• Search

  • Print or Digital

  • Volumes & Issues

  • Years

  • Topic

  • Types

The Rise of Private Equity Continuation Funds

The Rise of Private Equity Continuation Funds

Kobi Kastiel & Yaron Nili

Volume 172 2024
Article Corporate Law;

This Article provides the first comprehensive examination of an emerging practice within the private equity sector: continuation funds. Continuation funds break from the traditional private equity model by allowing sponsors to hold on to assets beyond the typical fund term and, instead of selling the assets to third parties, sell them to their own newly established fund. Lauded by the private equity industry as providing “optionality” to investors by allowing them to cash out or roll over, continuation funds have grown to represent a major segment of investment activity in the United States. Despite their surging popularity among private equity sponsors, they are subject to investor resistance, and, puzzlingly, most existing investors in the original funds decline the option to roll over their stakes into a continuation fund, even though it is run by the same private equity firm with which they have cultivated relationships for years.

This Article addresses this puzzle and makes three contributions to the literature. First, we highlight the labyrinth of concerns that cast a shadow on the growing prevalence of continuation funds. Specifically, we show that private equity managers have strong incentives to establish continuation funds and explore the web of conflicts of interest between sponsors and investors and among investors themselves. Second, employing in-depth interviews with market participants from both sides of the aisle––investors and sponsors­––we examine the practical dynamics of continuation funds, exploring the cautionary tale they present to the conventional deference of law and economic theory to private contracting among sophisticated parties. Third, we present two alternative viewpoints regarding continuation funds—the market outcome view and the market failure view—and against this backdrop, we offer several policy recommendations that are particularly timely in light of the SEC’s recently adopted rules addressing the issue.

Kobi Kastiel: Professor of Law, Tel Aviv University; Visiting Associate Professor of Law, New York University School of Law; Senior Research Fellow, Harvard Law School Program on Corporate Governance; Research Member, the European Corporate Governance Institute (ECGI).

Yaron Nili: Professor of Law, Duke University School of Law; Research Member, the European Corporate Governance Institute (ECGI). We would like to thank Jennifer Arlen, Lucian Bebchuk, Brian Broughman, Ryan Bubb, Will Clayton, Albert Choi, Steve Choi, John Coates, Jens Dammann, Kevin Davis, Luca Enriques, Richard Epstein, Jill Fisch, Matteo Gatti, Clay Gillette, Zohar Goshen, Tom Gosling, Alperen Gözlügöl, Dan Hemel, Assaf Hamdani, Sharon Hannes, Scott Hirst, Marcel Kahan, Ehud Kamar, Filippo Lancieri, Shay Lavie, Holger Spamann, Michael Ohlrogge, Ludovic Phalippou, Elizabeth Pollman, Andrew Rearick, Ed Rock, Mark Roe, Avi Tabach, Eric Talley, Roberto Tallarita, Andrew Tuck, Abe Wickelgren, Simon Witney, and Luigi Zingales as well as participants at the NYU School of Law Faculty Workshop, Virginia Law School Faculty Workshop, Harvard Law School Corporate Governance Seminar and the Corporate Lunch Seminar, the 2023 Annual Conference of Columbia Law School/Ono College, the 2023 ECGI Conference on the Law and Finance of Private Equity and Venture Capital at Oxford University, the 2023 Corporate Governance Conference at the London School of Economics, the 2023 Annual Penn-NYU Empirical Contracts Workshop, the University of Texas Law & Economics Workshop, the 2023 Corporate Law at a Crossroads Conference at Wisconsin University, Tel Aviv University Law & Economics Workshop, the Online Workshop of the Stigler Center’s Affiliate Fellows Program at Chicago University, and the Fall 2023 ABA Business Law Section Annual Meeting (Private Equity) for extremely helpful comments and discussions. We also gratefully acknowledge the excellent research assistance of Jessica Biggott, Jasmine Chen, Tony Isaac, Celia Garrett, Juliet Jacques, Omer Tzuk, and Ori Yaneev. We are especially grateful to Maayan Weisman for her invaluable and critical research assistance throughout our work on this Article.

#