THE RISE OF CONTINUATION FUNDS: OPPORTUNITIES & CHALLENGES FOR GPLED SECONDARIES IN INDIA
INTRODUCTION
Continuation funds, also referred to as General Partners (“GP”)-led secondary transactions or single-asset continuation vehicles, have emerged as one of the most consequential structural innovations in private equity over the last decade. Globally, GP-led secondaries have accounted for a significant proportion of secondary market volume in recent years. While the Indian GP-led secondary market remains nascent, it is witnessing a discernible increase in deal activity, particularly among vintage funds from the 2012 to 2016 cohort that are now
approaching the end of their contractual tenure.
Continuation funds present a multi-layered legal and regulatory challenge, cutting across fiduciary obligations, valuation standards, regulatory approvals, and tax structuring. Three structural gaps are particularly relevant in the Indian context:
- the absence of dedicated regulatory guidance from the Securities and Exchange Board of India on GP-led secondary transactions;
- the lack of a clearly articulated standard of GP fiduciary duty in continuation fund contexts under Indian law; and
- unresolved tax and exchange control issues relating to Limited Partner (‘LP”) rollover interests under the Income Tax Act, 1961 and the Foreign Exchange Management Act, 1999.
In the absence of settled jurisprudence or regulatory clarity, continuation fund transactions in India must be structured with a heightened focus on process defensibility, disclosure, and conflict mitigation, rather than mere commercial alignment.
WHAT IS A CONTINUATION FUND?
Definition and Structure
A continuation fund is a new investment vehicle created by a GP to hold one or more portfolio assets from an existing fund that has reached, or is approaching, the end of its term. Rather than executing a traditional exit through an IPO, strategic sale, or secondary buyout, the GP transfers selected assets into a newly formed vehicle, typically a new Alternative Investment Fund (“AIF”) in the Indian context, thereby extending the holding period and allowing the GP to continue managing assets it believes have further value creation potential.
At its core, a continuation fund is a solution to a timing problem. Private equity and venture capital funds are typically structured with a fixed lifespan of eight to twelve years, including an investment period and a harvest period. As funds approach the end of their term, GPs face pressure to exit portfolio companies, sometimes at suboptimal valuations driven by market conditions, regulatory timelines, or the incomplete execution of a portfolio company’s growth strategy. A continuation fund allows the GP to decouple the exit decision from the artificial constraint of a fund’s contractual end date.
How It Works
The mechanics of a continuation fund transaction typically involve three key steps. First, the GP identifies one or more assets within the existing fund, often referred to as the “transferring fund,” that it wishes to retain and manage beyond the fund’s original term. These are typically the fund’s highest performing or most promising assets, sometimes called “trophy assets,” where the GP believes significant value remains to be unlocked.
Second, the GP establishes a new vehicle, the continuation fund, into which the selected assets are transferred at a price determined through an independent valuation process. In practice, for transactions above a threshold size, a dual layer of price validation is considered best practice and increasingly expected by sophisticated LPs comprising both a SEBI registered valuer’s report and an independent fairness opinion from a reputable investment bank or financial advisor. This dual validation is particularly important in India where related
party transactions attract heightened regulatory and tax scrutiny, and where a single valuation report may be insufficient to withstand LP challenge or SEBI inquiry.
Existing LPs in the transferring fund are then presented with a choice: they may either roll over their economic interest into the continuation fund, thereby maintaining exposure to the asset, or opt for liquidity by selling their interest to new investors, typically institutional secondary market buyers, at the independently determined transfer price.
Third, the continuation fund is capitalised by a combination of rolling LPs and new investors, with the GP typically committing fresh capital as well, thereby demonstrating alignment of interest with incoming investors. The GP then continues to manage the asset under the continuation fund’s mandate, often under a revised fee and carried interest structure negotiated with the new investor base.
Types of Continuation Fund Structures
Continuation funds broadly fall into two categories. A single asset continuation vehicle holds only one portfolio company and is typically used where the GP has exceptional conviction in a specific asset’s prospects. A multi asset continuation fund pools several assets from the existing fund into the new vehicle, offering investors a degree of diversification.
A critical legal distinction between these two structures, which is often overlooked in practice, concerns SEBI’s concentration norms under the AIF Regulations. Category II AIFs are subject to investment restrictions under Regulation 15(1)(c) of the AIF Regulations, which prohibit investing more than 25% of investable funds in a single investee company. A single asset continuation vehicle, by definition, concentrates 100% of the fund’s capital in one portfolio company and may therefore require careful structuring, including consideration of whether a Category III AIF structure is more appropriate, with attendant regulatory and tax implications for investors.
In the Indian context, single asset structures are more commonly seen in growth equity and late-stage venture capital transactions where a portfolio company may be approaching IPO readiness but requires additional runway. Multi asset structures are more prevalent in buyoutfunds where a GP may wish to retain a cluster of portfolio companies that are mid cycle in their operational improvement plans.
Why Are Continuation Funds on the Rise in India?
Several converging factors are driving the growth of continuation funds in the Indian market. The Indian AIF industry has grown rapidly, with SEBI registered AIFs reporting commitments exceeding INR 11 lakh crore as of 2024, and a significant number of vintage funds from the 2012 to 2016 era are now approaching the end of their contractual terms. Many of these funds hold assets in sectors such as technology, financial services, and consumer goods where the investment thesis remains intact but exit windows, particularly through the public markets, have been affected by IPO market volatility and regulatory timelines.
Additionally, the maturation of the Indian secondary market, with the entry of dedicated secondary funds and global institutional buyers, has created the liquidity infrastructure necessary to support continuation fund transactions. LPs, including domestic family offices, insurance companies, and pension funds, are also becoming more sophisticated in evaluating and participating in such structures, lending further momentum to the trend.
KEY LEGAL CHALLENGES FOR GPS
1. Conflict of Interest and Fiduciary Duties
The most fundamental legal challenge in a continuation fund transaction is the inherent conflict of interest that arises when the same GP acts simultaneously as seller (on behalf of the existing fund) and buyer (on behalf of the continuation vehicle). In India, Category I and Category II AIFs are governed by SEBI’s AIF Regulations, 2012, and the associated circulars, which impose fiduciary obligations on fund managers. Specifically, Regulation 15(1)(a) of the AIF Regulations requires the fund manager to act in a fiduciary capacity towards its investors.
However, the Regulations do not specifically address the conflict of interest dynamics unique to GP led secondaries, and there is no developed body of Indian judicial precedent on GP fiduciary duties in the fund management context.
This is a significant gap. Unlike common law jurisdictions such as the UK, where fiduciary duties of loyalty and care are well developed through decades of case law, India’s articulation of fiduciary duties in the fund management context is largely regulatory rather than judicial.
For practitioners, this creates both risk and opportunity, risk because GPs cannot rely on settled judicial guidance when structuring a continuation fund transaction, and opportunity because well drafted fund documents can proactively shape the applicable standard of conduct and reduce the risk of successful LP challenge.
GPs must ensure that asset valuation is conducted by an independent, SEBI registered valuer, and that the transaction terms meet the arm’s length standard. In this context, it is important to note that “arm’s length” carries a specific technical meaning under Indian tax law. Under Section 92F(ii) of the Income Tax Act, 1961, read with Rule 10B of the Income Tax Rules, 1962, arm’s length price is determined by reference to prescribed transfer pricing methodologies applicable to transactions between associated enterprises. Where the GP entity and the fund are associated enterprises for transfer pricing purposes, the transfer ofassets to the continuation fund must be priced in accordance with these methodologies, and appropriate transfer pricing documentation must be maintained.
2. SEBI AIF Regulatory Compliance
India does not yet have a dedicated regulatory framework for GP led secondary transactions or continuation vehicles. The continuation fund must be registered as a fresh AIF with SEBI, requiring a new registration application, scheme documents, and compliance with minimum corpus requirements. SEBI’s review timelines can be protracted, and any delay directly affects the GP’s ability to execute within the existing fund’s legal term.
Practitioners should note that SEBI’s 2023 consultation paper on the AIF framework, while not specifically addressing continuation funds, proposed enhanced norms on related party transactions and LP consent mechanisms. The direction of travel is clear: SEBI is moving towards greater GP accountability in conflict transactions, and practitioners structuring continuation funds today should anticipate that forthcoming regulatory guidance will impose more prescriptive requirements in this space.
If the asset being transferred has offshore components or involves a foreign portfolio investor (FPI) structure, FEMA compliance, RBI approvals, and pricing guidelines under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 must be navigated. A particularly complex issue arises where the transferring fund holds its investment through a Mauritius or Singapore intermediate holding structure, as many vintage Indian PE funds do. In such cases, the transfer of the asset to the continuation fund may trigger significant tax and regulatory
complications, including: potential renegotiation of tax treaty benefits under the India Mauritius or India Singapore Double Taxation Avoidance Agreements (DTAAs); capital gains tax crystallisation at the holding company level; and Principal Purpose Test (PPT) scrutiny following India’s adoption of BEPS Multilateral Instrument provisions.¹³ The PPT risk is particularly acute where the continuation fund structure is perceived as being designed primarily to preserve treaty benefits rather than for genuine commercial reasons. These issues
require careful pre transaction structuring advice and, in many cases, advance rulings or external tax counsel opinions.Transfer pricing implications under the Income Tax Act, 1961 add further complexity, particularly where the GP entity and the fund are related parties.
3. LP Consent Mechanics and Information Asymmetry
A critical governance challenge is securing informed LP consent. Unlike a traditional exit, a continuation fund transaction asks LPs to make a binary choice, roll or liquidate, often under significant time pressure and with limited access to independent valuation or legal advice. This creates an inherent information asymmetry that Indian courts and regulators may increasingly scrutinise.
Best practice requires GPs to constitute an independent LP Advisory Committee (LPAC) or obtain approval from a supermajority of LPs before proceeding. When structuring consent thresholds, a critical distinction must be observed between consent by value of commitment and consent by number of LPs. A 75% by value threshold, while commercially standard, may effectively be controlled by one or two anchor LPs in a concentrated LP base, leaving smaller investors without meaningful voice in a transaction that materially affects their interests.
Institutional Limited Partners Association (ILPA) guidelines specifically recommend thatconsent mechanisms account for this dynamic, and practitioners should consider structuring consent requirements that operate both by value of commitment and, where the LP base is diverse, by number of LPs.
The LPA should specifically authorise continuation fund transactions; absent this, GPs risk challenges from dissenting LPs on grounds of breach of contract or fiduciary duty under the Indian Contract Act, 1872 or the SEBI AIF framework. Importantly, the article should address the position of dissenting LPs who neither wish to roll over nor are satisfied with the liquidity terms offered. Such LPs may pursue remedies through SEBI’s investor grievance redressal mechanism, initiate arbitration under the LPA’s dispute resolution clause, or, in extreme cases,
seek judicial intervention. GPs should proactively mitigate this risk by ensuring that the liquidity option is priced fairly, that dissenting LPs are given adequate time and information to make their decision, and that the LPA contains a clearly drafted dispute resolution mechanism capable of resolving valuation disputes efficiently.
GOVERNANCE CONSIDERATIONS AND EMERGING BEST PRACTICES
Given the regulatory gaps, GPs operating in India are increasingly adopting internationally recognised governance standards, including those recommended by the ILPA. Key governance safeguards being embedded in Indian continuation fund structures include:
- Independent valuation by a SEBI registered valuer with no prior mandate from the GP, supplemented by an independent fairness opinion for larger transactions.
- Formation of an LPAC with clear decision making authority, voting thresholds for conflict transactions, and balanced representation that prevents any single LP or group of LPs from exercising disproportionate control.
- Fairness opinions from reputed investment banks or transaction advisors, particularly for transactions above a defined size threshold.
- Enhanced disclosure obligations: GPs must proactively disclose the rationale for the continuation, projected holding periods, revised fee and carry structures, and the basis for asset selection.
- Anti-dilution protections for rolling LPs, both economic and governance related. Rolling LPs should be protected not only against preferential economic terms offered to incoming secondary investors, but also against dilution of their governance rights, including LPAC representation and information rights, in the continuation fund’s constitutional documents.
- GP clawback mechanics must be clearly documented in the continuation fund’s LPA, particularly where the GP is earning a fresh carry on the continuation vehicle. The interaction between the clawback provisions of the transferring fund and the new carry structure of the continuation fund can create complex economic outcomes for LPs and must be addressed explicitly.
From a drafting perspective, legal counsel advising GPs should proactively include the following specific provisions in fund documentation at the time of initial fund formation: express authority for GP led asset transfers to continuation vehicles; valuation methodology and dual validation requirements; LP consent thresholds structured by both value and number; LPACcomposition, quorum, and veto rights for conflict transactions; GP clawback mechanics and their interaction with continuation fund carry; carried interest reset provisions; and a clearly defined dispute resolution mechanism for valuation disputes with dissenting LPs. Embedding these provisions at formation stage significantly reduces the legal risk and transactional friction when a continuation fund is eventually executed.
CONCLUSION
The rise of continuation funds in India marks a fundamental shift in how GPs and LPs approach value creation, liquidity, and fund lifecycle management. For both constituencies, understanding the legal, regulatory, and structural dimensions of these vehicles is no longer optional. It is a commercial imperative.
For GPs, the ability to retain high conviction assets beyond a fund’s contractual term is a powerful tool, but one that carries significant legal and governance risk. Conflict of interest management, robust independent valuation, LP consent mechanics, and the FEMA, DTAA, and transfer pricing implications of the asset transfer must all be addressed proactively, beginning at fund formation and not at the point of transaction execution.
For LPs, continuation funds offer the opportunity to maintain exposure to high performing assets, but carry real risks around information asymmetry, governance dilution, and transfer pricing fairness. Independent legal advice at the rollover decision stage is not a luxury. It is a necessity.
The key structural and regulatory considerations that will determine transaction success are fund document architecture, valuation integrity, regulatory sequencing, tax efficiency, and LP protection mechanisms. Clients, whether GPs structuring a continuation vehicle or LPs evaluating a rollover decision, who invest in rigorous legal advice at the outset will be best placed to realise the full commercial potential of these structures while managing their legal and regulatory risk.
Disclaimer: This note is meant for informational purposes only. For any queries or legal advice please feel free to get in touch with us.
