Continuation Vehicles: Liquidity Tool or Conflict of Interest?

Section I: Challenges for LPs · from The State of Private Equity, Part 2B: Challenges and Opportunities for LPs.

As GP-led continuation vehicles have grown into a mainstream liquidity tool, they have also drawn real skepticism from the LPs who use them. In a McKinsey survey, roughly 30% of LPs characterized assets sitting in continuation vehicles as "distressed" or "challenged," and another 22% called them "complicated," reflecting a persistent worry that CVs can be used to extend the life of underperforming assets rather than to genuinely return capital.¹⁶

Chart in the full report — source: McKinsey¹⁶

Regulators are paying attention, too. According to UBP, the rapid growth of continuation vehicles has attracted heightened regulatory and investor scrutiny, with regulators specifically flagging inadequate disclosure of the conflicts of interest inherent in a transaction where the same GP effectively sits on both sides of the trade: selling from the old fund and buying into the new one.¹⁷

Yet the concern does not appear to be a dealbreaker: nearly two-thirds of LPs surveyed by McKinsey report at least a neutral-to-positive view of GPs that use continuation vehicles frequently, and first-quartile continuation funds have actually outperformed first-quartile buyout funds by 0.2x turns of net MOIC in recent vintages, which suggests the real issue for LPs is governance and disclosure, not the instrument itself.¹⁶

Chart in the full report — source: McKinsey¹⁶

In our view, financial engineering hasn't left private equity. It has shifted from balance-sheet leverage toward liquidity and structural tools like continuation vehicles, GP-led secondaries, LP-led secondaries, and NAV loans. These tools solve real problems, but they may also carry tail risk in ways that are harder for LPs to see and price properly than leverage ever was.