Sponsors pushed for a bigger slice of continuation fund profits in H1

Sponsors pushed for a bigger slice of continuation fund profits in H1

Tue, August 4, 2026 at 12:46 AM GMT+3 3 min read

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Jenna O'Malley/PitchBook News

In the first half of 2026, a record number of private equity managers used continuation funds to return cash to their investors without having to sell companies. They also moved to capture a bigger slice of returns when that sale eventually comes.

By dollar volume, around 35% of continuation funds closing in the first six months of the year had premium economics, colloquially known as super carry, baked into their fund documents, according to investment bank Evercore. This compares with 15% in the bank's full-year 2025 survey.

While there is no single definition of what constitutes super carry, Evercore, the most active broker of continuation fund deals, defines it as terms that allow a fund manager to claim more than 20% of the profit generated by a deal.

The highest level of carry observed in a 2025 study of continuation funds by law firm Morgan Lewis was 30%. The firm, which often represents institutional investors in secondary deals, also noted that three-quarters of continuation funds had tiered carry structures. For example, in the case of a fund employing super carry, a 2x return might net the manager a 20% profit share, with a 3x return bringing it 30%.

Offering super carry in a continuation fund is a way for a buyer to enhance the attractiveness of a bid in a competitive auction, Evercore noted. It is also a way of tightening that all-important thing: alignment between the manager and investors in the continuation fund.

To advocates of super carry, making a higher proportion of the overall fee burden of a CV dependent on performance, rather than on a contractually guaranteed management fee, focuses the sponsor's mind on producing the best possible outcome for the asset or assets involved. After all, the outstanding performance of a continuation fund deal benefits both investors and the sponsor.

For a PE firm such as Bain Capital, this principle guides the structure of all of its funds, not just continuation funds. The Boston firm offers two classes of LP interest, A and B, with its B shares bringing the manager a bigger potential profit share—30%—offset by a lower management fee.

Moving an asset into a continuation fund with less favorable economics than the original vehicle "could actually be a negative signal regarding the sponsor's conviction in the go-forward outlook," said Nick Lawler, managing director and head of secondaries at Churchill Asset Management. He added, however, that determining a fair price for the asset and ensuring the sponsor has a significant financial stake are more important than discussions about carried interest.

Not everyone believes that the promise of a higher performance fee leads to better alignment between GPs and continuation fund LPs. If a manager can potentially make more money by moving an asset into a continuation vehicle than by keeping it where it is, it "creates misalignment from the outset," said a managing partner of a secondaries firm that specializes in continuation fund deals.

A sponsor might even keep the asset's value artificially low to more easily meet the highest return hurdle if they know a continuation fund deal is on the horizon, they added.

In such cases, the fund's limited partner advisory committee, which has watched the evolution of that asset's valuation, would be expected to step in and block the deal.

Others fear that secondary buyers are giving with one hand and taking with the other, offsetting the promise of super carry with a lower overall price for the asset.

This ultimately hurts investors who want to exit the investment, who, in the view of Steven Hartt, managing principal with consultant Meketa Investment Group, often get a raw deal anyway.

"For an investor in the original fund, [continuation funds] are not a way to generate the highest value for the asset," he said. "I wish they would just sell the investment."

This article originally appeared on PitchBook News