In short
A continuation fund is a new private equity fund that a general partner (GP) creates to buy a portfolio company from an older fund that is reaching its end date. The old fund’s limited partners (LPs) get a choice. They can cash out their investment. Or they can roll their stake into the continuation fund and stay invested. New investors provide the cash to buy out the LPs who leave.
Transactions of this kind, where the GP acts on both sides, hit a record 75 billion dollars in 2024. Eighty four percent of that volume used continuation vehicles. Jefferies Global Secondary Market Review The strategy is especially useful for AI data center assets because those assets need large amounts of capital and many years to build and lease up.
The main federal rules come from the Investment Advisers Act of 1940 and the SEC’s Form PF reporting requirement. Since December 2023, registered investment advisers must report any adviser led secondary transaction to the SEC within 60 days after the end of the quarter in which it closes. Even though a broader rule that would have required fairness opinions was thrown out by a court in 2024, the general fiduciary duty and antifraud rules still apply. GPs must disclose conflicts and get informed consent from their investors.
On the tax side, the GP’s carried interest, its share of the profits, is subject to a three year holding period under Internal Revenue Code section 1061. If the underlying AI data center assets have not been held more than three years, the GP’s gain can be taxed at ordinary income rates up to 37 percent, rather than the lower long term capital gain rate of 23.8 percent.
Several major AI data center platforms have used continuation funds in 2025, including Flexential and EdgeConneX. Meanwhile, rollup strategies are also reshaping the market. A rollup is when a private equity firm buys many smaller companies and combines them into one larger platform. Both tools are changing how AI infrastructure is owned and financed.
What is a continuation fund?
A private equity fund pools money from investors. The investors are called limited partners, or LPs. The manager of the fund is the general partner, or GP. A typical fund has a fixed life of about ten years, with one or two one year extensions possible. At the end, the GP must sell the companies the fund owns and return cash to the LPs.
Sometimes the GP believes a portfolio company still has strong growth ahead and would be worth more if held longer. Instead of selling the company to an outside buyer, the GP can create a continuation fund. This new fund buys the company from the old fund. The old fund’s LPs get a choice. They can sell their stake and receive cash. Or they can exchange their interest for an interest in the continuation fund, keeping their capital at work.
This is called an adviser led secondary transaction because the GP acts for both the old fund and the new fund. New investors, often large secondary funds or institutional investors, put in fresh capital to pay the LPs who choose cash.
The price is usually set at or near the old fund’s last quarterly net asset value, or NAV. This is called the lockbox price. Adjustments are made for cash coming in or going out between that date and closing. In 2024, the median pricing was 93.6 percent of the reference NAV. Houlihan Lokey 2024 Continuation Fund Study
The GP almost always rolls over its own invested capital and its carried interest into the continuation fund. Management fees in the new fund are typically lower. A continuation fund might charge 1.0 to 1.25 percent of NAV each year, while a primary fund often charges 1.5 to 2.0 percent. Pipeline Road The LPs who stay invested usually represent about 40 to 65 percent of the old commitments. Pipeline Road
Why are continuation funds used for AI data center assets?
AI data centers are different from many private equity investments. Building a campus can cost hundreds of millions of dollars. It takes years to secure power, construct the buildings, install cooling and networking equipment, and sign long-term leases with hyperscale cloud providers. Once an AI data center is leased and stable, its value can jump sharply. A ten year fund may not allow enough time to capture that growth. The GP might have to sell right as the asset begins to pay off.
A continuation fund solves this problem. It extends the holding period by several years. That gives the GP time to build out new phases, add customers, and let the value compound. At the same time, LPs who want cash can get out at a price that reflects the current value.
The numbers show how large these assets have become. In 2024, single asset continuation vehicles made up 57 percent of continuation fund deals. Houlihan Lokey 2024 Continuation Fund Study The median implied enterprise value of a single asset deal rose from 582 million dollars in 2023 to about 1.4 billion dollars in 2024. Houlihan Lokey 2024 Continuation Fund Study And 44 percent of those deals involved a company with an implied enterprise value above 2 billion dollars. Houlihan Lokey 2024 Continuation Fund Study
Real examples of AI data center continuation funds
GI Partners closed a single asset continuation vehicle for Flexential in August 2025. Flexential runs more than 40 AI data centers across 18 US markets. The transaction let existing LPs cash out and brought in new capital from Hamilton Lane and other investors. Together with the investment from funds managed by Morgan Stanley Infrastructure Partners, which closed in November 2024, Flexential raised approximately 1 billion dollars in primary equity. GI Partners press release
EQT launched an open ended continuation fund for its AI data center platform EdgeConneX. An open-ended fund has no fixed termination date, which suits the long life of digital infrastructure. This reflects a broader trend among infrastructure GPs. Secondaries Investor report
Blue Owl Capital raised a 7 billion dollar fund dedicated to digital infrastructure and connectivity assets. It also acquired IPI Partners, the manager of STACK Infrastructure, in a deal that added over $11 billion in assets under management. Blue Owl press release, Blue Owl press release, STACK Infrastructure press release
Ares Management raised approximately 5.3 billion dollars for its infrastructure secondaries strategy, including its third dedicated fund (Ares Secondaries Infrastructure Solutions III), which exceeded its 2 billion dollar target. It aims to invest through GP led continuation vehicles and preferred structure transactions in seasoned private infrastructure assets. BusinessWire, Yahoo Finance
What does the SEC require for continuation funds?
The Form PF reporting rule
Since December 11, 2023, all private equity fund advisers must report any adviser led secondary transaction on Form PF within 60 days after the quarter in which it closes. The first filings were due February 29, 2024. The SEC said this rule would help it examine these transactions more efficiently. SEC Form PF amendments
The vacated adviser led secondaries rule
In August 2023, the SEC adopted a broader set of rules known as the Private Fund Adviser Rules, or PFAR. One rule would have required advisers to obtain a fairness opinion or valuation opinion from an independent provider for each adviser led secondary transaction. They would also have had to share a summary of any business relationship with the opinion provider. The compliance dates were set for September 14, 2024 and March 14, 2025. SEC PFAR
On June 5, 2024, the U.S. Court of Appeals for the Fifth Circuit vacated the entire PFAR package. The court held that the SEC exceeded its statutory authority. The SEC did not appeal. National Association of Private Fund Managers v. SEC, No. 23-60471, Reuters
So fairness opinions are not required by federal law. However, many GPs still get them. An independent opinion helps show that the process was fair, which can reduce the risk of LP lawsuits.
Fiduciary duties under the Advisers Act
Even without the PFAR rule, the Investment Advisers Act of 1940 imposes fiduciary duties on investment advisers. Section 206 and Rule 206(4)-8 require advisers to disclose all material conflicts of interest and to get informed consent from fund investors. In a continuation fund, the GP sits on both sides of the deal. That conflict must be clearly explained, and the LPs must agree to the terms.
The SEC continues to bring enforcement actions for failures in this area. In September 2023, it charged an adviser for transferring assets between funds without adequate conflict disclosure or investor consent. SEC enforcement action IA-6428 The SEC’s 2025 examination priorities also list adviser led secondary transactions as a focus area. ACA Group
What does the ILPA recommend for well run continuation funds?
The Institutional Limited Partners Association, or ILPA, publishes best practice guidance for continuation fund transactions. Many institutional investors expect GPs to follow these standards. While they are not law, they reduce litigation risk.
The main ILPA recommendations are these.
- Rolling LPs should be no worse off than if the transaction never happened. Management fees should not rise. The carried interest rate should not increase. The preferred return hurdle should not drop.
- The GP should roll 100 percent of its carried interest from the selling LPs into the new fund. It should not take any of that carried interest as cash.
- The price should be validated by a competitive process run by an independent third party.
- The limited partner advisory committee, or LPAC, should vote to waive the conflict of interest, even if the partnership agreement already permits the transaction.
- LPs should have at least 30 calendar days (or 20 business days) to make their roll-or-sell decision.
- The GP should deliver a disclosure package that meets the ILPA Continuation Fund Disclosure Template, which was released in January 2026. ILPA Disclosure Template
ILPA Continuation Funds Guidance
What tax issues arise in a continuation fund?
Carried interest and the three-year holding period
Carried interest is the GP’s share of the fund’s profits, usually 20 percent, paid after the LPs get their capital back and a preferred return. Under Internal Revenue Code section 1061, that carried interest qualifies for the lower long-term capital gain rate, 23.8 percent including the net investment income tax, only if the fund held the underlying asset for more than three years. If the holding period is three years or less, the gain is short-term and taxed at ordinary income rates up to 37 percent. 26 U.S.C. § 1061, 26 U.S.C. § 1
When a GP rolls its carried interest into a continuation fund, the holding period carries over from the old fund. Suppose the old fund held an AI data center for two years before the rollover. The carried interest still needs one more year to reach the three-year mark. If the continuation fund sells the asset during that third year, the GP’s gain is taxed as ordinary income. The timing of the rollover and the planned exit is therefore critical.
The One Big Beautiful Bill Act, signed in July 2025, did not change the carried interest rules or the capital gains rate.
Structuring the rollover as a tax free partnership division
The rollover of an LP’s interest from the old fund to the continuation fund can be tax-free if it is structured as a partnership division under tax code section 708. The most common structure is the assets-over form. The old fund is treated as contributing its assets to the new fund in exchange for new fund interests. Then it distributes those interests to the LPs who choose to roll. If done correctly, the rolling LPs do not recognize gain.
If the transaction is not structured carefully, the IRS could treat it as a taxable disguised sale of partnership interests. Legal and tax counsel must design the steps precisely to navigate the partnership division rules, ensure the rollover is tax-free under Sections 721 and 731, and manage the disguised sale treatment and resulting withholding obligations for selling investors. Tax analysis
Management equity and vesting triggers
Portfolio company executives often hold equity grants, such as profits interests or options. Many of those plans define a change of control, sale of the company, or liquidity event as triggers that accelerate vesting. A continuation fund transaction can fall within those definitions, causing unvested equity to vest immediately. Before closing, the GP must review the plan documents and, if needed, negotiate with management to address whether the transaction triggers accelerated vesting of incentive equity. Private Equity Report, Spring 2024
What is a rollup and how does it differ from a continuation fund?
A rollup is when a private equity firm buys several smaller companies in the same industry and combines them into one larger platform. The goal is to create scale, reduce costs, cross-sell services, and eventually sell the platform or take it public at a higher valuation.
In a rollup, the platform company itself makes the acquisitions using sponsor equity and debt. The original fund does not end. Instead, it keeps adding companies over time.
This is different from a continuation fund. A continuation fund is a transaction that moves an existing asset from an old fund into a new vehicle to extend the holding period. A rollup is about combining many companies. The two strategies can work together. A continuation fund might hold a platform, and then the platform might execute a rollup.
| Feature | Continuation Fund | Rollup |
|---|---|---|
| Main goal | Extend the hold for one or more existing assets | Combine many smaller companies into a larger platform |
| Structure | New fund buys assets from old fund | Platform company acquires other companies |
| Capital source | Secondary investors and rolled LPs | Sponsor equity, debt, sometimes asset backed securities |
| Typical hold | Several years beyond the original fund term | Often indefinite, until the platform is sold or goes public |
| Regulatory focus | SEC Form PF, fiduciary duties, ILPA guidelines | Antitrust, local zoning and permitting, securities laws |
| AI data center examples | Flexential CV, EdgeConneX CV | Flexential Atlanta acquisitions, TierPoint consolidation, Madison Air rollup |
How are AI data center rollups being done?
Flexential acquired two AI data centers in Atlanta in May 2025, solidifying its presence in one of the fastest growing US data center hubs. Flexential press release
TierPoint, backed by Argo Infrastructure Partners, has issued 1.99 billion dollars in asset-backed securities secured by 33 AI data centers. These securitizations help fund its expansion, including the purchase of the TekPark campus in Pennsylvania. TierPoint financing, TierPoint press release, Argo majority owner
Madison Air, a company that makes cooling systems for AI data centers, was built through 13 acquisitions and filed for a 2.2 billion dollar IPO. AInvest analysis
A consortium that includes BlackRock’s Global Infrastructure Partners announced plans to acquire Aligned Data Centers in a deal reportedly valued around 40 billion dollars. That would be the largest AI data center acquisition ever. CNBC
In the lower middle market, rollups accounted for more than 80 percent of all deals in 2024. Cherry Bekaert report
Open questions and practical considerations
The Fifth Circuit’s 2024 vacatur of the PFAR rules is final. The SEC did not appeal, but it could propose new rules under a different legal authority. Advisers should watch for any new rulemaking.
The Committee on Foreign Investment in the United States, or CFIUS, increasingly reviews private equity secondary transactions that involve foreign sovereign wealth funds investing in US AI data centers. This scrutiny can add time and conditions to deals with foreign investors.
The One Big Beautiful Bill Act did not change carried interest taxation. However, opportunity zone provisions that could affect AI data center developments are set to take effect in 2027.
Key takeaways
- Continuation funds let GPs hold AI data center assets longer than a standard ten-year fund, while giving some LPs a cash exit.
- The SEC requires Form PF reporting within 60 days after quarter end for adviser led secondary transactions. Fiduciary duties under the Advisers Act remain in effect and demand clear conflict disclosure and LP consent.
- The SEC’s fairness opinion rule was vacated in 2024. No federal law requires a fairness opinion, but many GPs still get one to show a fair process.
- ILPA best practices call for LPAC approval, competitive price validation, rolling of all carried interest, and at least 30 days for LP decisions.
- Carried interest is subject to a three-year holding period under section 1061. Timing the rollover is important to keep the lower capital gain rate.
- The rollover can be tax-free for LPs if structured as an assets-over partnership division under section 708.
- Rollup strategies are a separate tool used to consolidate smaller AI data center operators into large platforms. Asset-backed securities are a common financing tool for these rollups.
- The market for continuation funds and AI data center deals is large and growing. GP led secondaries reached 75 billion dollars in 2024, and AI data center M&A hit a record 61 billion dollars in 2025.
Frequently asked questions
Q:What is a continuation fund?
A:A continuation fund is a new private equity fund formed by a GP to buy a company from an older fund that is reaching its end date. LPs in the old fund can cash out or roll their investment into the new fund. New investors provide the money to pay the cashing-out LPs.
Q:Why do GPs use continuation funds for AI data centers?
A:AI data centers need huge capital and many years to build and fully lease. A standard ten-year fund may not allow enough time to capture the full value. A continuation fund extends the holding period while giving some LPs an exit.
Q:What does the SEC require for a continuation fund?
A:Registered investment advisers must report the transaction on Form PF within 60 days after the end of the quarter in which it closes. They must also comply with the Advisers Act’s fiduciary duties by disclosing conflicts and getting LP consent.
Q:Are fairness opinions required for continuation funds?
A:No, not by federal law. The SEC rule that would have required them was vacated in 2024. Many GPs still obtain an independent fairness opinion to demonstrate a fair process and reduce litigation risk.
Q:What is the three-year carried interest rule?
A:Under section 1061 of the tax code, carried interest qualifies for the 23.8 percent long-term capital gain rate only if the underlying asset was held more than three years. If held three years or less, the GP’s gain is taxed as ordinary income up to 37 percent.
Q:Is a rollover into a continuation fund taxable for LPs?
A:Usually not, if the transaction is structured as a tax-free partnership division under section 708. Most deals use an assets-over form. If not done carefully, however, it could trigger tax.
Q:What is the difference between a continuation fund and a rollup?
A:A continuation fund moves an existing asset into a new fund to extend its hold period. A rollup is when a private equity firm buys many smaller companies and merges them into one larger platform. The two strategies can be used together.
Q:How are AI data center rollups financed?
A:Rollups are often financed with sponsor equity and debt. Some AI data center operators, like TierPoint, also use asset-backed securities secured by long-term lease revenues to fund further acquisitions.
Q:What are the ILPA’s best practices for continuation funds?
A:The ILPA recommends that rolling LPs not be made worse off. The GP should roll all its carried interest from selling LPs into the new fund. The price should be validated by a third party. The LPAC should approve the conflict waiver, and LPs should get at least 30 days to decide.
Q:How large is the continuation fund market?
A:GP led secondary transactions reached a record 75 billion dollars in 2024. Continuation vehicles accounted for 84 percent of that volume. The median implied enterprise value of a single asset continuation fund rose to about 1.4 billion dollars in 2024, up from 582 million dollars in 2023.
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Junde Liu, JD, LL.M. (Taxation) candidate at UF Law. Originally published on Compute Law Blog. This article is general information and does not constitute legal advice. Reading it does not create an attorney client relationship. The reader should not act on the basis of any content here without first consulting a licensed attorney in the relevant state. Last reviewed for accuracy May 23, 2026.