How to Answer “What is a continuation fund, and why would a GP use one?” in Private Equity Interviews
In Private Equity interviews, you may be asked: “What is a continuation fund, and why would a GP use one?” A good answer is more than a definition—you need to explain the transaction mechanics, who wins/loses, and how conflicts are managed.
This guide helps you explain continuation fund private equity concepts at an associate level: a clear definition first, then the GP’s rationale, and finally the governance steps that make the deal credible to LPs and new investors.
What Interviewers Look For in a Continuation Fund Definition
Interviewers use this question to test whether you can give a tight continuation fund definition and place it correctly within the secondaries market (specifically GP-led secondaries). They’re assessing whether you understand what actually changes (asset ownership, fund terms, economics) versus what stays the same (same underlying company and usually the same GP).
They also test commercial judgment. A GP continuation fund can be a sensible liquidity and portfolio-management tool, but it creates real conflicts: the GP is effectively selling an asset to a vehicle it will continue to manage, so pricing, disclosures, and allocation of economics matter.
Finally, it’s a communication screen typical of private equity interview questions: can you stay structured, cover motivations for GP/LP/new money, and mention the core process mechanics (sell vs roll elections, LPAC involvement, third-party valuation/fairness opinions, competitive bidding) in 2–3 minutes without rambling.
Answer Framework for GP Continuation Fund Mechanics (Step-by-Step)
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Step 1: Give a clean continuation fund definition (one sentence, then parties)
Start with a one-sentence definition that’s precise: a continuation fund is a new private equity vehicle (often anchored by secondary investors) that buys one or more assets from an existing “legacy” fund, allowing the GP to continue owning and managing those assets beyond the legacy fund’s remaining term.
Then name the parties and the choice set, because that’s what interviewers listen for: the legacy fund is the seller; the continuation vehicle is the buyer; existing LPs typically get an election to sell for cash or roll into the new vehicle; and new secondary investors provide purchase capital (and sometimes additional follow-on capital).
This framing shows you understand the structure before you discuss motivations or governance.
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Step 2: Explain why a GP uses one—separate asset rationale vs stakeholder needs
Answer “why use a continuation fund in private equity” in two buckets.
Asset-driven rationale: the GP believes the asset has meaningful upside that can’t be fully realised within the legacy fund’s timing constraints. The company may need 2–4 more years, incremental capital, add-on acquisitions, or operational work; or exit markets may be temporarily unattractive. A continuation fund avoids a “sell because the fund is old” outcome.
Stakeholder rationale: LPs have different liquidity preferences. A continuation fund creates a decision point: liquidity for those who want to exit, and continued exposure for those who like the asset. It can also align the asset with a vehicle whose term and capital plan match the next phase of value creation.
Be balanced: it may also reset economics (fees/carry), which is precisely why process matters.
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Step 3: Show you understand the GP-led process and conflict management
At associate level, you should briefly highlight that this is effectively a related-party transaction, so credibility comes from robust process.
Key points to mention:
- Market-based pricing: often supported by a competitive secondary process (multiple bidders) and third-party valuation work; sometimes a fairness opinion.
- Governance and disclosure: LPAC engagement, clear disclosure of conflicts, and transparent presentation of terms and returns.
- LP election mechanics: clean execution of the sell vs roll choice (timing, paperwork, treatment across LP classes), with consistent treatment and clear communication.
- Alignment: negotiated continuation vehicle economics (management fees, carry, GP commitment), plus any new-money rights and governance provisions for incoming investors.
This shows you can discuss the deal beyond buzzwords.
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Step 4: Close with benefits, trade-offs, and one concrete example
Close by summarising outcomes for each stakeholder and naming one trade-off.
Benefits: the GP keeps compounding a strong asset with the right time horizon; selling LPs get liquidity; rolling LPs keep exposure; new investors access a seasoned asset with negotiated terms and governance.
Trade-offs: valuation and incentive conflicts, plus the reputational risk if LPs feel pressured or pricing/terms aren’t demonstrably market.
A simple example helps: “If a legacy fund is in year 9 and owns its best performer that needs 2–3 more years and follow-on capital, a continuation fund can buy it at a market-tested price, give LPs a sell-or-roll election, and fund the next phase—provided governance and disclosures are tight.”
Model Answer: Continuation Fund Private Equity (Associate)
A continuation fund in private equity is a new vehicle—often funded by secondary investors—that buys one or more assets from an existing PE fund so the GP can keep owning and managing them beyond the legacy fund’s remaining life.
A GP uses a continuation fund when the asset still has meaningful upside but the original fund is approaching the end of its term, or when LPs have different liquidity needs. Instead of selling the company just because the fund is ageing, the GP can transfer it to a new vehicle at an agreed price, giving existing LPs a choice to sell for cash or roll into the continuation fund and stay invested.
It also lets the GP match the asset to the right capital plan and time horizon—often bringing in new money for add-ons, capex, or de-levering—so the next phase of value creation isn’t constrained by the legacy fund structure.
Because it’s effectively a related-party transaction, the key issue is conflicts and governance. Strong processes typically include a market-tested pricing exercise (often competitive bidding), third-party valuation support and/or a fairness opinion, LPAC involvement, full disclosure, and clearly negotiated terms in the new vehicle around fees, carry, and GP commitment. Done well, it’s a liquidity and alignment tool; done poorly, valuation and incentive conflicts are the main risk.
- Open with a one-sentence definition that describes the new vehicle buying assets from the legacy fund.
- Explicitly mention the LP decision: sell for cash or roll into the continuation vehicle.
- Split the ‘why’ into asset rationale (more upside/time/capital) and stakeholder needs (liquidity mismatch).
- Acknowledge conflicts, then immediately state mitigants (competitive process, LPAC, third-party valuation/fairness).
- Keep it practical: fund maturity trigger + transaction mechanics + governance in under 3 minutes.
Common Mistakes in Private Equity Interview Questions on GP-Led Secondaries
- Calling it “a fund extension” without explaining the asset transfer into a new vehicle (and who funds the purchase).
- Describing only benefits and ignoring conflicts around valuation, disclosures, and fee/carry resets.
- Forgetting the LP election mechanics (sell vs roll), which is central to GP-led secondaries.
- Sounding cynical by implying it’s always GP self-interest, rather than presenting balanced stakeholder drivers.
- Skipping the “why now” trigger (fund age, exit window, remaining value-creation plan) and staying abstract.
- Confusing a continuation fund with a standard LP secondary, where the fund stays the same and only LP interests trade.
Follow-Ups on Valuation, LP Elections, and Continuation Vehicle Terms
How is a continuation fund different from an LP secondary sale?
In an LP secondary, an LP sells its fund interest to another investor and the underlying assets stay in the same fund. In a continuation fund, the GP moves assets into a new vehicle and LPs typically choose to sell or roll.
What are the key conflicts in a GP continuation fund, and how are they mitigated?
The biggest conflict is pricing and terms because the GP is on both sides of the transaction. Mitigation usually includes a competitive process, third-party valuation and/or a fairness opinion, LPAC oversight, and clear disclosures with a clean sell/roll election.
What typically happens to fees and carry in a continuation vehicle?
Economics are negotiated deal-by-deal, but you often see a new carry structure and management fees that may be lower than a flagship fund. Alignment is typically supported by a GP commitment and negotiated governance rights for incoming investors.
Why might an LP choose to roll rather than sell?
They may want continued exposure to the remaining upside, trust the GP’s plan, and view the pricing and new vehicle terms as attractive—especially if there is fresh capital to fund growth.
When would a continuation fund be a bad idea?
If pricing isn’t demonstrably market-based, disclosures are weak, or the asset is being moved mainly to avoid crystallising underperformance, LP trust and headline risk increase materially.
How to Explain Continuation Funds in Interviews (Targeted Practice)
- Practise a 90–120 second version: definition → why (asset + stakeholder) → governance; only add detail if prompted.
- Prepare two “mechanics” lines you can say smoothly: asset transfer to a new vehicle and LPs can sell or roll.
- Rehearse one conflict-and-mitigant pair (valuation conflict → competitive process/LPAC/third-party work).
- In AceTheRound, drill follow-ups on pricing, fee/carry resets, and LP election logistics so you can stay structured under pressure.
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