Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/281759 
Year of Publication: 
2024
Series/Report no.: 
New Working Paper Series No. 340
Publisher: 
University of Chicago Booth School of Business, Stigler Center for the Study of the Economy and the State, Chicago, IL
Abstract: 
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.
Subjects: 
Private Equity
Continuation Funds
Corporate Governance
Corporate Law,Securities Law
Reputation
Related Party Transactions
SEC
JEL: 
K12
K22
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.