The rise of continuation funds – uncomfortable or unethical?

It’s interesting, I have had multiple conversations in the last 12 months about the ongoing use of continuation vehicles with clients and our valuation, debt, and corporate finance teams.

These vehicles are a way for private equity funds to exit investments and generate liquidity to pay back to their investors – whilst keeping the asset ‘in house’. 

This practice is becoming increasingly common, and in many respects, this practice reflects a structural tension at the heart of the asset class: investors are incentivised to deploy capital into assets, build them patiently, and generate long‑term value – yet fund structures typically require an exit after c. five years, irrespective of where the asset is in its value‑creation journey.

Against this backdrop, the wider market for exits remains challenging, largely because:

• Liquidity in the market is becoming more and more selective and fragmented. If it’s not AI, data centres logistics, or something with a high level of ESG credentials, it’s increasingly difficult.
• PE firms are keeping quality assets ring-fenced – this means PE is protecting and compounding its high performing assets rather than working out and selling quickly at the wrong value.
• Limited Partners or ‘LPs’ as the capital provider have become pragmatists and not purists. They understand that real cash generation and known outcomes are currently more valuable than valuation plays.
• PE is now in the business of managing time and not just assets. This means that if the right buyer for the right value can’t be found for a positive EBITDA business. Then it is better to wait and invest in operational growth than to sell at a low value. 

So, in many ways, what is happening is the natural evolution of the market, and the case of David Lloyd Health Clubs and TDR Capital rolling it forward into a continuation fund in September last year is a great example.

TDR and its co-investors, including CVC, also set aside £100m to invest in the luxury health clubs to expand wellbeing services such as spas and pools as well as padel courts.

All of this surely must be better for employees (less volatility in ownership structure), customers (improved services), and the wider market through more stable pricing and exit structures. 

This brings us to the ethical debate. 

Some have questioned the ethical spirit behind these continuation vehicles, and critics tend to point out that selling the assets into these funds is perhaps a sign of a poor investment or an asset that can’t be sold as a way of generating a false return for investors. 

Furthermore, where the fund is the seller, the buyer and the controller of the assets it can cause ethical friction. But continuation funds aren’t unethical by default, as ethics hinge on the way they are used:

Optionality – If LPs have the choice to:

• Sell at a fair price (where one is available); or
• Roll into a new vehicle on clear terms.

Provided there is no coercion by liquidity pressure or some opaque process – but rather an informed, voluntary decision, it is a fair one. 

Valuation – Critics may point to a sense of quasi inside dealing/self-dealing – but if the values are:

• independently validated and robust;
• market-tested; and
• existing conflicts are transparently disclosed. 

This provides an external benchmark to validate purchase price and provides investors and the market with full transparency. 

Rationale – Finally, where the rationale is:

• value creation as opposed to;
• reputational management – it should add to ethical standards. 

With the case of David Lloyd, the rationale was about the asset needing more time to compound, and the exit market not reflecting intrinsic value as opposed to avoiding a loss or raising capital for the next fund. 

In a market where genuinely high‑quality assets are scarce, continuation vehicles offer an elegant solution. They allow investors to follow their money – doubling down on assets they understand, equity theses they continue to believe in, and management teams they trust. For LPs, this can represent continuity, reduced blind‑risk, and exposure to outcomes that are already partially de‑risked operationally. 

Alternatively, they offer a solution to an uncomfortable but familiar truth in private equity: sometimes the asset is right, and the market is wrong. Rolling a genuinely strong business forward is not a sign of failure; rather, it is an acceptance that value creation is often non‑linear and does not always align neatly with fund life calendars. Businesses compound over time, not to timetable.

Seen through this lens, continuation vehicles are best understood as a structural response to a structurally challenged exit environment, not a tactical workaround. They are tools – and like any tool in private equity, their ethical standing is determined not by their existence, but by how they are used.

Looking ahead, given the current macroeconomic and geopolitical backdrop, continuation vehicles are unlikely to disappear. They are neither a silver bullet nor a red flag. They are a pragmatic response to real market conditions – powerful when used with transparency, restraint, and a clear value‑creation rationale. Firms that apply them with discipline and clarity of purpose will be best positioned to benefit as the market continues to evolve.