A continuation vehicle is a conflict by design, and the governance exists for that.

A continuation vehicle moves an asset, or a portfolio, from a fund near the end of its term to a new fund under the same manager, so that the manager can hold for longer and the existing holders can choose between cash and rolling into the new vehicle. The manager is on both sides of the transaction. It proposes the price, it proposes the terms of the new vehicle, it proposes the economics it will earn in the new vehicle, it advises the holders of the old one on whether to accept, and it will continue to serve whichever holders roll. The conflict is the transaction: a sale by a manager to itself, of assets it values, to a register it wants to keep. What makes it lawful, in the centres' regimes and in the judgement of the holders who approve it, is process, and the process is the whole of the structure.

This note sets out the conflict in its parts, the process that makes it lawful and its six elements, the price and the three ways it is tested, the lead investor and the rolling holders' terms, the old fund's committee and its independent advice, the new vehicle's constitution and who reads it, the manager's economics and their disclosure, the status-quo option, the lenders' consents, the centres' rules and the regulators' views, a comparison, a worked continuation as a type, cases, what each party holds, the sequence, questions, terms and what to read.

The conflict, in its parts

The manager sells, and the manager buys: the old fund disposes and the new fund acquires, and the manager acts for both. The manager prices, and the price moves value between the holders who take cash and the holders who roll: a low price favours the rolling holders and the new vehicle's lead investor, a high price favours the cash holders. The manager's economics reset: the old fund's carried interest may crystallise on the transfer, and the new vehicle's carries a new hurdle and a new share. The manager advises the old fund's holders on whether to sell, and the advice is given by the party that benefits from the sale. The manager continues to serve the rolling holders, whose goodwill it needs, and stops serving the cash holders, whose goodwill it does not. Each of those is a conflict the conduct rulebook's conflicts duty reaches, and a manager that identifies them all has started the process.

The process

Six elements make the continuation lawful and defensible.

The old fund's investors' committee, or the holders by vote at a threshold the constitution sets, approves the transaction as a related-party dealing, on a recommendation that is not the manager's.

The price is set by a process the committee can test: an independent valuation, a market check with third-party bidders, or a lead investor in the new vehicle who has negotiated the price at arm's length and whose terms the rolling holders receive.

The manager's economics in the new vehicle, its share, its hurdle, its charge and any crystallisation in the old fund, are disclosed to the old fund's holders before they decide, in a form that lets them compare.

The rolling holders receive the same terms as the lead investor, or the differences are disclosed and the committee approves them.

A holder who wants neither to sell nor to roll is given a status-quo option, or the absence of one is disclosed and the committee approves it.

The old fund's counsel reads the new vehicle's constitution before the vote, and the committee's independent adviser opines on the fairness of the process and the price.

A continuation with all six is a transaction the regulator's review, the holders' counsel and a court read as a conflict managed; one missing any is a conflict disclosed and not managed.

Why continuations exist

A closed-ended fund's term ends before some assets have finished what the manager bought them for: a development half built, a company whose value event is two years away, a portfolio whose best exit is a market that has not yet recovered. The old fund's holders could extend the term, and some do, but an extension keeps every holder in, including those who want cash, and keeps the manager's old economics, which may have no upside left. A sale to a third party gives cash to everybody and loses the asset's remaining upside to the buyer. A continuation gives cash to those who want it, keeps the asset with the manager who knows it, and resets the economics so that the manager has a reason to finish the work. It is a sensible transaction, which is why it is common, and a conflicted one, which is why it is governed.

The cash holders' position

The cash holders are the party the process protects most, because they are leaving at a price the manager proposed and will not be served by the manager afterwards. They read the price evidence for whether they are being bought out cheaply by the holders who roll; they read the manager's economics for whether the manager's crystallised share comes out of their proceeds; they read the lead's terms for whether the lead's discount is their loss; and they read the committee's composition for whether the members who approved were the members who roll. A process that answers each question in the disclosure is one the cash holders accept; one that does not is one their counsel reads after the fact.

The rolling holders' position

The rolling holders are the party the process protects second, because they are subscribing to a new fund on a deck the manager wrote, at a price the manager proposed, with a lead whose terms they may not have seen. They read the new constitution, or their old fund's counsel does for them; they read the lead's terms against their own; they read the new economics; and they read the new vehicle's tier, register and term, because they are holders of a different fund from tomorrow. A rolling holder that rolled because rolling was easier than deciding has subscribed by default to a fund it did not diligence, and the process is designed to make the decision one that can be made on information.

Where it surfaces

At the market check, when a third-party bid exceeds the continuation price.

At the lead's side letter, discovered by a cash holder's counsel after the vote.

At the committee's minute, which records an approval by the members who rolled.

At the manager's economics, when the crystallised share and the new share are read together for the first time by a holder.

At the lenders' consent, priced after the vote and inside the price.

At the regulator's review, which asks for the six elements and receives three.

The cost of getting it wrong

A continuation that fails the process costs a claim by the cash holders, who were bought out at a price a court reads as the manager's; a claim by the rolling holders, who rolled on terms they were not given; a regulatory finding on the conflicts duty; and a manager whose next fund is raised from a register that read all three. The six elements cost an independent adviser, a market check, a disclosure and a quarter of process. The transaction's value is usually large; the process's cost is a fraction of it; and a manager that skips the process to save the fraction has risked the whole.

The price

The price is the term that moves value, and it is tested three ways. An independent valuation, by a valuer appointed by the committee rather than the manager, on assumptions the committee sees. A market check, in which the asset is offered to third parties and their bids are the price's evidence, which is the strongest test and the one managers most resist because it may produce a buyer. A lead investor's negotiation, in which a new institutional investor that will anchor the new vehicle negotiates the price at arm's length, on its own diligence, and the rolling holders receive its price. The three can be combined, and a continuation that has all three has a price nobody can later call the manager's.

The lead investor and the rolling holders

The lead investor anchors the new vehicle and negotiates its terms: the price, its own economics, its governance rights, its co-investment rights. The rolling holders are offered the new vehicle on the lead's terms, and the process fails where they differ: a lead that negotiated a discount to the price, a preferred return, a governance right or a side letter the rolling holders do not receive has made the rolling holders' decision on information they were not given, and the committee that approved the transaction approved one it did not see. The rule is that the rolling holders receive the lead's terms, or that every difference is disclosed to them and to the committee before the vote.

The committee and its independent advice

The old fund's investors' committee is the body that approves, and it approves on advice that is not the manager's. The constitution gives it the power to appoint an independent adviser at the fund's cost for a related-party dealing above a threshold, and a continuation is such a dealing. The adviser reads the price process, the new vehicle's terms, the manager's economics and the rolling holders' position, and opines on fairness. The committee's members are holders with their own interests, some rolling and some taking cash, and the constitution says whether a conflicted member votes; a committee whose rolling members approve a price the cash members dispute is a committee whose composition the constitution should have addressed.

The new vehicle's constitution

The new vehicle is a new fund, with a new tier, a new register and a new constitution drafted by the manager for the manager. The old fund's counsel reads it before the vote: the term and the extensions, the manager's share and hurdle, the governance, the committee's powers, the related-party regime, the transfer provisions, and the treatment of the rolling holders against the lead. A rolling holder that rolled into a constitution nobody read on its behalf has subscribed to a fund whose terms it learns in year two.

The manager's economics

The manager's share in the old fund may crystallise on the transfer: the transfer price is a realisation, and a deal-by-deal waterfall pays the share on it. The manager's share in the new vehicle starts again with a new hurdle on the transfer price. The two together can pay the manager a share on the old fund's gain and a share on the new fund's gain from the same asset, and the holders read the two together. Many continuations reinvest the manager's crystallised share into the new vehicle as a condition the lead investor requires, so that the manager's money rolls with the holders'. The disclosure shows the crystallisation, the reinvestment, the new hurdle and the new share, side by side, before the vote.

The status-quo option

A holder in the old fund that wants neither to sell at the price nor to roll into the new vehicle has a third position in some continuations: to remain in the old fund, which holds its interest in the asset through a residual structure, or to roll on terms that replicate its old position. The option is expensive to provide and is often absent; where it is absent, the absence is disclosed and the committee approves a transaction that forces every holder to choose between two outcomes the manager designed.

The lenders

The old fund's facilities and the asset-level facilities carry change-of-control and disposal clauses the continuation triggers, and the lenders' consents are obtained before the vote, at a price the committee sees, because a consent obtained after the vote lands inside a price the committee approved. The new vehicle's facilities are negotiated with the rolling holders' acknowledgements in view.

The centres' rules

In both centres a continuation is a related-party dealing under the conduct rulebook's conflicts duty and, for the public tier, under the funds rules' provisions on transactions with affiliated persons; for the private tiers the constitution's own related-party regime governs, and the regulator's review reads the process against the conflicts duty. The regulators have published views on continuations in the form of guidance on conflicts and on related-party transactions, and the process above is the process the guidance describes. A manager that follows it has a file that answers the review; one that does not has a transaction the review reads as a sale to itself.

By element · by purpose	What it manages	Who performs it	What its absence costs
Committee approval on independent recommendation	The sale to oneself	The committee, with its adviser	A transaction approved by nobody independent
Price tested by valuation, market check or lead	The price moving value between holders	The valuer, the market, the lead	A price that is the manager's
Disclosure of the manager's economics	The reset of the manager's share	The manager, before the vote	A share taken twice without consent
Rolling holders on the lead's terms	The lead's better deal	The manager and the lead	Holders deciding on information they lacked
Status-quo option, or disclosed absence	The forced choice	The manager	A choice nobody could refuse
Old fund's counsel reads the new constitution	The terms nobody read	The old fund's counsel	A fund the rolling holders learn in year two

A timeline, as a type

Year eight, quarter one: the manager identifies the assets that need more time and writes down every conflict. Quarter two: the committee appoints an independent adviser; the valuer is commissioned by the committee; a market check is opened with a data room. Quarter three: two third-party bids; a lead investor negotiates at the floor the valuation and the best bid set, with a disclosed anchor discount; the lenders are approached for consents and the price of each is obtained. Quarter four: the disclosure to every holder: the price evidence, the manager's economics old and new side by side with the reinvestment condition, the lead's terms and the differences, the absence of a status-quo option, the old fund's counsel's report on the new constitution, and the lenders' consents and their cost. Year nine, quarter one: the committee approves on the adviser's fairness opinion with the rolling members abstaining; the holders elect; the cash holders are paid; the rolling holders roll; the new vehicle's facility takes their acknowledgements. The file holds all of it.

The structure paper's page

The structure paper's continuation page carries: every conflict identified; the six elements and the party performing each; the price evidence, with the valuation, the market check and the lead's negotiation; the manager's economics, old and new, side by side; the lead's terms and every difference from the rolling holders'; the status-quo option or its disclosed absence; the old fund's counsel's reading of the new constitution; the lenders' consents and their prices; the committee's composition and conflicts rule; and the disclosure's date against the vote's. The page is the regulator's review answered in advance and the holders' counsel's questions answered before they are asked.

The secondary buyer's view

Secondary buyers that lead continuations have their own process, and a manager that has run one knows what the lead will ask: its own diligence on the assets, its own valuation, a price that reflects the old fund's need to close, governance rights in the new vehicle, and a reinvestment by the manager. The lead's process is the manager's ally in the committee's eyes, because a lead that negotiated hard at arm's length is evidence the price was not the manager's, provided the lead's terms reach the rolling holders or are disclosed. A manager that hides the lead's terms from the rolling holders to keep the lead has converted its best evidence into its worst.

The new vehicle's own placement

The new vehicle is a fund raised, and its placement to the lead and to the rolling holders is a placement under every regime the holders sit in. A rolling holder in the Kingdom receives the new vehicle's units through the distributor on a notification; a Kuwaiti one under a permit for the new scheme; a Qatari one within the count or through the bank. The continuation's timetable carries the placement clocks, and a continuation that rolled a Saudi institution without the distributor has placed a foreign fund's securities in the Kingdom outside the regime, in the middle of a transaction whose every other element was designed.

The onshore assets and the continuation

Where the old fund's assets sit onshore, the transfer to the new vehicle is a transfer of the holding companies or the assets in the asset states, with the registries' recording, the ownership categories for the new vehicle, the 1446H registration for a new Saudi holder, the grantor's consent for a Qatari usufruct, the Kuwaiti scheme's rules for a change of its unitholder, and the Kingdom's disposition charge where a parcel itself moves. The continuation's price carries each, and the exit test is run for the transfer as for any exit, because the continuation is an exit from the old fund whatever it is to the new one.

A continuation, as a type

A fund in year nine holds two assets whose programmes need four more years. The manager proposes a continuation. The committee appoints an independent adviser at the fund's cost. The price is set by an independent valuation the committee commissioned and by a market check in which two third parties bid, and the higher of the valuation and the best bid becomes the floor; a lead investor negotiates at that floor with a modest discount for its anchor commitment, which is disclosed. The manager's old-fund share crystallises on the transfer and is reinvested in the new vehicle as the lead requires; the new vehicle's hurdle and share are disclosed beside it. The rolling holders receive the lead's terms except the anchor discount, which is disclosed. A status-quo option is not offered and the absence is disclosed. The old fund's counsel reads the new constitution and reports. The lenders' consents are obtained and priced before the vote. The committee approves on the adviser's fairness opinion, with the rolling members abstaining as the constitution requires. The cash holders are paid; the rolling holders roll; the file shows who knew what, and when.

Four cases, as types

A manager proposes a continuation at a price set by its own valuation, with a lead investor that negotiated a preferred return the rolling holders did not receive and were not told about. The committee, two of whose three members are rolling, approves. A cash holder's counsel later obtains the lead's side letter and reads the price as the manager's; the regulator's review reads the same file.

A manager runs a market check that produces a third-party bid above the continuation price. The manager declines the bid and proceeds with the continuation at the lower price. The committee, which saw the bid, is asked why it approved a sale to the manager below a price a third party offered, and has no answer its adviser will sign.

A manager discloses everything, tests the price three ways, and obtains the lenders' consents after the vote. The consents cost a repricing that lands inside the approved price; the rolling holders' new vehicle bears it; the committee's minute shows an approval of a number that was not the number.

A manager follows the six elements, tests the price three ways, discloses its economics side by side, gives the rolling holders the lead's terms, discloses the absence of a status-quo option, has the old fund's counsel read the new constitution, and obtains the lenders' consents before the vote. The continuation survives the review and the cash holders' counsel, because the file shows the process.

What each party holds

The manager holds the identification of every conflict, the six elements, the disclosure and the file.

The old fund's committee holds the approval, its independent adviser and its own conflicts rules.

The independent adviser holds the fairness opinion on the process and the price.

The lead investor holds its negotiated terms, which the rolling holders receive or see.

The old fund's counsel holds the reading of the new constitution.

The lenders hold their consents, priced before the vote.

The cash holders and the rolling holders each hold the disclosure on which they chose.

The sequence

1. Every conflict in the continuation is identified and written down before the process is designed.
2. The committee appoints an independent adviser at the fund's cost.
3. The price is tested by independent valuation, by a market check and by the lead's arm's-length negotiation, in whatever combination the committee accepts.
4. The manager's economics, old and new, are disclosed side by side before the vote, with any reinvestment condition.
5. The rolling holders are offered the lead's terms, with every difference disclosed to them and the committee.
6. The old fund's counsel reads the new constitution and reports; the lenders' consents are obtained and priced.
7. The committee approves on the adviser's opinion, with conflicted members treated as the constitution provides; the file records who knew what and when.

Questions a manager asks

Is a market check always necessary. It is the strongest evidence of price and the one a cash holder's counsel asks for first; a continuation without it rests on the valuation and the lead, and the committee decides whether that is enough.

What if the market check produces a buyer. Then the fund has a sale to a third party at a price, and the continuation proceeds only if it matches or the committee prefers the continuation for reasons it records.

Must the manager reinvest its crystallised share. Lead investors usually require it and committees read it as alignment; a manager that takes its share in cash and rolls the holders' money has disclosed something the holders will weigh.

Can the committee's rolling members vote. The constitution says; the safe rule is that members with a conflicting interest abstain or that the cash holders have a separate vote.

What does the regulator look for. The six elements, in the file: the approval, the price evidence, the disclosure, the terms, the option or its disclosed absence, and the reading of the new constitution.

Does the old fund's tier matter. The old fund's related-party regime is its constitution's and the conduct rulebook's; the new vehicle has its own tier and register, chosen to the rolling holders and the lead.

Terms used

Continuation vehicle: a new fund under the same manager to which the old fund's assets are transferred.

Rolling holders: the old fund's holders who take units in the new vehicle rather than cash.

Lead investor: the new institutional investor that anchors the new vehicle and negotiates its terms.

Market check: the offer of the asset to third parties to test the continuation price.

Status-quo option: a holder's right to neither sell nor roll but to remain in its old position.

Crystallisation: the payment of the manager's share in the old fund on the transfer.

Fairness opinion: the independent adviser's view that the process and the price are fair to the old fund's holders.

What to read

The old fund's constitution on related-party dealings, the committee's powers and the independent adviser; the conduct rulebook's conflicts duty and the regulators' guidance on related-party transactions; the new vehicle's constitution; the lead investor's terms and side letters; the lenders' change-of-control and disposal clauses. On this site, the continuation room under Structures, the worked structure on a continuation and the economics room.