Private Fund Insights Blog

Historically, investors in private equity buyout funds expected to commit capital, with that capital deployed over a three- to five-year investment period. They expected profitable exits to follow during the subsequent three to seven years, resulting in the return of invested capital plus profits to investors — often with the cycle repeating through successor funds or investments with other sponsors. But as many existing buyout funds (especially mid-market) struggle to profitably divest investments during the traditional exit period, and capital available for new buyout funds grows scarce (due partly perhaps to prolonged “exit deserts” and related capital lock-up exceeding initial investment expectations), “zombie funds” have emerged as a dreaded market reality for both sponsors and investors.

A zombie fund is typically characterized by extended holding periods, limited realizations and diminished prospects for near-term liquidity. Sponsors are increasingly offering continuation vehicles both as options for patient investors willing to ride out the exit desert and as an avenue for new capital, often from dedicated secondary-focused funds. Although generally having lower fee exposure than the original buyout fund, new capital provides strongly desired liquidity to investors determined to exit on a more traditional timeframe.

As we explored in our September 2023 post on adviser-led secondaries and the (now-vacated) SEC Private Fund Adviser Rules, these structures, commonly referred to interchangeably as GP-led secondaries or continuation vehicles, have long carried inherent conflicts of interest warranting careful attention from all stakeholders. With the rules vacated by the Fifth Circuit in June 2024, related formal compliance obligations, like mandatory fairness or valuation opinions, no longer apply, although advisers remain subject to the fiduciary duty and antifraud provisions of the Investment Advisers Act of 1940. In today’s environment of record-low distributions, persistent liquidity challenges and a sharp resurgence of zombie funds, continuation vehicles remain a dominant tool for managing aging portfolios. This post examines the evolving legal and practical considerations in 2026, focusing on fiduciary duties, conflict management best practices, LP protections and strategies to navigate these conflict-rich arrangements amid market pressures.

The Current Zombie Fund Landscape

Zombie funds — those with longer-dated vintages facing stalled exits, ongoing management fees and persistently low distributions — have become increasingly prevalent, particularly among mid-market sponsors. Recent industry commentary highlights a growing cohort of managers holding aging or difficult-to-exit portfolios, with fundraising timelines stretching materially compared to prior cycles and capital flowing disproportionately toward top-tier sponsors and alternative strategies such as private credit and infrastructure. This bifurcation has left many mid-market firms navigating extended holding periods, constrained liquidity and more challenging re-upping dynamics.

This scenario creates acute investor-relations challenges, as limited partners increasingly demand exit ramps and scrutinize the DPI (distributions to paid-in capital) metric — the tangible cash actually returned to investors relative to paid-in capital. Industry-wide DPI as a share of total private equity AUM has hit record lows (below historical norms, with many industry reports showing single-digit percentage distribution levels relative to AUM).

Sponsors face parallel risks, including potential loss of key talent, as top investment professionals gravitate toward firms with fresh, dry powder for deploying on high-upside current deals, rather than managing legacy stragglers in low-activity environments. As Forbes notes, reliable access to new capital is “an important element of keeping the very best talent,” and mid-market zombie firms often see shrinking AUM, reduced deal flow and talent flight, which exacerbates the cycle of underperformance and fundraising difficulty.

Continuation Vehicles as the Primary Response

By way of recap, a continuation vehicle (also known as a continuation fund) is the predominant form of GP-led secondary transaction today, accounting for the vast majority of GP-led volume in 2025. In these structures, the sponsor transfers one or more selected portfolio assets from a maturing legacy fund into a new, dedicated vehicle that the same sponsor continues to manage. Existing investors in the legacy fund are typically given a clear choice: cash out their pro-rata interest (receiving liquidity from the transaction proceeds) or “roll” all or part of their exposure into the new continuation vehicle (sometimes with the option, or a requirement, to “staple” an additional commitment with the rolled commitment). The new vehicle is usually capitalized by a combination of rolling LPs and fresh secondary capital from dedicated secondaries investors (e.g., funds specializing in GP-led deals), often at a negotiated fair value supported by independent processes.

From the sponsor’s perspective, continuation vehicles serve as a powerful tool to mitigate mounting LP liquidity pressure — particularly in zombie fund scenarios — by offering an exit option to investors eager to realize returns on a more traditional timeframe, while allowing patient LPs (and new entrants) to maintain, acquire or increase exposure to high-conviction assets. Sponsors retain control and the opportunity to pursue additional value creation over an extended runway (typically 3–6+ years), implementing management adjustments, operational improvements or growth initiatives that might otherwise be constrained by the legacy fund’s term limits. The infusion of new capital can further accelerate these efforts, potentially enhancing returns without the need for new full fundraising.

For existing LPs, the appeal is twofold, as those seeking liquidity gain a structured, often attractive exit path amid low traditional distributions, while rolling investors preserve upside in proven assets, thus avoiding forced sales in suboptimal markets and benefiting from the sponsor’s continued stewardship. New secondary investors, meanwhile, access curated, lower-risk opportunities with known performance history and shorter expected hold periods compared to primary investments.

In today’s environment of persistent exit challenges and zombie fund proliferation, continuation vehicles have evolved from niche liquidity patches into a mainstream portfolio management strategy, providing flexibility for all parties while bridging the gap between prolonged asset holds and investor demands for realized returns.

Inherent Conflicts and Legal Considerations

Continuation vehicles inherently present significant conflicts of interest due to the sponsor’s dual role on both sides of the transaction. Sponsors are naturally incentivized to select high-conviction or “crown jewel” assets for transfer at valuations that favor their carried interest and future upside, while the structure creates differential treatment between rolling investors (who retain exposure) and selling investors (who cash out). Additional conflicts arise from ongoing management fees and carried interest in the new vehicle, as well as risks of undervaluation (to facilitate the deal) or over-optimism in projections to justify the extended hold. To the extent they are registered investment advisers, sponsors must remain vigilant about their fiduciary obligations under the Advisers Act, and all sponsors must be mindful of applicable state law and the legacy fund’s governing documents, including full and fair disclosure requirements and any obligations to consult with or obtain approvals from the limited partner advisory committee (LPAC).

Since the full vacatur of the Private Fund Adviser Rules by the Fifth Circuit in June 2024, mandatory fairness or independent valuation opinions are no longer required. Nevertheless, voluntary fairness opinions remain a widespread industry practice and are often viewed as a de facto standard, consistent with ILPA guidance and prevailing LP expectations. Competitive bidding processes, independent third-party valuations, enhanced documentation of the rationale and process, and robust disclosures are now market norms — frequently expected by existing investors and sometimes contractually required via side letters.

Emerging risks underscore the need for careful navigation. LP pushback and potential litigation have increased, particularly around claims of unfair pricing, inadequate disclosures, or breaches of fiduciary duty in asset selection and valuation. Further, the SEC’s 2026 Examination Priorities continue to emphasize fiduciary duties, conflicts of interest, valuation practices and compliance program effectiveness — areas that often arise in adviser-led transactions. In practice, these themes encompass many of the structural and disclosure issues inherent in continuation vehicles, such as allocation decisions, interfund transfers, valuation methodologies and documentation of governance processes, including LPAC consultations and approvals. At the same time, side letter negotiations have become a key battleground, with LPs increasingly seeking protections such as most-favored-nation rights, enhanced review periods or other consent and disclosure mechanisms to address perceived structural imbalances.

Best Practices and Protective Strategies

Given the ongoing market pressures — prolonged exit deserts, low DPI yields and zombie fund proliferation — that are likely to drive ongoing use of continuation vehicles, sponsors should prioritize processes that demonstrate alignment, transparency and conflict mitigation to preserve investor trust and reduce litigation risks.

Key sponsor best practices include the following:

• Engaging the LPAC early and robustly after providing full disclosure of the transaction rationale, asset selection criteria, valuation support and any potential conflicts — ideally convening LPAC review at least 10 business days before finalizing terms (consistent with ILPA guidance).
• Voluntarily obtaining independent fairness opinions or other market-tested pricing guardrails (now widely viewed as baseline expectations for institutional LPs, per 2026 industry analyses).
• Establishing clear, reasonable election timelines with sufficient review periods — ILPA has recommended election period of approximately 30 calendar days for LPs to evaluate materials and return elections. a standard Sponsors have historically sought to compress this election period, but investors have successfully resisted, ensuring informed decisions.
• Implementing additional conflict mitigations, such as carefully structuring any stapled commitments with clear disclosure and express LP consent, ensuring competitive processes for price discovery where feasible, and applying rolling LPs’ preexisting side letters to the continuation vehicle (insofar as relevant).

For existing investors evaluating a continuation vehicle opportunity, the following considerations are important:

• Scrutinizing key elements thoroughly, such as asset selection rationale, independent valuation support, fee/carried interest terms in the new vehicle (including any material differences from the legacy fund), governance rights and alignment with the sponsor’s track record.
• Leveraging side letters aggressively — negotiating protections like MFN clauses, enhanced review periods or redemption/transfer rights — while recognizing that compressed deal timelines often make mid-process negotiations challenging.
• Proactively securing advance protections in initial fund investments by negotiating side-letter provisions addressing future continuation vehicles (e.g., minimum disclosure standards, LPAC consultation rights or default “status quo” options), which can significantly improve outcomes when elections arise on short notice.
• Requesting and analyzing the sponsor’s historical performance in prior continuation vehicles, including details on past roll/sell outcomes, valuation accuracy and post-transfer value creation, which can inform whether to cash out or roll, providing valuable context beyond the current proposal.

By adopting these practices, sponsors can foster more collaborative processes that balance liquidity needs with extended value creation, while investors can better protect their interests in an environment where continuation vehicles remain a core liquidity and portfolio management tool.

Looking Ahead

Continuation vehicles are poised to remain a cornerstone of private equity portfolio management in the years ahead, driven by persistent liquidity challenges, low DPI yields and the structural realities of aging funds amid uneven market recovery. As these transactions continue to proliferate — particularly for mid-market sponsors navigating zombie fund pressures — industry best practices have coalesced around key safeguards such as robust LPAC engagement, voluntary fairness opinions, competitive pricing processes, transparent disclosures and reasonable election timelines.

While these norms have helped fill the regulatory gap left by the 2024 vacatur of the Private Fund Adviser Rules, the risk of renewed scrutiny persists. Depending on evolving SEC enforcement priorities and potential future rulemaking (including any renewed focus on side-by-side conflicts, valuation practices or LP treatment in restructurings), additional formal requirements could emerge if market participants do not consistently adhere to prevailing standards.

Sponsors and investors alike are well-advised to address continuation vehicles proactively at the fund formation stage. Thoughtful drafting in governing documents can significantly reduce uncertainty and execution risk years later. Key provisions to consider include:

• Express authority and guardrails for GP-led restructurings, including continuation vehicles and other affiliate transfers, subject to defined procedural safeguards.
• Pre-agreed valuation frameworks, such as pricing methodology guardrails, requirements for independent third-party valuations or fairness opinions, competitive bidding processes where appropriate and clear documentation standards.
• Defined LPAC procedures and approval thresholds, specifying when LPAC consent is required, applicable voting standards, recusal mechanics for conflicted members and the consequences of non-response.
• Advance disclosure mechanics for economic resets, including potential fee step-downs, carried interest resets, GP rollover commitments and expense allocation principles in a continuation vehicle context.
• Structured consent or negative-consent pathways, reducing the need for ad hoc approvals under compressed timelines.

Investors, for their part, should negotiate targeted side letter protections during initial commitments — such as enhanced disclosure standards, minimum review periods or defined LPAC consultation rights — to streamline future elections and enhance outcomes. By anticipating these dynamics early, both sides can better mitigate conflicts, preserve relationships and reduce the potential for disputes in an increasingly complex environment.

For sponsors structuring continuation vehicles or updating governing documents to reflect best practices, or investors negotiating initial fund terms or evaluating a continuation vehicle proposal, our Private Funds & Investments Practice Group stands ready to provide tailored guidance. Please contact a member of the team for assistance navigating these opportunities and challenges.