverage our experience and technology to build a bespoke solution for your continuation fund, please reach out to your client service representative or contact info@gen2fund.com.

Published on: February 10, 2025

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