There's plenty of headlines about how non-traded BDCs have been dealing with redemptions, but what might be overlooked is how continuation funds are providing investors in traditional closed-end funds with an orderly exit.
Continuation funds have been a life boat for private equity managers dealing with a sluggish exit market for some time. The concept has been adopted by private credit funds over the last 18 months or so and the trend is picking up speed.
Last week, Arcmont closed a $2.5bn credit continuation vehicle (inclusive of leverage) led by Ares Credit Secondaries funds. The CV was oversubscribed and consisted largely of first-lien senior secured loans from Arcmont’s 2019-vintage Direct Lending Fund III (which closed at €5.7bn).
Arcmont’s CV followed a nearly €480m credit continuation fund by Eurazeo in February, supported by Pantheon. The Eurazeo CV comprised performing European senior credit assets from Eurazeo’s legacy private debt platforms.
Quality control forms an important part of the process for portfolio selection and it’s one of the main differences between private credit and multi-asset private equity CVs.
"In private equity you tend to sell your underperforming assets, but in private credit it’s actually the other way around — you can only sell good quality portfolios otherwise you are facing prohibitive discounts,” Nicolas Nedelec, partner at Eurazeo, said.
So, instead of a way to offload their troubled assets, private credit GPs are using CVs as a spring cleaning tool, taking care of tail-end funds and simplifying their portfolios, while also providing liquidity to their investors.
“Credit CVs aren't the same animal as equity continuation vehicles. You're not warehousing a troubled company and hoping for a Hail Mary. These are cash-flowing assets,” a second direct lender said.
Brushing up on your CVs
There is $940bn worth of assets left in private credit funds from the 2017-2021 vintages, according to Ares, citing Preqin data. At the same time, the average distribution to paid-in capital of a 2019 private credit fund is 0.7x, Preqin data shows.
“Continuation vehicles are a liquidity tool and at the same time they enable GPs to continue to manage the assets over a longer period of time,” Seb Burdel, partner in the Ares secondaries group, said. “They have rapidly become a structural tool for GPs to offer liquidity sooner than the natural harvesting periods of their underlying funds.”
Proving his point, most LPs will choose to take the liquidity option, despite being offered the opportunity to roll over into the continuation vehicle, multiple sources told 9fin.
This preference for liquidity also allows for a small discount when selling the loans into the continuation vehicle. Typically, there would be a discount between 1% and 2%, however this does not tend to cause any problems.
“Many investors feel locked up and they are under pressure to release that capital and put it elsewhere,” Diala Minott, partner at Paul Hastings, said: “With everything that is happening in the market at the moment, all the gating that’s happening and all those various issues, and given the macro environment, investors are trying to reduce the exposure they have to illiquid assets.”
Additionally, as one lender pointed out, a 1%-2% discount of the remaining 15% of a fund, will not have a material effect on LPs’ returns.
“In the grand scheme of things, it doesn’t have an impact on the investors’ returns. We’re talking 10bps max,” they said.
The lender added that, just like for GPs, it is good for LPs to wind up their tail-end investments before they get too close to maturity and the risk of defaults increase. In this sense forgoing 1%-2% could materially enhance IRRs.
Giving new life to end-of-life funds
Since private equity sponsors are holding onto their assets for longer, private credit lenders are naturally being repaid later. At the same time, the asset class is maturing and fund managers find themselves with rather big funds, some of them which are headed towards the end of their harvesting period.
"Direct lenders have increasingly large portfolios, where the tail ends will have to be actively managed,” Nedelec said. “Continuation vehicles are an efficient way to address that, a win for all parties involved: sellers, buyers, managers.”
It certainly feels that way with LPs finding their exit, and a fresh set of investors coming in armed with capital better suited to holding legacy assets.
A CV can also provide more leeway when it comes to management of older vintage funds.
“A continuation fund will give the manager a new investment horizon and more flexibility in managing the portfolio, e.g with maturity extensions,” Nedelec continued.
The alternative is refinancing assets into a new fund. But in this case parties would have to agree on new terms and margins. By transferring it to a continuation vehicle however, everything stays the same, without the borrower having to do anything.
Paul Hastings’ Minott said: “The refinancing cost on 60 loans is probably extraordinary because it will take ages to agree them. Whereas if you roll them over into a new fund, that’s management business — you’re getting a management fee for it and you are getting rid of the operation costs of running those tail-end funds for just a handful of assets.”
In many ways the advent of private credit continuation funds has parallels with CLO resets. This first came into play in 2015 with CLO managers keen to have the ability to extend their funds, reasoning that as the underlying loans refinance and get extended, a CLO should be able to do likewise.
There was some early resistance to that movement, but CLO resets are now deeply embedded into the way the CLO market operates.
Safety in numbers
The rise of single-asset continuation funds for star assets has been prevalent in private equity, but that model is less suited to private credit, where diversification is important, according to Burdel at Ares.
For a credit continuation fund to be interesting for investors, there needs to be diversification. And how do you achieve that when transferring tail-end funds? Well, it’s all about timing.
“You’d probably not want to wait until you have less than 10-15% of the portfolio left,” Eurazeo’s Nedelec said. "The longer you wait, the more concentrated your portfolio will be and buyers will need to perform an asset-by-asset due diligence.
“Whereas if you sell it a bit earlier, it will be more diversified and buyers and leverage providers will be able to have a more probabilistic approach and offer a better price,” he continued.
Burdel agreed: “In our experience, managers typically launch private credit continuation funds before the tail-end stage, when the underlying portfolios have 15-20 plus assets remaining — sometimes we’ve seen as many as 100+.”
He added: “Private credit managers have recycled significantly during their investment period, so by the time a fund gets to year six or seven, the fund still has a lot of young assets.”
Additionally, fund managers can combine several funds into one continuation fund, which would also help diversification within the CV, Eurazeo’s Nedelec said.
There is plenty of capital in need for deployment in the credit secondaries market. In January, Ares raised over $7bn for its credit secondaries strategy. In 2025, Pantheon raised $2.2bn for its third opportunistic credit secondaries fund and Coller raised $6.8bn for its second credit opportunities fund.
“A lot of credit secondaries funds were ahead of their time and have raised a lot of capital,” a lender said. “Credit continuation vehicles are a good deployment opportunity for them.”
However, that doesn’t mean they’d invest in anything. For starters, the portfolio has to be performing.
“CVs are a portfolio management tool, not a life boat,” one direct lender commented. “The assets lenders are putting into these structures are the ones they'd have fought to keep in the fund anyway.”
A secondaries investor agreed: "Reputation still matters. If a manager tries to offload problem loans into a CV, the secondaries community knows immediately. Nobody will touch the next deal. There's strong self-policing and that keeps quality high.”
The manager is also important. According to Burdel, Ares will consider a GP’s monitoring and portfolio management resources, ability to deal with defaults and restructurings, and portfolios ideally consisting of the safest position in the capital structures, such as predominantly senior loans.
European private credit pipeline
On the deal-side of things, 9fin’s private credit team remains busy.
La Caisse, Partners Group, and Permira are providing a debt package to support Eurazeo’s acquisition of French conveyor design and maintenance firm Netco. The lenders are providing a unitranche, which levers the business around 5x. Recent EBITDA estimates for the business are up to €73m.
In Germany, private equity firm Nord Holding is considering debt options to support its all-equity buyout of German IT services company Visionmaxx. The business has been marketed off around €8m EBITDA during a recent sale process.
And in the UK, Zoopla-owner Houseful is in the process of selling its property data arm Hometrack. Arma Partners is advising on the sale, with Hometrack generating around £30m EBITDA.
You can read our weekly updated pipeline of new and in-market deals here.
