When using a subscription credit facility for a continuation fund, lenders and borrower funds should keep in mind certain best practices to ensure that the facility is structured appropriately. In this Legal Update, we discuss the ins and outs of both continuation funds and subscription credit facilities and considerations for implementing a subscription credit facility in connection with a continuation fund.

What Are Continuation Funds?

In a traditional private equity fund, capital contributions are used to make portfolio investments. These investments will be held for a limited period prescribed by the constituent documents of the fund. At the end of this period, the fund’s investments will need to be liquated in some way.

Historically, exit options have included an IPO or sale of the asset. A relatively new exit option, however, is for a fund sponsor to establish a new continuation fund that purchases unripe assets from the liquidating fund. In this way, continuation funds provide a valuable liquidity option for investors who want to exit the investment, while also providing an opportunity for the fund sponsor and continuing investors to remain invested in a maturing asset that may have remaining upside – and without the costs of finding a new asset and de novo diligence.

How Is a Continuation Fund Formed?

A continuation fund is usually formed as a new fund (e.g., a completely separate and distinct legal entity) with the limited purpose of acquiring one or more identified assets from an existing private equity fund. Typically, the same fund sponsor manages the continuation fund. The investors in the liquidating fund will be given a disclosure memorandum that explains the continuation fund’s formation and strategy and offers investors the option to either exit the fund by selling their interests or roll their investment into the continuation fund.

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