SUNANDO ROY – On Banking, Finance and Society

Fairness in GP/LP allocations around investor rollovers is ultimately a story about who gets to buy how much of a scarce exposure, at what price, and on whose numbers. The visible choice is “sell or roll”; the hidden game is often in the valuation and the allocation grid behind it.corpgov.law.harvard+3​

Setting the scene

In a classic GP‑led “flipper” or continuation transaction, the GP sells one or more trophy assets out of an ageing fund into a new vehicle, offering existing LPs the choice to cash out or roll into the new structure, sometimes with tax deferral. Fresh secondary capital arrives, often with a lead investor negotiating anchor economics, while the GP typically rolls carry and may add fresh capital, signalling confidence but also locking in enhanced economics on the new deal.hoganlovells+3​

On paper, the menu looks neutral: LPs can sell, roll, or blend. In practice, frictions such as compressed timelines, mandate constraints and information asymmetries tilt both the decisions and the eventual distribution of value between selling LPs, rolling LPs, new money and the GP.cambridgeassociates+1​

Inside the allocation process

Once the GP fixes a headline price and terms with a lead secondary buyer, the allocation question becomes a constrained optimisation: how to fit the lead’s minimum allocation, other secondaries’ demand and LP rollover elections into a finite continuation fund size. Sponsors usually reserve the right to re‑cut allocations after the election window closes, which can mean that new money gets priority allocations and rollover LPs are back‑filled into residual capacity.skadden+2​

In more sponsor‑friendly deals, the GP’s discretion over allocations is maximised, allowing it to favour strategic partners, investors with whom it seeks deeper relationships, or fee‑sensitive capital, while presenting the outcome as a market‑clearing solution. In more balanced structures, the allocation grid is pre‑defined — for example, a lead investor minimum, pro‑rata allocations to all rollover LPs up to their elections, and only then scaling across non‑lead new investors, subject to the overall continuation fund cap.securities.cib+2​

The valuation risk beneath

All of this sits on a single fulcrum: the price at which legacy LPs sell and at which both rollover LPs and new investors re‑enter. That price typically starts from GP‑determined NAV, perhaps with negotiated adjustments or premiums, but private NAVs can lag real‑time market conditions, and the GP is structurally conflicted as both seller (for the old fund) and buyer (for the continuation vehicle).valuationresearch+2​

For rolling LPs, valuation risk is subtle: overpaying for the next leg of value creation, effectively transferring upside to new investors and to the GP through crystallised carry and improved terms. For selling LPs, the mirror risk is leaving money on the table by accepting liquidity at a discount to intrinsic value, often to simplify relationships or to clean up tail‑end positions.areswms+3​

The layers of valuation risk include stale or optimistic NAVs based on old financing rounds or stretched multiples, asymmetric information where the GP holds the most recent operational data, and structural biases in asset selection, since continuation funds tend to house the GP’s highest‑conviction winners. These features can make a transaction look arm’s‑length while quietly redistributing surplus from one cohort of investors to another.kroll+1​

Regulatory and market best practices

Regulators and standard‑setters have begun to focus on these conflicts, treating GP‑led secondaries as conflicted adviser transactions that require independent checks and enhanced disclosure. Recent SEC rules for private fund advisers, for example, require independent fairness or valuation opinions in certain adviser‑led secondary transactions where investors are offered a choice between cashing out and rolling into a new vehicle, even though aspects of those rules have been challenged in court.sec+3​

Market practice has evolved in parallel. Independent fairness and valuation opinions, when properly scoped, test key assumptions, sensitivities and methodologies rather than simply endorsing a single point estimate. LP advisory committees increasingly review conflicts around pricing, GP participation and fee resets, and ILPA’s guidance pushes for robust LPAC engagement and transparency on process. Competitive auction‑style processes, rather than bilateral negotiations, are more commonly used to evidence that the selected price lies within a fair market range.empireval+5​

Regulatory and governance focus is also shifting from form to process: how options are framed, whether timelines are realistic for institutional approvals, and whether default outcomes or information asymmetries nudge investors toward a particular choice. Supervisors and policymakers appear most concerned when continuation funds morph into a routine liquidity device for GPs under fundraising pressure rather than a targeted solution for genuinely long‑dated assets that need more time to mature.ecgi+3​

Frictions in GP‑led rollover allocations

Takeaways for LPs and GPs

For LPs, the central question is not whether continuation funds are inherently problematic, but whether the specific process in front of them creates value or extracts it. Treat the election as a fresh underwriting decision, demanding access to management, data rooms and independent views where warranted, rather than defaulting to historical trust in the GP. Focus on the valuation bridge from last audited NAV to the deal price, including any premium or discount, and test whether growth, margin and multiple assumptions are credible in current conditions.plantemoran+3​

LPs should scrutinise allocation mechanics—where the lead investor sits, how rollovers are scaled, and who retains final discretion to flex fund size—because quiet tweaks in these variables can transfer meaningful option value to new money. They can also deploy governance levers, from LPAC roles to side letters, to demand independent opinions, reasonable timelines and, where feasible, competitive price discovery rather than bilateral, GP‑designed processes.ilpa+3​

For GPs, each “flipper” is a live test of credibility. A GP that consistently engineers processes tilted in its own favour may win a few basis points of incremental economics but risks a longer‑term erosion of trust that will surface in future fundraising. Those that codify a clear, repeatable playbook—early LPAC engagement, transparent valuation methodologies, genuinely independent fairness work and disciplined allocation policies—can turn continuation funds into a durable part of their capital‑management toolkit rather than a recurring fairness controversy.stblaw+3​

references and links

Bennett Jones. “Continuation Funds: ILPA Updated Guidance.” Bennett Jones Insights, June 21, 2023. ​

Harvard Law School Forum on Corporate Governance. “The Rise of Private Equity Continuation Funds.” June 17, 2024. https://corpgov.law.harvard.edu/2024/06/18/the-rise-of-private-equity-continuation-funds/.corpgov.law.harvard​

Kastiel, Kobi J. “The Rise of Private Equity Continuation Funds.” University of Pennsylvania Law Review 172, no. 6 (2024). “The Rise of Private Equity Continuation Funds” by Kobi J. Kastiel and Yaron Nili​

Mercer Capital. “Private Equity Secondaries Growth: M&A, IPO Markets Slow.” Mercer Capital Insights, June 13, 2024. https://mercercapital.com/article/sec-fairness-opinion-requirement-has-not-slowed-gp-led-secondaries/.mercercapital​

Securities and Exchange Commission. “Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews.” Release No. IA‑6383, August 23, 2023. Final Rule: Private Fund Advisers; Documentation of Registered Investment Adviser Compliance Reviews​

Stout. “SEC Requires Fairness or Valuation Opinion in GP‑Led Secondary Transactions.” Stout Insights, August 31, 2023. https://www.stout.com/en/insights/article/sec-requires-fairness-valuation-opinion-in-gp-led-secondary-transactions.stout​

“GP‑Led Secondary Transactions Alert: Recent Developments.” Client Memorandum, May 23, 2023. GP-Led Secondary Transactions Alert: Recent Developments​