Engage with LPACs early when initiating GP-led deals

GP-led secondaries have become a key consideration for private equity firms, accounting for roughly half of secondary transaction volume in recent years. Last year saw a record $160 billion in secondary deal volume, with Schroders noting that GP-leds amounted to $71 billion.

There is no sign of activity slowing. As reported by the Financial Times, citing a report by Jefferies, buyout funds used continuation funds to exit $41 billion of portfolio investments in the first half of 2025.

In a similar way to traders buying call options, on the bullish assumption that a stock’s price will be higher at a future date, GP-led secondaries, or ‘continuation vehicles’, allow GPs to harvest further alpha in high quality assets. The benefit to this is that limited partners have the option to either stick and roll over in to the CV, or twist and liquidate their position(s). When executed correctly, adhering to best practices, continuation funds can be a win:win situation.

Skeptics will point out, however, that the motivations behind such deals are not always necessarily pure. Does the GP genuinely believe the asset has further capacity to grow, or are they using a CV because the asset is not worth as much as they want to believe, and they are unable to find a suitable buyer? The lack of exit activity over the last two years has been well documented.

"GP-led transactions inherently involve GPs acting as both buyer and seller, which is not without certain challenges. This dual role raises critical concerns among LPs and regulators, including fairness in asset valuation, transparency in the sale process, and governance standards,” says Sabina Comis, Partner, Dechert.

Dechert’s Global Private Equity Outlook 2025 report asked GPs what their biggest challenges were when returning capital to investors over the next 12 months. Forty percent responded that it would be securing a buyer willing to pay the desired valuation.

Enter the GP-led deal, which offers an agile solution to this challenging exit environment.

Early engagement with LPACs

Needless to say, clear communication with the fund’s investors is vital for GPs who wish to mitigate the risks that could arise from conflicts of interest. This frames the GPs core motivation. Why do they believe this is the best option for LPs? What aspects of future value creation can they point to that warrant the formation of a continuation fund?

Early engagement with investors’ committees to secure informal approval before initiating bids is vital but insufficient alone.

GPs should also implement rigorous valuation practices and pricing methodology, to be clearly disclosed to investors, such as running a transparent and competitive process to obtain third-party, arm’s-length valuations and obtaining a fairness opinion from independent experts to help justify the auction price of the transaction. 

When assets are being moved to a continuation fund, GPs generally conduct a transparent and competitive process to choose one or several lead investors which would help ensure that the contemplated valuation of the transaction reflects unbiased market conditions and avoids any perception of self-dealing or conflicts of interest.

Furthermore, a fairness opinion is another tool which provides an independent assessment that the transaction is financially fair to all parties involved, including existing investors and new investors in the continuation fund. This is particularly important in continuation fund transactions, as existing investors may have the option to cash out or roll over their interests, and the fairness opinion helps validate that the terms of the deal are equitable.

These practices are critical in continuation fund transactions to address potential conflicts of interest, protect investor interests, and ensure the integrity of the process.

“Clear communication with LPs is equally essential to mitigate regulatory scrutiny and maintain trust. This topic matters now because the industry’s ability to navigate these complexities will shape the future of such transactions and investor confidence in alternative liquidity solutions,” asserts Comis.

Having an ethical framework is also vital in avoiding potential conflicts of interest.

Integrating ethical principles into the deal process is a way to not only build trust with LPs but provide, in effect, an investment audit trail, which the GP can draw upon should there be any future issues to resolve around valuations.

New investors should also take action to guard against potential conflict issues.

For example: identifying GPs with proven track records and evidence of having successfully managed one of these vehicles; making sure the economic incentives are well structured and well aligned to protect against underperformance; using statistical models to analyse deals against historical benchmarks; determining how much skin in the game the GP has beyond carry.

To uphold industry standards, organisations like the Standards Board for Alternative Investments (SBAI) are developing frameworks to ensure integrity and trust between stakeholders in the secondaries market to address concerns around valuation and conflicts of interest.

Raised eyebrows are not uncommon among LPs who would prefer PE managers to stick to the basics and sell assets by conventional means. According to an ILPA poll, 63% of LPs would prefer conventional exits at lower marks, rather than dividend recapitalisations or continuation vehicles.

Nevertheless, these vehicles are expected to remain popular and today represent a permanent feature of private equity’s liquidity landscape, enabling GPs to bridge gaps until flagship funds are raised. NAV-based financing has also emerged as a complementary tool, supporting acquisitions and operational needs in challenging exit environments.