The Continuation Fund Roll: An LPAC Member's Judgement Call
You sit on the LP advisory committee of Arbor Capital Partners Fund IV (2016 vintage, $800m). Your institution committed $50m; current NAV is $78m and DPI is 0.55x. Arbor now proposes to move three assets representing 60% of Fund IV's NAV into a $650m continuation fund: $390m rolled from existing LPs and $260m from a secondary buyer who is simultaneously committing $200m to Arbor's new Fund V. LPs may roll at 1.0x NAV with fees reset to 1.5%/15% for two years, or sell at 1.0x NAV. The buyer is getting new-money units at a 4% discount to the same NAV. The fairness opinion was prepared by a bank paid by Arbor, which also crystallizes carried interest on the assets at the transfer date.
1. What is the LPAC's proper role here, and what should you demand before any vote?
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The LPAC does not approve price, and treating it as a fairness ratifier is exactly the failure mode regulators and LPs worry about. Its role is to test process: was the conflict identified, managed and disclosed, and did LPs get a genuine alternative?
Demand, in writing:
- An independent valuation, not only a GP-paid fairness opinion - ideally a second bid or a market check showing what an unaffiliated buyer would pay.
- Full disclosure of the stapling. The link between the CV and the $200m Fund V commitment is the central conflict: the GP is selecting which assets stay and which go, and is paid on both sides.
- Carry disclosure. Confirm whether carry crystallized on the transfer is credited against future carry in the continuation vehicle. If not, the GP is paid twice on the same assets.
- The counterfactual. What happens if the deal fails - hold to maturity, asset-by-asset sale, fund extension? LPs cannot judge a roll without the outside option.
- Fee reset economics stated per LP in dollars, not basis points.
Your duty on the LPAC runs to the fund's LPs as a class, not to your own institution's roll decision, and the two must be kept separate in the minutes.
2. As an LP with a 5% PE target that you are currently over, how do you decide between rolling and selling?
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Frame it as a sale at 1.0x NAV versus a purchase of the same three assets at 1.0x NAV - because that is what the roll is.
- Is NAV the right price? New money is buying at a 4% discount to the same marks. That is market evidence that the marks are above clearing value. If you would not buy these assets today at NAV, rolling is buying them at NAV.
- Underwrite the assets, not the relationship. Model the rolled portfolio's expected cash flows at the new fee load versus your opportunity cost - including the fact that your PE allocation is already over target. Rolling keeps a stale, concentrated position; selling frees capital for the rebalancing you actually need.
- Price the liquidity. The roll has no secondary discount but 3-5 more years of lockup. A 4% discount is a modest price for immediate liquidity in an over-allocated program.
- Consider splitting. Sell part of your interest to the buyer and roll the rest - many CVs permit partial elections and this hedges your valuation view.
Given an over-allocation, no independent valuation and a fee reset that still leaves you paying two layers, selling is the easier case to defend. Rolling requires a positive view on the specific three assets that survives the conflict.
3. Two months later Arbor returns asking the LPAC to bless a second continuation fund for a different set of assets, again stapled to Fund V fundraising. What is your response?
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Treat the repeat as a governance finding, not a transaction.
- Pattern evidence. A second CV inside 24 months, again with a stapled primary commitment, converts an exceptional tool into a recurring liquidity channel for the GP. That changes the risk profile of every subsequent vintage and should be reflected in how you underwrite Arbor's next fund.
- Policy pre-commitment. Ask the GP to adopt a written policy - maximum number of CVs per fund, a minimum holding period, mandatory independent valuation, carry credited across vehicles, and a majority-of-LPs (not just LPAC) election right for rollovers above a size threshold.
- Your own consent power. Rollovers of this size typically need LP consent or LPAC sign-off. Use it: no second CV without the independent valuation and the carry-neutral treatment you asked for the first time and did not get.
- Escalate internally. If your institution's investment committee has a 'no repeat stapled CVs without LP vote' rule, that binds your LPAC vote too.
A GP that refuses fee-neutral, independently valued CVs is telling you how it will treat future conflicts. That is more informative than any single deal's numbers.