Will private equity’s pivot to continuation vehicles continue in 2026?

Core Insights - The total dollar value of continuation funds is projected to reach $100 billion by the end of 2025, a significant increase from $35 billion in 2019, indicating a growing trend in private equity practices [1][2] - Continuation funds allow private equity firms to sell portfolio companies from one fund to another managed by the same firm, often at the end of the original fund's lifecycle, providing limited partners (LPs) the option to reinvest or cash out [2][6] - The median holding period for portfolio companies has extended to almost six years in 2025, the longest in 25 years, reflecting a slowdown in selling activity despite ongoing acquisitions [3] Continuation Funds Dynamics - Continuation funds have gained popularity as private equity firms seek to return promised returns to LPs, with many LPs opting to cash out rather than reinvest [2][6] - The motivations for establishing continuation funds have evolved, with firms now using them for well-performing assets rather than just hard-to-divest ones, aiming for better selling prices [7][8] - Critics highlight governance concerns, as continuation funds can create conflicts of interest between exiting and incoming investors, particularly when a significant majority of existing investors prefer cashing out [10][11] Legal and Regulatory Context - A legal case in the Delaware Court of Chancery involving a private equity firm and a foreign investor may impact the future of continuation funds, with potential outcomes that could either encourage or hinder their use [6][12] - The lack of stringent regulation around continuation funds raises concerns, although recent SEC rules aimed at addressing conflicts of interest have been stalled due to political changes [14][15] Implications for Portfolio Companies - Being included in a continuation fund may signal ongoing investment interest from private equity sponsors, potentially leading to additional capital infusion and increased scrutiny of portfolio companies [16][17] - Management teams may view this as a positive sign, indicating confidence in the business's prospects, but it may also result in heightened involvement from private equity owners [17]