Evaluating the Hidden Costs and Conflicts of Continuation Vehicles

The rise of continuation vehicles (CVs) has changed the private equity landscape, creating tension between General Partners (GPs) and Limited Partners (LPs). GPs see these vehicles as a way to manage exits, but LPs often view them as a source of conflict, misaligned incentives, and hidden costs. This suggests that the common solution to exit bottlenecks masks deeper issues, such as the removal of high-performing assets from original funds and the dilution of GP focus. For institutional investors, the advantage lies in moving beyond surface-level metrics to perform rigorous, asset-by-asset underwriting. Those managing capital or evaluating private equity partnerships should recognize that the cost of these vehicles is often paid in lost alignment and deferred liquidity, requiring a more disciplined, skeptical approach to portfolio governance.

The Hidden Costs of Exit Paths

When continuation vehicles first appeared, they were seen as a breakthrough. GPs found a new way to exit assets beyond the traditional IPO, strategic sale, or sponsor-to-sponsor transaction. However, Scott Ramsower, Head of Private Equity Funds at the Teacher Retirement System of Texas, argues that this innovation has created a conflict vehicle that frequently leaves LPs worse off. The systemic issue is that GPs now act as both the seller for the legacy fund and the buyer for the new CV, creating an environment where price discovery is opaque.

> There is a joke now that CV stands for conflict vehicle. Some LPs say my heart sinks when a CV request lands in my inbox. I have even heard some say CVs are going to be the death of the industry.
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> -- Scott Ramsower

The result is a distortion of performance metrics. By moving assets into a CV, GPs can lock in Internal Rate of Return (IRR) and Distributed to Paid-In Capital (DPI) figures for the original fund. This synthetic performance creates a trap for LPs: if the CV performs well, the investment committee questions why the asset was sold cheaply; if it performs poorly, the GP judgment is called into question.

The Dilution of Alignment and Mindshare

Beyond pricing, CVs erode the GP-LP relationship. Every hour a GP spends managing a continuation vehicle is an hour taken from the original co-mingled fund. Furthermore, the economic structure of these vehicles often leaves LPs paying higher fees for assets they already owned.

> The CV may have 70 basis points as a headline management fee rate. 70 basis points, that is good. That is less than 1%. However, the second component of the management fee is crucial which is what is the cost basis. Your new cost basis is $300 but LP is now paying 70 basis points on $300 which is higher than 100 basis points of $100.
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> -- Scott Ramsower

This shows how the idea that a lower headline fee rate is beneficial fails when examined closely. When the cost basis is marked up to current fair market value, the effective fee burden on the LP increases, even if the percentage rate appears to decrease.

Systemic Risks: Zombie Funds and Retail Capital

The liquidity drought in private equity is creating a backlog of zombie funds, which have stopped making new deals but cannot exit their existing assets. Ramsower notes that continuation vehicles are often used to delay this problem, but they are insufficient to solve it.

The industry faces a structural vintage problem from 2018 to 2022, where capital was deployed in a low-rate, high-multiple environment that no longer exists. As LPs grapple with this, they are also observing the entry of retail capital into private equity. The warning here is that while the strategy may be sound, the structure is often wrong; retail investors, who may require liquidity, are being placed in vehicles designed for institutional capital, where illiquidity is a feature, not a bug.

Key Action Items

• Implement a Rigorous Scorecard: Develop a standardized internal checklist for all CV requests. If a GP fails to meet clear criteria regarding competitive process and alignment, vote no. (Immediate)
• Deconstruct Synthetic Performance: When underwriting managers, strip out all CV and NAV-loan-driven DPI to evaluate the true, organic performance of the underlying assets. (Immediate)
• Deepen Unrealized Portfolio Analysis: Move beyond cost-basis assumptions. Audit the multiple paid at entry, revenue performance versus budget, and leverage levels on an asset-by-asset basis. (Over the next quarter)
• Assess Partnership Dynamics: Use qualitative tools, such as reference calls with departed employees, on-site visits, and direct observation, to identify cracks in the GP partnership that usually appear only when carry is at risk. (Ongoing)
• Re-evaluate Co-investment Thresholds: Because CVs cannibalize fee-free co-investment opportunities, establish a clear size threshold for when to invest in a CV versus when to walk away. (Over the next 6-12 months)
• Monitor Retail/Institutional Mixing: Closely scrutinize LPAs for retail-heavy funds to ensure that retail capital inflows do not uncap the fund or create conflicts in buy/sell timing that disadvantage institutional LPs. (Over the next 12-18 months)