Continuation Funds and Private Equity's Exit Backlog
Private equity firms are sitting on thousands of companies they bought years ago and have not yet sold. By some industry estimates, roughly 31,000 portfolio companies worth in the neighborhood of $3.7 trillion are waiting for an exit, many acquired at the high valuations of 2021 and 2022. With initial public offerings still selective and traditional sales slow, firms have leaned on a structure that barely registered a decade ago: the continuation fund. Understanding why it has scaled so quickly tells you a great deal about the current state of private capital, and about the environment any business owner will face when a private equity buyer comes calling.
The Backlog Behind the Trend
Private equity runs on a cycle. A firm raises a fund, buys companies, improves them over three to five years, sells them, and returns the proceeds to its investors. Those investors, called limited partners (LPs), are typically pension funds, endowments, and insurers. The cash they receive back funds their next commitment. When sales slow, the cycle stalls.
That is what has happened. Higher interest rates, cautious lenders, and a narrow IPO window have suppressed exits since 2023. The result is a backlog of aging investments and a shortage of distributions, the cash actually paid back to investors. The pressure has changed how performance gets judged. For years the headline number was internal rate of return (IRR), an annualized figure that can be flattered by paper valuations a firm assigns to companies it still owns. In 2026, attention has shifted to distributed to paid-in capital (DPI), the simpler ratio of cash returned versus cash invested. The phrase repeated across investor conferences this year, "DPI is the new IRR," captures the mood. Investors want money back, not marks on a spreadsheet.
What a Continuation Fund Actually Is
A continuation fund is a way for a private equity manager to hold a company longer while still returning cash to the original investors. The manager raises a new fund, often backed by specialist secondary investors, and uses it to buy one or more companies out of the older fund. Investors in the older fund can take cash and exit, or roll their stake into the new vehicle and stay invested. The manager, called the general partner (GP), keeps running the business under the new structure.
These deals fall under a broader category known as GP-led secondaries. In a traditional secondary, an investor sells its fund stake to another investor. In a GP-led secondary, the manager initiates the transaction, usually to move a prized asset into a continuation vehicle rather than sell it to an outsider. The appeal is straightforward. The manager keeps a company it knows well and believes has further to run, the selling investors get liquidity, and new capital comes in to support the next phase of growth.
Why the Structure Has Scaled So Fast
The numbers explain the momentum. The secondary market reached a record of roughly $226 billion in transaction volume in 2025, according to Evercore, up about 41 percent from the prior year. GP-led deals, the category that includes continuation funds, accounted for close to half of that total, at an estimated $116 billion, a year-over-year increase of more than 50 percent. Continuation vehicles made up the large majority of GP-led activity. Early reads on 2026 suggest the pace has not slowed, with first-half volume tracking above $100 billion.
Adoption has broadened, too. Bain's 2026 private equity report found that roughly a quarter of managers have already used a continuation vehicle and about 40 percent expect to explore one in the next year or two. Some forecasts now suggest continuation vehicles could account for 30 to 40 percent of all private equity exits over the next few years. Capital has followed: Morgan Stanley closed one of the largest funds dedicated to single-company continuation deals at $2.5 billion, a sign that institutional investors view the structure as a durable part of the market rather than a temporary workaround.
What began as a tool for managing troubled assets has become a mainstream exit route for good ones. A firm with a strong, growing company and no attractive buyer no longer has to choose between selling at a discount and holding with no way to return cash. The continuation fund offers a third path.
What It Means for Owners and Investors
For business owners, the rise of continuation funds is a useful signal about the private equity buyers across the table. Many firms are under real pressure to show distributions, which shapes how they behave. A buyer carrying a backlog of unsold companies may be more selective on price, more focused on assets it can hold flexibly, and more attentive to how a purchase fits its own liquidity needs. If you sold a business to private equity and rolled some equity into the deal, there is a growing chance your company gets moved into a continuation vehicle rather than sold outright. That is not inherently bad, but it changes your timeline and the identity of your co-investors, and it is worth addressing in the original agreement.
For investors, the structure carries a built-in tension. The same manager often sits on both sides, selling a company out of one fund and buying it into another, which raises a fair question about price. Independent valuations and a genuine market check help, but the conflict does not disappear. The healthiest continuation deals involve a competitive process, clear disclosure, and pricing that reflects what an outside buyer would pay. The weakest ones look like a way to avoid an honest sale and reset the fee clock.
The structure is neither a problem to avoid nor a cure-all. It is a financing tool that works well when used on strong assets at fair prices, and poorly when used to delay a reckoning on weak ones. The distinction matters more than the label.
Key Considerations
- Owners selling to private equity: Ask how the buyer plans to return cash to its own investors, and whether your business is a likely candidate for a continuation vehicle later.
- Owners rolling equity: Negotiate what happens if your company is moved into a continuation fund, including your right to cash out, the valuation method, and information rights.
- Investors offered a continuation deal: Look for an independent valuation, a competitive process, and pricing consistent with an arm's-length sale before deciding to roll or cash out.
- Anyone judging fund performance: Weigh DPI, the cash actually returned, alongside IRR, which can rest on unrealized marks.
- Watch the incentives: A manager on both sides of a deal has a conflict. Disclosure and a real market check are the safeguards that matter.
What to Watch Next
Three developments are worth tracking. First, regulatory and investor scrutiny of continuation deals is rising, with more attention to conflicts, valuation, and the fairness of the process. Second, pricing discipline will be tested as volume grows; a flood of capital can push valuations past what the underlying businesses justify. Third, distributions across the industry are projected to improve modestly in 2026, and if traditional exits recover, the question becomes whether continuation funds remain a core tool or recede as a stopgap. The early evidence points to staying power. The structure has moved from the margins to the mainstream, and the capital lined up behind it suggests investors expect it to last.
The Bottom Line
The continuation fund boom is a symptom of a private equity market that cannot sell its inventory fast enough, and a practical response to it. For owners, it is a window into the pressures shaping how buyers price and hold companies. For investors, it is a structure that rewards careful attention to valuation and process, and punishes the assumption that every deal is priced fairly. Treat it as what it is: a useful tool that says as much about the liquidity environment as it does about any single company.