Continuation Vehicle Finance: Key Issues for Lenders in UK and Europe

Key Points About Financing a Continuation Vehicle

What is a Continuation Vehicle

A CV is a form of GP-led secondaries transaction in which a sponsor transfers one or more portfolio assets from an existing fund into a newly formed vehicle managed by the same general partner (GP). Existing limited partners (LPs and each, an LP) elect to roll their interest into the CV or cash out at a process-determined price (typically supported by a fairness opinion and Limited Partner Advisory Committee (LPAC) approval), whilst new secondary investors acquire exposure alongside rolling LPs. Through the CV, the GP maintains management of the underlying assets, whilst resetting its carry terms and securing additional time to maximise returns. In credit fund CVs, the transferred assets are typically discrete loan or credit portfolios rather than operating companies.

Why CVs Present a Different Lending Profile

• Conflicts of interest: as the GP sits on both sides of the transaction (as buyer and seller), it creates reputational and litigation risk if process integrity is later challenged. Lenders should diligence LPAC approval, fairness opinions and Institutional Limited Partners Association (ILPA)-aligned process.
• Concentration risk: CVs typically hold a single asset or small pool, shifting the credit from diversified portfolio risk to concentrated, asset-backed exposure.
• Bespoke documentation: CV constitutional documents are transaction-specific, not the sponsor’s standard-form limited partnership agreement and therefore, this requires fresh legal review of default, transfer, and excuse provisions.
• Timing pressure: financing must often bridge to or close simultaneously with the secondary transaction, compressing diligence and documentation timelines.
• Mixed investor base: a combination of rolling legacy LPs and new secondary buyers changes the investor pool and as such, lenders must conduct new know your customer/anti-money laundering checks and diligence commitment quality.

Capital Call Issues Specific to CVs

• Borrowing base recalibration: smaller, concentrated commitment pools and a different investor mix (rolling LPs vs. new secondary investors) require adjusted advance rates and eligibility criteria rather than reuse of primary fund templates.
• Limited partnership agreement and side letter diligence: CV-specific terms on investor defaults, excuse/exclusion rights and transfer restrictions must be reviewed afresh and as such, fund-family precedents will not apply.
• Rolling LP commitments: lenders must diligence whether rolling LPs have formally reaffirmed commitments and consented to the new structure, and assess new secondary investors’ creditworthiness independently.
• Rollover commitment scope: rolling LPs may have limited or no obligation to fund further capital calls, with commitment amounts often reduced by the value of equity rolled over, so lenders should review rollover documentation, transfer agreements, and LPAC approvals to confirm that the capital call security package has enforceable value.
• Closing coordination: funding timelines are tightly linked to the secondary transaction’s closing mechanics, requiring lenders and counsel to coordinate conditions precedent with an M&A-style closing process.

NAV Facility Issues Specific to CVs

• Concentrated credit risk: unlike a diversified fund NAV facility, lenders take asset-level credit risk on a single or small asset pool. Valuation methodology, loan to value (LTV) covenants and reporting must be more rigorous and asset-specific.
• Valuation conflict: the GP that sold the asset into the CV also marks its NAV. Lenders should require independent valuation input, robust reporting covenants, and baseline valuations informed by the fairness opinion obtained on the secondary transaction.
• Structural subordination: NAV lenders should analyse the waterfall and existing leverage at the underlying portfolio company level (including acquisition debt) to understand true attachment point and recovery.
• Double-leverage risk: where a CV has both a capital call line (against unfunded commitments) and a NAV facility (against asset value), careful intercreditor analysis, cross-default provisions and priority of payments arrangements are required.
• Typical security package: a capital call facility is usually secured on the right to call capital from LPs and the accounts into which capital call proceeds are paid, whilst a NAV facility is typically secured by a share charge over the top holding entity, security over bank accounts and an assignment of distribution proceeds. A number of CV facilities are hybrid, combining both forms of security with LTV covenants and NAV decline triggers.

Practical Takeaways for Lenders

• Engage fund finance counsel early as CV transactions move quickly and require bespoke structuring.
• Build enhanced diligence checklists addressing conflicts/process integrity, concentration risk, and valuation methodology.
• Review LPAC approval minutes and fairness opinion outputs as part of credit underwriting.
• Develop CV-specific borrowing base and covenant structures rather than reusing primary fund facility templates.
• Where both capital call and NAV financing are contemplated at CV level, design intercreditor and cross-default arrangements from the outset.
• Expect greater convergence between capital call, NAV, and hybrid facility structures as CVs become more common in the market.
• Broaden diligence scope to cover valuation methodology, transfer restrictions, and governance alongside standard LP credit analysis.

UK and European Considerations

• Alternative Investment Fund Managers Directive (AIFMD) and UK alternative investment fund manager (AIFM) regime: the CV will typically constitute an alternative investment fund (AIF), engaging leverage reporting obligations and regulatory requirements on the CV manager’s authorisation and substance.
• AIFMD II leverage caps (not applicable to UK AIFs): EU Member States were required to transpose AIFMD II into domestic law by 16 April 2026. For EU AIFMs managing EU loan-originating AIFs, AIFMD II introduces leverage limits of 175% of NAV for open-ended AIFs and 300% of NAV for closed-ended AIFs, calculated using the commitment method. Borrowing fully covered by contractual LP commitments generally falls outside these caps, whereas a NAV facility with recourse to the fund will usually count towards them, so facility sizing and AIFM reporting covenants should be checked against the applicable limit.
• Vehicle jurisdiction: CVs marketed into the UK and Europe are commonly domiciled in Luxembourg, Jersey, Guernsey, or the Cayman Islands. Governing law, security taking and enforceability analysis for both capital call and NAV facilities must be tailored to the chosen vehicle jurisdiction.
• Additional jurisdictions: CVs marketed into the UK and the EU are frequently established in Ireland, as an ICAV or QIAIF, alongside the Luxembourg, Jersey, Guernsey, and Cayman Islands structures noted above. Irish vehicles similarly offer tax transparency, established regulatory frameworks, and a creditor-friendly enforcement regime that should be factored into security and enforceability analysis.
• Regulatory scrutiny of conflicts: conflicts of interest in GP-led secondaries face increased regulatory and investor scrutiny. Institutional LP expectation (informed by ILPA principles) of robust, independent process should be factored into lender diligence, particularly given the reputational exposure should a transaction be challenged post-closing.