The continuation vehicle's second life

The continuation vehicle was built to let LPs out; it has become how small LPs get in, and the outsourced chief investment officer arranging their access may be getting in first. The original economics ran the other way: a sponsor moved one or more assets from an aging fund into a fresh vehicle, offered existing limited partners cash or rollover, and found a secondaries buyer—usually a dedicated fund pricing seasoned private assets at a discount to their next mark—to stand behind the cash, while the seller was an LP solving a liquidity problem. That inversion is the GP-led market's next structural shift: after single-asset deals became the supply, small institutions became the buyer.

The shift began on the supply side. Large diversified LP portfolios proved hard to price in a market where every buyer had the same marks and the same models, so sponsors pushed single-asset continuation vehicles instead: one asset, one buyer, one mark. That move compressed the market's inventory because a single-asset CV is smaller by definition, and the new wave of small-LP buying rides on top of that compression, which is why even the unglamorous deals now clear.

The same structure is now clearing at the other end of the investor size curve, where small LPs that never appeared in the original fund are buying into the continuation vehicle to own a concentrated private asset without committing to a blind pool or a decade-long fund. That makes the vehicle an entrance, not an exit, and the change goes beyond new demand at the margin: a dedicated secondaries purchaser underwriting a CV is pricing a trade, while a small LP buying into one is building a private markets allocation, and the two are likely to pay very different prices for the same piece of paper.

The appeal is duration. A continuation vehicle holds a known asset with an existing cash-flow history, often for a shorter hold than a new blind-pool commitment, and for a small institution without the staff to diligence a ten-year fund that certainty is worth a premium. The structure designed to solve a seller's illiquidity has become the product for a buyer's liquidity.

The OCIO sits between those small LPs and the deal. Under an outsourced chief investment officer, client capital is often allocated through a discretionary vehicle or a comingled arrangement, and the OCIO can put its own commitment ahead of client mandates when capacity in a deal is scarce. In a market where single-asset CVs for a fitness-equipment maker and a shipping franchise are clearing while large LP portfolios wait, that seat is the scarce resource: the OCIO controls the queue, and its seat as the new allocation chokepoint sits ahead of its clients' capital. Governance is the thing being sold, the fee secondary.

The OCIO is the transaction's first counterparty, ahead of any intermediary role. That matters because secondaries pricing has always depended on who else is in the room, and when the first counterparty has discretion over multiple client pools, the price discovery a true third-party buyer would provide is muted before it begins. The small LP does not see the deal the way the OCIO saw it, because the OCIO saw it before the small LP knew it existed.

The StepStone fertility CV is the clearest case of what that governance is buying. A benchmark-free fertility continuation vehicle shows the GP-led market now prices services assets off the sponsor's mark rather than the tape. Once the pricing reference is the GP's own mark rather than an external comparable, the buyer is no longer underwriting the asset class or the sector; the buyer is underwriting the sponsor's ability to hold the mark. That is how credit investors think, and it is why the structure now attracts capital that wants exposure without asking too many questions about the last dollar of valuation.

Credit investors do not rely on a daily tape; they rely on the borrower's covenant and the sponsor's mark. Once a secondaries buyer accepts that a fertility-services asset has no liquid benchmark, it is making a covenant-like bet on the GP. That is not necessarily wrong, but it changes the risk: the secondaries fund no longer diversifies a marking error; it concentrates one. The buyer whose return depends on the GP's next mark is, in effect, long the GP's judgment rather than short the market's.

Below that sits the lower-middle-market clearing. Two single-asset continuation vehicles have found buyers even as larger LP portfolios wait: a fitness-equipment maker and a shipping franchise. Neither is the kind of asset that would obviously support a standalone listed exit in the current market, but both have cash flows a secondaries buyer can model, which is precisely the point. When the high-profile portfolios stall on price, the unglamorous assets clear because their marks are less contested and the capital needs somewhere to go. The market now has a barbell shape: the fertility CV prices off a sponsor's mark, and the franchise CV prices off actual cash flow, but both are clearing while the middle remains stuck.

Traditional secondaries funds still hold the bulk of dry powder, and their presence used to be enough to absorb any GP-led deal. The money is still there; the queue is what changed. A dedicated secondaries fund can wait for a discount, while a small LP building an allocation cannot. When the two meet in the same vehicle, the waiting buyer sets the floor and the impatient buyer sets the clearing price, and the OCIO's client is, usually, the impatient one.

The result is a secondaries market that no longer has a single buyer type. The exit-seeking secondaries fund, the access-seeking small LP, and the OCIO sitting between them are bidding for the same single-asset CVs, which is why capital outgrows deal flow: every new source of demand adds to the queue but not to the inventory. The GP, already holding the mark, is the only party in the room with a full view of both prices, so the sponsor's pricing power follows directly from adding access buyers to a market built for exit sellers.

The continuation vehicle has outgrown its name—once a liquidity event, now an allocation tool—and the next disclosure to watch is whether the OCIO's seat, the one ahead of its clients' capital, shows up in the client bill as a line item, and which small LP asks why.