Continuation funds carry a warning for retail investors — and a challenge for regulators.
As policymakers consider opening private markets to retail investors, they should draw lessons from the rise of continuation funds. These once-obscure private market funds have grown significantly, with transactions surging to $63 billion in 2024, and their rapid rise tells us much about the current state of private markets. Continuation funds offer some positive lessons, and there are reasons why incoming investors find them attractive. But they also reveal potential pitfalls that regulators should take into account as they design guardrails to protect individual investors in private markets.
Continuation funds have undergone a remarkable reputational transformation, from the dumping ground of “zombie funds” to a fund for trophy assets. The funds have grown rapidly because they provide an alternative source of liquidity for private markets as traditional sources have dried up. The private funds model depends on smoothly functioning markets, in the form of initial public offerings and an active environment for mergers and acquisitions, which enable fund managers to sell investments and make distributions back to investors.
But this model has come under increasing strain as exit markets stagnate, distributions shrink, and capital raising for new private funds lags. Even institutional investors, equipped with expertise, long investing horizons, and bargaining power, are suffering as their cash remains tied up in illiquid funds. The scope of the problem is captured in a single staggering number: as of the start of 2025, private equity buyout funds globally held 29,000 unsold portfolio companies valued at $3.6 trillion.
An influx of retail money could help supply much-needed liquidity to private markets, but would raise two questions. First, are retail investors prepared to endure such liquidity constraints? Retail investors are vulnerable as they typically rely on timely access to cash, and investing in private markets risks getting trapped in illiquid assets. Second, will retail entry into private markets lead to adverse selection, in which unwanted assets are dumped on unwary individual investors?
Some institutional investors that invest as limited partners in private markets criticize continuation funds, arguing they are a “transfer of economics” or financial benefits from investors to the general partner. Our recent report found that several investors felt their institutions received inadequate compensation when they cashed out. Investors also objected that the continuation fund allows private equity firms to prolong fees, reset terms, crystallize carried interest, and increase their own equity exposure to trophy assets — all while, too often, denying existing investors the chance to roll their money into the new fund on the same terms as in the older fund.
If seasoned institutional investors feel disadvantaged in these transactions, what pitfalls lie ahead for retail investors? Without the ability to assess complex deal structures, retail investors may be exposed to unfair value capture by fund managers, with limited means to protect their interests. One potential solution could be to require retail investors to invest solely through intermediaries, such as funds-of-funds, though that would raise other issues, including layering on another set of fees.
Continuation funds also show the limits of relying solely on private equity firms’ fiduciary duty to safeguard investors. With continuation funds, managers sell one or more assets in a legacy fund to a new fund that they will also manage. The firm serves as the fiduciary for both sides of the same transaction — while also having a strong financial incentive to complete the transaction and launch the fund. That raises clear conflicts of interest along with the potential for misalignment of incentives with investors. Disclosure of conflicts to sophisticated investors (often coupled with Limited Partner Advisory Committee approval) may be adequate to comply with the firm’s fiduciary duty, but that cure may not be sufficient for retail investors.
The entry of retail investors into private markets may weaken existing norms and mechanisms to address conflicts of interest. Private markets have traditionally relied on a mix of limited, light-touch regulation, formal fund governance and informal “reputational restraints,” based on relationship-building and iterative fundraising. If the business moves to a subscription-based model with a more dispersed investor base, these checks may lose effectiveness, and a fresh look at governance frameworks will be required.
For all these concerns, however, continuation funds also offer positive lessons. Their rise demonstrates private markets’ capacity for flexibility and creativity in response to clogged exits and illiquidity. Continuation funds attract incoming investors by replacing blind pool risk with asset visibility, often by selling at a discount, and by offering the potential for reduced risks, shorter investment horizons, and faster distributions. The funds also allow incoming investors access to assets that may otherwise be unavailable.
Nor are the concerns noted above meant to argue against retail access per se. It seems untenable, if not unfair, to deny retail investors opportunities that the super wealthy and institutional investors enjoy to diversify their portfolios and capture the potential upside of private companies. Arguments against regulatory paternalism are hard to resist, and greater retail access to private markets appears all but inevitable.
But that likelihood makes it all the more important for everyone involved—including policymakers, the investment industry, and retail investors themselves—to proceed carefully. Achieving the right balance of retail access and investor protection will require a careful calibration of regulation, industry best practices, and investor education. The long-term success of private markets will hinge on careful design of safeguards that help investors navigate the complexity and risks involved.
Stephen Deane, CFA, is senior director of capital markets policy at CFA Institute
