Selling to Yourself: Continuation Funds in Private Equity

Continuation funds (CFs) are private equity structures in which a manager raises a new fund to purchase assets from their existing fund. This structure has surged in popularity, from five funds in 2018 to 130 in 2024. We use a hand-collected sample of 472 CFs to test a model in which heterogeneous preferences drive CFs. Consistent with the model’s predictions, CFs emerge when LPs are more heterogeneous and managers have earned carried interest that they can roll. LPs typically choose to exit rather than invest, with this decision driven by both LP-level frictions and time varying LP liquidity demands.