Publish Date

Jul 18, 2023

Continuation Funds: Beyond Business As Usual

Industry Insights

Over the last 12 months, we have seen an increase in fund managers asking us about the feasibility of a continuation fund as an end-of-fund strategy. At a time of challenging dealmaking and fundraising conditions, continuation funds allow sponsors to capture additional value from their best-performing assets by extending the investment horizon, while also providing liquidity options for existing investors who may need to realise some cash.

This article briefly looks at some of the key tax and non-tax issues which fund managers may need to consider as part of their appraisal and implementation of a continuation fund strategy.


In simple terms, the strategy involves the manager of the original fund establishing a new fund vehicle, to which certain assets of the original fund are sold or transferred. The investors in the continuation fund will typically be a combination of new investors and the continuing (or “rolling”) investors from the original fund, i.e., those who wish to retain exposure to the underlying assets. In addition, a cash exit is facilitated for those who do not roll (the “exiting” investors).

A typical structure is depicted below, although there may be multiple ways of achieving a similar outcome and the precise steps should be considered on a case-by-case basis.

In any case, although the continuation fund is managed by the same manager as the original fund, it will have its own distinct terms and economics which can be negotiated with investors, therefore providing both parties with an opportunity to reset arrangements around fees, carried interest and governance.


For the fund manager, the continuation fund strategy gives rise to challenges related to valuation and potential conflicts of interest, and in this context communication and transparency with investors will be paramount.

Among the unique points for fund managers to consider are the possible implications for the fund manager’s executives and the investors in each fund, as well as for the assets being transferred, depending on the structure of the continuation fund and how the asset transfer is implemented. It is vital that the issues are worked through carefully with the help of professional advisers.

The following issues are typical, although not exhaustive:


Fund managers should consider whether continuing investors could roll their investment over into the continuation fund without crystalising a tax charge and, if that is not possible, whether the reinvestment will be on a gross or net-of-tax basis. The same issue applies to the fund manager executives in respect of their co-investment and carry, assuming they will be required by the continuation fund investors to reinvest or roll this over.

In addition, if their co-investment in the original fund was financed with loans, it should be considered whether the loan repayment conditions will be triggered by the transaction or not.


The continuation fund will typically have its own distinct carried interest arrangements, with a new performance hurdle. The terms of the new arrangements should be reviewed carefully to ensure they meet the conditions to be taxed as carried interest rather than as management fee and therefore as trading income.  The appropriate price should be paid by participants in the new arrangements for their interest.

For carried interest participants who are not employees, the tax treatment of carried interest may also depend on the asset holding period, which is likely to be reset upon transfer to the continuation fund.


Are there any tax implications on the transfer of assets to the continuation fund as a result of a change of ownership or the new holding structure? Other tax-related considerations include:

  • Withholding taxes: Does the nature or jurisdiction of new investors change the withholding tax obligations of the portfolio company on distributions to the fund, or invalidate previously obtained Double Tax Treaty Passports?
  • Interest deductibility and losses: Does the change in ownership impact the deductibility of any interest expenses on shareholder debt e.g., under local hybrid mismatch rules? Or does it cause any carried forward losses or other tax assets to lapse?
  • Tax regime eligibility: Does a transfer of a portfolio company to a fund with a different investor composition affect the eligibility of the company for certain tax regimes, for example the UK qualifying Asset Holding Company (QAHC) regime, or the Substantial Shareholder Exemption for Qualifying Institutional Investors?


Where a portfolio company has an equity-based management incentive plan, what happens on the transfer to the continuation fund and is the same plan still fit for purpose post-transfer, or is some form of restructuring or reset required? Typically, the fund manager will want to work with portfolio companies to refresh the business’s strategy and ensure management’s incentivisation is aligned with this. The refreshed arrangements would then be communicated to investors as part of the fundraising process.


The activity of the fund and the intended method of exit from its investments can be important for ascertaining the VAT recovery on the fund management fee. Where these are different for the continuation fund compared to the original fund, does this require a refresh of VAT recoverability at fund manager level? Does VAT grouping need to be reviewed for new vehicles?


Depending on the tax residence of the investors there may be specific non-UK tax points to consider. For example, if there are German investors, it would need to be considered if the continuation fund would be trading or investing for German tax purposes, and accordingly whether it would need to file German tax returns. Similarly, there will be specific US tax points to consider if there are US investors in the continuation fund and/or any of the underlying assets are US based.


In current market conditions, continuation funds are an increasingly popular strategy for fund managers, with their own set of tax and non-tax issues which should be considered carefully alongside the opportunities. At A&M, we have strong experience of helping fund managers work through these issues. If this is a strategy you are considering, we would be delighted to discuss this with you in more detail and answer any questions you may have.


Alvarez & Marsal Tax, part of Alvarez & Marsal (A&M), a leading global professional services firm, is an independent tax group made up of experienced tax professionals dedicated to providing customized tax advice to clients and investors across a broad range of industries. Its professionals extend A&M’s commitment to offering clients a choice in advisors who are free from audit-based conflicts of interest, and bring an unyielding commitment to delivering responsive client service. A&M Tax has offices in major metropolitan markets throughout the U.S., Latin America, and EMEA.

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