Borrowed from private equity, continuation funds allow a GP to move a prized asset from an old fund into a new vehicle they still control. This provides liquidity to LPs in the original fund who can choose to cash out, while others can roll over and continue to ride the winner.
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Limited Partners should resist pressuring VCs for early exits to lock in DPI. The best companies compound value at incredible rates, making it optimal to hold winners. Instead, LPs should manage portfolio duration and liquidity by building a balanced portfolio of early-stage, growth, and secondary fund investments.
The old VC mindset of "let your winners run" and waiting for an IPO is gone. Today's GPs must act as fiduciaries by creating liquidity plans, proactively orchestrating secondary sales, and navigating complex buyout deals with partial rollovers to generate returns for LPs.
The traditional PE model—GPs exit assets and LPs reinvest—is breaking down. GPs no longer trust that overallocated LPs will "round trip" capital into their next fund. This creates a powerful incentive to use continuation vehicles to retain assets, grow fee-related earnings, and avoid the fundraising market.
General Partners (GPs) have shifted from viewing secondary sales as an LP-driven nuisance to a strategic tool. They now facilitate liquidity for investors to maintain their reputation and use continuation vehicles to retain top-performing assets beyond a fund's original lifespan.
The rigid 10-year fund model is outdated for companies staying private longer. The future is permanent capital vehicles with hedge fund-like structures, offering long durations and built-in redemption features for LPs who need liquidity.
An estimated 15-20% of all private equity "distributions" in the last two years were not traditional sales or IPOs, but "inorganic" transactions like continuation funds and NAV loans. This means the actual yield from organic, market-driven exits is even lower than the already-dismal headline numbers suggest.
In frothy markets with multi-billion dollar valuations, a key learned behavior from 2021 is for VCs to sell 10-20% of their stake during a large funding round. This provides early liquidity and distributions (DPI) to LPs, who are grateful for the cash back, and de-risks the fund's position.
With fund lifecycles stretching well beyond the traditional 10 years, LPs are increasingly seeking liquidity through secondary sales. This trend isn't just a sign of pressure but a necessary market evolution to manage illiquid, long-duration assets.
Despite widespread complaints about a lack of liquidity, LPs in an a16z fund unanimously rejected the opportunity to sell shares in top portfolio companies like Stripe. This reveals that LPs want to ride their winners and only seek exits for their less promising investments, creating a fundamental market mismatch.
When a portfolio company is public, liquid, and highly appreciated, some VCs distribute shares directly to their Limited Partners (LPs). This tactic returns value while allowing each LP to decide whether to hold for further upside or sell for immediate cash, effectively offloading the hold/sell decision.
