LPs are developing new selection criteria to filter managers. They will actively screen out GPs who lean too heavily on continuation vehicles as a default liquidity solution or who prioritize scaling their own firm's growth through retail capital, due to concerns about conflicts of interest and alignment.

The market's liquidity crisis is driven by a fundamental disagreement. Limited Partners (LPs) suspect that long-held assets are overvalued, while General Partners (GPs) refuse to sell at a discount, fearing it will damage their track record (IRR/MOIC) and future fundraising ability. This creates a deadlock.

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.

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.

To combat mistrust in CV valuations, LPs are advocating for a concept dubbed 'schmuck insurance.' This mechanism would penalize or claw back economics if a GP sells an asset out of a CV within a short period (e.g., 12 months), undermining the original thesis that the asset required a longer hold for value creation.

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.

ILPA's CEO reveals a major disconnect: while LPs frequently take liquidity from continuation vehicles (CVs), this action is not a vote of confidence. It's often driven by practical constraints like governance hurdles, short decision timelines, and resource limitations that prevent them from rolling their investment, not a belief in the CV's merits.

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.

A key frustration for LPs with continuation vehicles is the lack of a true 'status quo' option. ILPA's CEO defines this ideal as the ability to simply ignore the transaction notice without being forced to either accept liquidity or roll into a new, complex structure. This passive option is currently unavailable in the market.