Hi, it’s CJ Gustafson and welcome to Looking for Leverage.

Today’s term: continuation vehicle, a new fund your sponsor raises, mostly with outside money, to buy your company out of one of its own older funds.

Yes, your sponsor is effectively selling your company to itself. Private equity has figured out how to be both the buyer and seller in the same transaction. You gotta respect the ingenuity.

And if you're a CFO at a PE-backed company that's been in the portfolio for five-ish years, there's a decent chance you'll encounter one of these things.

Continuation vehicles accounted for about 14% of sponsor-backed exit value globally in 2025, up from 5% in 2021. In Houlihan Lokey's sample of single-asset transactions, the median company had been held for about five years, and the median fund was about seven years old.

I've been trying to wrap my head around these deals for a while, mostly because they create a rather peculiar situation for management. Your sponsor gets to sell the company, its investors get to cash out, and you may end up working for the exact same people with another three to four years on the clock.

Depending on how your equity agreement is written, you might not even get paid.

Back in 2024, I had Scott Voss, a managing partner at HarbourVest, on Run the Numbers. Scott operates in the secondaries market, where investors buy existing private equity interests from other investors. HarbourVest is one of the firms that can supply the new capital for continuation vehicles.

Scott explained:

Say your sponsor bought your company five years ago. Business is good, EBITDA has grown, and there are still acquisitions to make or margins to expand. The sponsor would love to own the company for another five years, but the investors in its original fund would also love to see some of their money again.

Those two desires are starting to conflict.

So the sponsor sets up a new fund, raises money from secondary investors like HarbourVest, and uses that money to buy the company from its original fund.

The original LPs typically get a choice: take cash at the transaction price, or roll their investment into the new vehicle and keep riding.

Most take the cash. Rollover rates have reportedly increased from around 10% to 15%, meaning the large majority of the investor capital behind the company can turn over while the sponsor stays exactly where it was.

Pretty clever.

Scott told me these deals weren't always viewed so favorably. A decade ago, continuation vehicles were often where tired portfolios went when the sponsor couldn't find anyone else to buy them. The funds were getting old, the assets weren't particularly exciting, and buyers demanded big discounts.

He's watched that change. Today, he describes the market as consisting mostly of "good news, good story situations," where the sponsor hasn't finished executing its value creation playbook.

The pricing reflects that evolution. In 2023, the median continuation vehicle traded at 92.5% of its reference-date NAV. By 2025, that had climbed to 97%, with about half of the deals pricing at or above NAV.

In other words, these aren't necessarily the PE equivalent of putting your unwanted furniture on Facebook Marketplace.

I had Scott back on the show last year, and he explained the sponsor's motivation by putting himself in its shoes:

I think that's a perfectly legitimate reason to pursue one of these deals. A fund's expiration date doesn't necessarily coincide with the moment a company has reached its full potential.

And if the sponsor still believes it can double the equity value, why hand that opportunity to another PE firm?

There's also a pretty attractive economic arrangement for the sponsor.

Depending on how the transaction is structured, the GP can crystallize carried interest on the original investment and negotiate a fresh set of management fees and carry on the new vehicle.

So the same company can generate carry twice.

Of course, this creates an interesting conflict. Your sponsor is negotiating a sale price with itself.

The original fund wants to maximize proceeds for its existing LPs. The new vehicle needs to acquire the company at a price that leaves enough upside for its incoming investors. The sponsor happens to represent both sides.

This is why the transaction needs a serious valuation process, third-party investors willing to underwrite the price, and oversight from the LP advisory committee (LPAC).

It's also why ILPA, the trade association representing institutional private equity investors, published updated continuation vehicle guidance this month. The roughly 40-page document gets pretty specific about the process. It covers voting timelines and conflicts of interest.

I went looking for the corresponding section about management equity.

There isn't one.

That's understandable. ILPA represents the pensions, endowments and other institutions investing in private equity funds. They're looking after their constituents.

But the CFO and management team who helped create all this value are going along for the ride, and their treatment can be considerably less straightforward.

From the operator's perspective (and workload), a continuation vehicle can look an awful lot like a regular exit.

Incoming investors want diligence. This includes QoE reports, data rooms, management presentations, valuation analyses, projections and access to the management team.

So congratulations, you get to do a bunch of the work associated with selling your business, only to wake up afterward with the same sponsor. Weird.

There are a few wrinkles worth understanding.

1.) Your debt might survive the transaction: Many US sponsor credit agreements define change of control to include the original fund and its controlled investment affiliates as permitted holders. Moving the company between two vehicles controlled by the same sponsor may therefore avoid triggering a change of control.

Scott suspected this was part of the attraction. Imagine you're sitting on a beautiful piece of debt financed in 2021, and a traditional sale would force you to refinance it at considerably higher rates. Keeping the existing financing could be a meaningful advantage.

Some lenders are starting to question whether these transfers should continue getting that treatment, so I'd pull out the actual credit agreement before getting too excited.

2.) Your holding period starts another lap: About 70% of the vehicles Houlihan Lokey reviewed had a five-year base term with two one-year extensions. A few companies have even been moved into a second continuation vehicle.

There's apparently no rule against playing the same game twice.

3.) It might not be based on your forecast: Who controls the forecast used to justify the sale price?

The sponsor typically hires an independent adviser to assess whether the transaction price is fair. But McGuireWoods points out that the adviser might never speak to company management, and the financial projections it receives might not have been prepared by the CFO.

That's a little (a lot) unsettling. Your sponsor could effectively sell your company to itself using a financial forecast you've never signed off on.

Two weeks ago, I wrote about management rollover equity and how we ended up quizzing a buyer about its stock before anyone signed the deal.

At least in that situation there was an actual buyer.

With a continuation vehicle, the sponsor you've been working for all along is effectively acquiring the company again. And this creates a fascinating question about your management equity.

Does the transaction even count as a sale under your equity agreement?

A lot of incentive equity plans define a change in control or liquidity event in ways that exclude transactions between affiliates.

Debevoise has written about this problem. If the old fund and the continuation vehicle are controlled by the same sponsor, the transaction often won't trigger the provisions that would ordinarily accelerate vesting or provide liquidity to management.

That can be a rather unpleasant discovery after you've spent five years helping quadruple the equity value.

And if the transaction doesn't trigger your payout, the sponsor has considerable flexibility in deciding how to treat your equity. Debevoise describes several possible approaches:

There's no universally accepted market practice here.

One of the factors Debevoise explicitly identifies for the sponsor to consider is how much negotiating leverage management has.

If you end up receiving a new incentive plan, you'll also need to understand the new hurdle. H.I.G. has described structures where new equity incentives are established at the continuation vehicle level, sometimes with hurdles materially above the prior NAV, including an example set 25% above NAV. Yikes.

Let's put some numbers around this, because I think this is where the whole arrangement gets particularly interesting.

Your sponsor bought the company for $150M of equity, and five years later it's worth $600M. Your management equity gives you 1% of the appreciation above that original $150M.

The sponsor moves the company into a continuation vehicle at $582M, or 97% of NAV. Your equity is now worth $4.32M on paper.

There are three possible outcomes, depending on your plan documents and what gets negotiated.

Scenario 1: Everybody cashes out.

The continuation vehicle is treated like a normal liquidity event for management, and you receive $4.32M before taxes.

You can take your winnings, put them in your pocket, and decide how much you want to reinvest in the next chapter.

Scenario 2: Nothing triggers.

Your existing equity simply carries forward into the new structure, subject to whatever terms govern the transaction. For this example, assume your original $150M appreciation threshold is preserved.

You've accumulated $4.32M of theoretical equity value and are entitled to the future upside, but you haven't received a dollar of liquidity.

Oh, and you might have another five to seven years of ownership ahead of you.

Scenario 3: You roll and reset.

Let's assume your existing incentive equity is converted into $4.32M of invested equity in the new vehicle.

On top of that, you receive a fresh 1% profits interest grant. Except this new incentive comes with a hurdle 25% above the $582M transaction price.

That's a $727.5M threshold.

Your new award has to clear another $145.5M of equity appreciation before it starts generating value. And the existing $4.32M you've rolled remains invested rather than being deposited into your bank account.

Of course, the rollover equity and the new incentive grant are separate instruments, with different economics. This is just one illustrative structure, and the precise treatment can vary substantially.

Still, imagine the sponsor announcing that it's realized an excellent return on the original investment while you're being introduced to a fresh hurdle and a new vesting schedule.

I suspect you'd have a few questions.

And you should.

The more I learn about continuation vehicles, the more I think management teams should treat them like a legitimate exit process, even though the sponsor stays the same.

I'd want answers to a few things before getting too far into the transaction.

And if you're negotiating management equity at a newly acquired PE-backed company today, I'd ask counsel to address continuation vehicles in the documents right from the beginning.

Debevoise says management counsel has already started bringing this up in initial equity negotiations. Given the growth of these transactions, I suspect we'll be seeing a lot more of it.

I actually like the idea behind continuation vehicles. If a sponsor owns a great company and believes there's more money to be made, it's perfectly reasonable to want to keep investing in it. Scott convinced me of that a couple of years ago.

I'd just like to know whether the people running the company get to take some chips off the table before everybody agrees to play another round.

Wishing you a hurdle you can clear the second time around,

CJ

Looking for Leverage breaks down one PE term, clause, or mechanic each week, written for the CFOs and finance leaders who actually have to live with these things. If this got forwarded to you, subscribe at lookingforleverage.com. If there's a term you want broken down, reply and tell me. I read everything.

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