As Australia’s private equity market continues to mature, continuation funds are emerging as an increasingly common tool to manage mature assets while balancing liquidity needs across diverse investor bases. While the structure has long been established in US and European markets, Australian investors are now engaging more actively with continuation vehicles as part of broader GP-led secondary processes. This article outlines how continuation funds operate, why they are gaining traction locally, and the legal considerations relevant to Australian market participants.
Characteristics of a continuation fund
A continuation fund is a newly formed investment vehicle established to acquire one or more portfolio companies or assets from an existing private equity fund nearing the end of its term. The continuation fund allows the trustee or general partner (GP) to continue managing assets while providing a mechanism for existing investors or limited partners (LPs) with a choice of either:
- receiving liquidity by selling their interests in the fund and their exposure to the fund’s underlying assets; or
- electing to rollover all or part their exposure into the continuation vehicle and participate in future upside.
At the same time, existing and new investors may commit fresh capital to support follow-on investments, future growth initiatives, or balance-sheet optimisation at the portfolio-company level.
Why are Continuation funds becoming more relevant in Australia?
Several factors are driving the uptake of Continuation funds in Australia, including:
- Extended value-creation runway: Many assets require additional time beyond the initial fund term to complete their growth trajectory or strategic plan. It allows time for GPs to implement new strategies for the assets which may involve bolt on opportunities. It also avoids selling a valuable asset at a less-than-optimal time in the market.
- Liquidity for existing LPs: Investors nearing the end of a fund’s life often seek predictable liquidity, which continuation funds can provide without requiring an immediate exit. This gives investors a viable exit option alongside an IPO, trade sale or a secondary sale.
- Alignment of incentives: LPs can choose between immediate liquidity or retaining exposure to a strongly performing asset.
Legal and transactional considerations
Conflicts of interest
The establishment of a continuation fund inherently creates a conflict of interest because the GP or manager is effectively selling an asset from one fund it manages to another fund it will also manage and the value at which the asset is being sold by the existing fund and being acquired by the new fund must be able to withstand investor scrutiny and negate any concern that the asset is being sold or acquired at a price which favours investors in one fund over the other.
Australian GPs/managers must carefully comply with:
- fiduciary and equitable duties, particularly where LPs/unitholders are wholesale clients relying on the GP’s judgment obtaining an independent valuation or fairness opinion;
- disclosure obligations under the Corporations Act 2001 (Cth); and
- fund-specific conflict-management processes required under the GP’s AFSL.
Australian GPs must also ensure that LPs are given a genuine choice between liquidity and rollover options.
To combat the conflict risk, Australian market practice increasingly involves obtaining:
- an independent valuation or fairness opinion;
- oversight from the fund’s investment committee (which is comprised of investors) or advisory board; and
- a robust LP voting or consent process.
Regulatory considerations
Continuation fund transactions can trigger a range of regulatory, fiduciary and governance requirements because the selling fund is entering into a self-directed related-party transaction. This includes compliance with:
- disclosure requirements;
- AFSL obligations;
- requirements of the selling fund’s trust deed and constitution; and
- any related-party transaction rules applicable to the transaction.
Approvals
A key obstacle in implementing a continuation fund transaction is the need to obtain the necessary approvals from the selling fund, which may include investor consent, investor committee approval, or compliance with other regulatory requirements (mentioned above). Because continuation fund transactions involve the GP or manager effectively selling an asset to a vehicle it also controls, the approval pathway can be complex, time-consuming, and uncertain. Investors who carry over into the new fund will be keen to ensure there is no increase in management fees to ensure they are not in a worse position compared to their prior investment.
Tax and duty
Australian tax implications can be complex and typically require early structuring advice. Issues can include:
- rollover tax treatment for existing LPs;
- potential CGT events on the transfer of assets between funds or the acquisition of fund interests;
- transfer duty or landholder duty on the transfer of assets between funds or the acquisition of fund interests;
- carried-interest structuring; and
- the use of intermediary jurisdictions to facilitate foreign investor participation.
Case Study: Anacacia Capital’s A$280m Continuation Fund
The growing acceptance of continuation funds in Australia was highlighted recently by Anacacia Capital’s successful raise of a A$280 million continuation vehicle to house three of its existing portfolio companies. The transaction was backed by both rollover investors and new secondary capital and allowed Anacacia to transfer Direct Couriers, RP Infrastructure and Big River Industries into a new fund.
The structure provided liquidity options for existing investors nearing the end of the fund’s term, while enabling others to remain invested in assets that Anacacia considers are high-conviction for future growth. It also brought in fresh capital to support the next phase of these businesses’ development.
This deal reflects a broader market trend that Australian private equity managers are increasingly turning to continuation funds as an alternative to traditional exits, particularly where portfolio companies require more time to realise their full value. The size of the Anacacia continuation fund and its application across multiple mid-market assets signals that continuation structures are moving firmly into the mainstream of the Australian private equity ecosystem.
Conclusion
For Australian sponsors and investors, continuation funds present a compelling mechanism to extend the lifecycle of high-performing assets while offering LPs meaningful optionality. With careful attention to governance, conflicts management, regulatory compliance, and tax structuring, continuation funds can deliver significant benefits across the stakeholder spectrum and are poised to remain a growing feature of Australia’s private equity ecosystem.
For sponsors seeking additional runway on high-conviction assets and for investors looking to tailor their liquidity exposure, continuation funds offer a compelling and increasingly familiar solution. With appropriate governance, transparent process management, and careful structuring, continuation funds can deliver meaningful benefits while safeguarding the interests of all stakeholders.
