As the market for continuation vehicles (CVs) continues to evolve, sponsors are increasingly using financing to help bridge the pricing gap between secondary investors and selling fund limited partners seeking liquidity.
Historically, sponsors have used subscription-line and other credit facilities to smooth out capital calls, allowing investor commitments to be drawn less frequently without limiting the sponsor’s ability to satisfy funding obligations as they arise. In the CV context, these credit facilities have allowed sponsors to pay certain organizational fees and partnership expenses and to make follow-on investments, without calling limited partners for each individual expense.
Recently, however, sponsors have also begun using these facilities to fund a portion of the purchase price payable by the CV at closing to those selling fund investors seeking liquidity. By deferring a portion of secondary investors’ initial capital contributions, this leverage can improve their underwriting economics, potentially enabling those investors to offer more attractive terms. Selling fund investors, meanwhile, receive the full purchase price at closing rather than through a deferred payment.
Because closing facilities can benefit both sides of a CV transaction, a recurring question is who should bear the financing cost. While the market continues to evolve on this point, current practice generally allocates the financing costs onto the CV. CV investors (and especially sophisticated lead investors) are nevertheless pushing for a portion of these costs to be treated as shared transaction costs—in particular, where the alternative would be a more straightforward deferral of a portion of the purchase price.
CV financings are typically “hybrid financings” in which lenders look to credit support from both the undrawn commitments of the CV investors and the assets of the CV. While these financings are often structured as typical subscription credit facilities, they often include NAV-style features, such as a minimum net asset value or loan‑to‑value covenants, negative pledges and security over the underlying assets. Combining these “look-up” and “look-down” elements can reduce lender risk and produce more favorable pricing and terms than either form of collateral alone.
With lead investors representing a meaningful portion of CV commitments, sponsors often need significant cooperation from secondary investors to satisfy lender diligence requirements (including by providing an investor letter and certain financial information). Likewise, given the significant portion of the borrowing base these investors may represent, lead investors are increasingly involved in negotiating the specifics of the closing facility. Prospective lead investors may begin negotiating the parameters for the closing facility as early as the first-round bid stage, before potential lenders have even been approached. These discussions typically focus on pricing.
For rolling investors—existing investors that retain all or a portion of their portfolio exposure by investing in the CV—the benefits of participating in a closing facility are less straightforward. Because these investors already financed their original acquisition of the portfolio and have elected to roll rather than cash out, their incentives may differ from those of both new secondary investors and those selling fund investors seeking liquidity. Market practice varies as to whether, and how, rolling investors participate in the closing facility. In some CV transactions, the rolling investors will participate in the closing facility pari passu with secondary investors. In other transactions, the rolling investors are carved out of the closing facility, either structurally (i.e., through their investing vehicle) or contractually (e.g., pursuant to the CV’s operative documents). Each approach has its benefits but may also drive additional complexity.
As continuation vehicle transactions continue to evolve, closing facilities are becoming an increasingly flexible tool for addressing funding, liquidity and execution challenges. Their benefits can extend across the transaction, but the economics ultimately depend on how leverage, costs and recourse are allocated among the selling fund, the CV and its investors. Careful structuring—particularly where lead and rolling investors have different objectives—will remain important as market practice continues to develop.
Private Equity Report Fall 2026, Vol 26, No 3