A go-to liquidity tool used across the private equity industry is drawing fresh scrutiny from federal regulators – and Matthew Malone, head of investment management at Opto Investments, says that's forcing a harder look at how continuation vehicles actually work.
The Securities and Exchange Commission's enforcement division has reportedly opened a probe into continuation vehicles, the fund structures that let general partners roll assets from an aging fund into a new vehicle rather than sell them outright.
According to a Reuters report last month citing unnamed sources in the know, the SEC is looking into potential conflicts of interest within transactions involving CVs, how managers are valuing assets, and whether investor disclosures are adequate and consistent.
Manager-led secondary deals, the bulk of them continuation vehicles, totaled $106 billion last year, up from $70 billion in 2024, according to investment bank Evercore. That surge comes at a time when sponsors are holding nearly 33,000 PE-backed companies globally, according to PitchBook data, including more than 11,000 that have been held for more than five years.
The uneven IPO markets and caution among corporate buyers have limited PE fund managers' ability to return cash to the pension funds and endowments that back them. Against that backdrop, continuation funds have proven to be a useful tool, growing from 2.7% of global PE exit value in 2020 to 8.1% last year, according to PitchBook.
Malone, who has worked in private markets since 2005, said Opto – an outsourced CIO that builds private-markets programs for independent registered investment advisors and multifamily offices – has largely avoided continuation vehicles.
"Broadly speaking, we as a firm have stayed away from the continuation vehicle space because of a lot of the things that were outlined in that probe," Malone said. "I think especially if you're doing a single asset continuation vehicle, it's very difficult as an outside investor to really know what's going on with that business unless you've been following that business for a very long time."
Malone said every continuation vehicle carries two competing narratives: a genuine case for holding a strong asset longer, and a manager's need to recycle capital into a new fundraise.
"Usually the money that's going to come into Fund IX would come from Fund IV, V and VI," he said. "So I [as a PE fund manager have] got to find some way to provide some liquidity to people so that I can hopefully recycle this capital back into my current fund and continue to compound my AUM."
He pointed to specific red flags advisors should watch for: whether carry is reset, whether the manager collects outsized transaction or management fees simply by holding a deal, and whether capital is being rolled over or extracted.
"There's a high, high incentive to not have a market transaction if you think that the valuation could go down," Malone said.
When clients ask Opto about a specific continuation vehicle, Malone said the firm's default response is to run a comparison against other options. "You could invest in a fresh deal that has no conflicts, that we know has aligned fees and that has basically the same target return," he said. "What would you rather do?"
Rather than getting into CVs directly, Opto invests in funds pursuing LP-led secondaries through independent third-party managers, a structure Malone considers better aligned because the buyer is negotiating price on the investor's behalf.
Still, he's careful not to dismiss continuation vehicles outright, pointing to lower fee loads, portfolio rebalancing and genuine liquidity needs as real legitimate reasons investors use them.
"All this liquidity innovation in private markets, it's happening because there's a real need," Malone said, noting that LP-led secondaries were once considered a niche, non-investable corner of the market and are now mainstream.
He argued that collateralized fund obligations, which securitize secondaries and bring in third-party bond underwriters, as the next stage of that evolution.
For advisors worried about so-called zombie funds – aging vehicles with no clear exit path – Malone said the damage is often already done by the time a fund reaches that stage. His advice is to screen managers earlier using distributions paid in, or DPI, rather than relying solely on IRR and multiples.
"Have managers consistently distributed in prior funds? Do they have a record of distributing and finding ways to provide liquidity?" he said.
Malone's broader message for advisors evaluating continuation vehicles: proceed only if you have a particular conviction to support the investment.
"Unless you have some individual idiosyncratic compelling reason to focus or to move on these, your time may be better spent elsewhere," he said.
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