Key Takeaways
- • Continuation funds captured $95.8 billion of the $226 billion secondary market transaction volume in 2025, representing 42% of all secondary market activity and signaling a structural shift in private equity exit strategies.
- • The secondary market reached a record $226 billion in transaction volume during 2025, with continuation fund activity demonstrating that these vehicles have evolved from temporary holding mechanisms into legitimate, primary exit alternatives for PE sponsors.
- • Continuation funds appeal to sponsors seeking to monetize top-performing assets (generating 2.5x to 3x multiples in four to five years) while maintaining operational control and capturing future value creation—allowing existing LPs to exit while new investors assume positions with optimized leverage.
- • The broader M&A environment in 2025 produced over 50,000 deals worth approximately $5 trillion, but masked weakness in the middle market, which experienced its slowest year since 2020; continuation funds are filling a liquidity gap for middle-market assets as traditional exit conditions remain uncertain.
- • Middle-market M&A momentum has carried into 2026, with selective sector improvements suggesting potential resurgence, though definitive indicators for sustained dealmaking activity remain elusive.
Summary
The secondary markets underwent a fundamental transformation in 2025, with continuation funds establishing themselves as a dominant and increasingly permanent exit mechanism rather than a temporary workaround for constrained dealmaking conditions. According to Kroll's analysis, continuation fund activity reached $95.8 billion of the $226 billion secondary market volume recorded in 2025—representing nearly 43% of all secondary transactions and underscoring a significant structural evolution in private equity exit strategies.
The broader M&A landscape in 2025 delivered headline strength with over 50,000 deals totaling approximately $5 trillion. However, this aggregate figure masked pronounced weakness in the middle market, which experienced its slowest year since 2020. The concentration of deal value in mega-transactions obscured underlying challenges for smaller and mid-sized portfolio companies seeking traditional exits. As middle-market M&A activity lifted selectively toward the end of 2025 and momentum extended into 2026, dealmakers remain cautious about forecasting sustained improvement, citing a lack of definitive indicators for middle-market M&A fortunes.
Continuation funds have emerged as a principal response to this liquidity environment. These vehicles allow PE sponsors to extend their ownership of select assets beyond traditional fund lifespans while providing existing limited partners with cash liquidity and enabling new investors to enter positions with reoptimized leverage structures. Critically, continuation funds appeal primarily to sponsors holding best-performing assets—particularly those generating multiples of 2.5x to 3x within four to five years—rather than serving as repositories for underperforming holdings. By rolling high-quality assets into continuation vehicles capitalized by new investor cohorts, sponsors retain operational control and continued upside participation while resolving LP liquidity requirements.
The elevated continuation fund activity in 2025 signals that these vehicles have transcended their historical role as temporary exit deferrals. Instead, they now function as viable, permanent alternatives to traditional secondary sales or dividend recapitalizations, reshaping how sponsors evaluate portfolio exit timing and liquidity management within constrained market conditions.
The broader M&A landscape in 2025 delivered headline strength with over 50,000 deals totaling approximately $5 trillion. However, this aggregate figure masked pronounced weakness in the middle market, which experienced its slowest year since 2020. The concentration of deal value in mega-transactions obscured underlying challenges for smaller and mid-sized portfolio companies seeking traditional exits. As middle-market M&A activity lifted selectively toward the end of 2025 and momentum extended into 2026, dealmakers remain cautious about forecasting sustained improvement, citing a lack of definitive indicators for middle-market M&A fortunes.
Continuation funds have emerged as a principal response to this liquidity environment. These vehicles allow PE sponsors to extend their ownership of select assets beyond traditional fund lifespans while providing existing limited partners with cash liquidity and enabling new investors to enter positions with reoptimized leverage structures. Critically, continuation funds appeal primarily to sponsors holding best-performing assets—particularly those generating multiples of 2.5x to 3x within four to five years—rather than serving as repositories for underperforming holdings. By rolling high-quality assets into continuation vehicles capitalized by new investor cohorts, sponsors retain operational control and continued upside participation while resolving LP liquidity requirements.
The elevated continuation fund activity in 2025 signals that these vehicles have transcended their historical role as temporary exit deferrals. Instead, they now function as viable, permanent alternatives to traditional secondary sales or dividend recapitalizations, reshaping how sponsors evaluate portfolio exit timing and liquidity management within constrained market conditions.
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