• Higher rollover rate seen as key to long-term health of GP-led secondaries
• Limited distributions, small teams mean most LPs choose to exit rather than roll
• GPs, secondaries investors look to facilitate participation with friendlier terms

With continuation vehicle (CV) volume expected to reach another record high this year, industry participants are grappling with one of the market’s stickiest challenges – how to get more LPs to roll over.

The reasoning behind these decisions varies: LPs may lack the bandwidth to complete rapid due diligence; they could be subject to cumbersome board of trustee oversight protocols; or they might just need liquidity. But when investors are asked if they want to retain exposure to the target company once it is transferred to the CV, most opt to take the cash instead.

Increasing sponsor adoption of CVs drove GP-led secondaries to USD 48bn in 1H25, up 54% year-on-year, according to Evercore. It is expected to help overall secondaries volume surpass USD 200bn for the first time this year. Yet Jefferies noted that only 17% of LPs chose to roll over in deals during 1H25.

“LPs rolling over would provide a powerful signal to the market that this is a good asset,” said a banker. “The issue is I just haven’t seen much of this phenomenon.”

Improving this percentage is seen as important to the long-term health of the secondaries space as it matures. Persistent under-capitalization remains a key long-term challenge.

The volume of closed single-asset CVs is roughly half the level of potential demand, according to an investor at a large secondaries manager, and this imbalance is an impediment to growth. Capital from new entrants such as direct-style sponsors, as well as inflows from semi-liquid evergreen funds, is encouraging, but it isn’t moving the needle significantly.

Higher participation from LPs could help provide further capital. “LPs have now seen enough transactions and election forms to begin organizing themselves to make rollover decisions more systematically,” the secondary investor said.

Against this backdrop, some GPs are working to make the CV process more palatable to LPs. Measures include extending election periods to allow more time for review and using status quo provisions that ensure elements of existing fees and terms are carried into the CV. The secondary investor added that their firm and others are pushing to make terms more attractive to LPs.

The drive for better terms is also being pushed by large secondary investors, who do not want to be seen driving bad ones for existing investors, according to Lauren King, who co-leads the fund transactions practice at Simpson Thacher.

Since many secondaries investors sit within asset managers that also make primary commitments, they are familiar with what it is like to be on the other side of that decision, she said.

”So it’s important to them to just generally care about their reputation in the space,” she said. “Not only being seen as an easy counterparty to sponsors but also driving favorable terms for everyone.”

Protocols and liquidity

Some LPs are also taking steps to improve decision-making on CVs. These typically involve creating new internal structures to facilitate deal assessment and giving investment teams greater autonomy in decision making.

“What you’ve seen recently are groups developing a framework to provide a little bit more flexibility and assess whether to roll over closer to real time,” said the banker.

Twelve months ago, British Columbia Investment (BCI) would opt to exit in 75% of situations. Jim Pittman, the group’s global head of private equity, estimates it is now exiting in much closer to just 30% of scenarios. Size is a factor: if BCI has substantial exposure and likes the company, it is more inclined to roll; with smaller positions that make less of an impact on returns, it tends to sell.

However, this shift is not necessarily a function of process reform. BCI has always been well-resourced internally, with sector teams that can assess CV opportunities. Rather, the turning point was a LP-led secondary sale earlier this year that created more deployment headroom.

“Before the secondary, we would look at how close we were to our allocation [limit], and our team by default wanted to get the money in,” said Pittman. “I don’t think that’s a great strategy. Some of these are great assets that will continue to deliver 15%-plus returns, which is great for our clients. Selectively, we’ll take distributions, but by and large, our default is now to stay in.”

This gives some context to observations that, while rollover rates have hovered between 10% and 20% in recent years, it has not always been so. During the 2021-2022 boom period, for example, a larger share of LPs opted to roll because they had greater liquidity, according to industry participants.

After interest rates began to creep higher, M&A and IPO markets short-circuited, holding periods were extended, and distributions dried up, meaning LPs became more cautious. With insufficient distributions to paid-in capital (DPI), many are hard-pressed to roll into a CV, even if they wanted to. The priority is getting capital back to rebalance allocations or reconsider where it should be invested.

“If LPs were getting more cash back from their managers, they would be rolling over in greater numbers,” said Nigel Dawn, global head of Evercore’s private capital advisory group. “What’s happening now is they’re receiving good returns for the investments, so they are selling.”

Dawn expects rollover rates to rise as liquidity improves, just as they did during the 2021 deal rush. Pricing is another factor – there is more motivation to sell if valuations are perceived to be attractive.

“LPs tend to take liquidity even if they think the continuation fund offer is likely to do well. But the decision will depend on the LP,” said Alistair Watson, partner and deputy head of private equity at Patria GPMS. “If CV assets are offered at a significant discount, LPs might roll over instead of selling at low value.”

On the same page?

Discussions on valuation inevitably highlight the structural concerns that weigh on LPs when deciding whether or not to roll. Chief among these is price discovery and fears that alignment may break down when dealing with a GP that sits on both sides of the transaction.

“Not all CV transactions are built to achieve true price discovery,” said an investment professional at a large US pension fund. “As long as it’s being sought, we can all be aligned, but I’m not sure that’s been the case in all instances.”

The investment professional added that the overall trendline on pricing appears to be improving, partly due to greater involvement of intermediaries. However, there is still room for improvement.

An investment professional at a second US pension fund added that her institution was initially “very negative” on CVs but is now working to improve alignment. The addition of a “true status quo” option for LPs that roll into a CV, and a third-party marking price would help to address the imbalance.

The International Limited Partners Association (ILPA) has advocated for many of these measures in its guidance on CVs. Nevertheless, some secondaries investors argue more can be done to reduce conflicts, such as requiring LPs with both primary and secondaries capabilities to recuse themselves from price-setting processes.

While some LPs have sought to streamline internal processes, bandwidth and bureaucracy remain challenges. Small teams quickly become overburdened by CV requests and find they cannot make considered decisions within relatively limited timeframes. Others are constrained by the need to seek board approval because rolling into a CV constitutes a “new” investment.

Many LPs treat decisions on CV roll over as they would for a primary commitment, which takes a lot longer than the typical 20-day window for CVs, according to a second banker. “That is a six-to-nine-month process. Historically, some groups that would have loved to have rolled all or half of their position but structurally could not,” the banker explained.

Simpson Thacher’s King agrees that many LPs are simply not set up to act swiftly. “Endowments, pension plans, and similar LPs seem to get a little more nervous about making this kind of decision – they view it as an investment decision – and they are often acting in a fiduciary capacity,” she said.

It is possible that greater conviction will come with growing familiarity. To many industry participants, CVs are much like co-investments, and LP participation has certainly risen in this area. Either they outsource co-investment to third parties, or they have in-house programs designed to work alongside GPs. In this sense, stretching capacity and protocols to CVs isn’t necessarily a huge leap.

“These are similar to co-investments at the end of the day,” said Evercore’s Dawn. “They’re similar in terms of a decision-making process to a co-investment.”