Finance Seminar Simon Mayer

The paper examines a rapidly growing phenomenon in private equity: continuation vehicles (CVs), where general partners (GPs) transfer portfolio companies from an existing fund into a new vehicle that they continue to manage. These transactions have become increasingly common, accounting for a significant share of secondary market activity and private equity exits.
The study develops a theoretical framework to understand the conflicts of interest inherent in these deals. While CVs can create value by allowing high-potential firms to remain in the portfolio longer, they also introduce agency problems because GPs effectively act as both seller (for the old fund) and buyer (for the new vehicle).

The model highlights two key informational frictions:
• Adverse selection, where new investors may overpay for weaker assets
• Inverse selection, where strong assets may be transferred at undervalued prices

The paper shows how outcomes depend critically on GP incentives, co-investment, carried interest, and the legacy fund's performance, shaping both asset quality and the distribution of value among investors.