.avif)
Compare continuation funds, NAV financing and asset sales for North American GPs seeking liquidity while balancing cost, control and LP alignment.
Private-equity and private-markets GPs have more ways to create liquidity than simply selling a portfolio company.
A mature fund holding a high-conviction asset can pursue a continuation vehicle, borrow against portfolio net asset value, sell the asset outright or combine several approaches. Each option creates liquidity differently and has very different implications for leverage, LP distributions, control, future upside and conflicts of interest.
Quick Answer: An asset sale creates the cleanest permanent liquidity but gives up future ownership. NAV financing preserves the existing portfolio while adding fund-level leverage and repayment risk. A continuation fund can provide liquidity while extending ownership, but requires a defensible valuation, strong conflict management and a fair sell-or-roll process for existing LPs.
The traditional private-equity model assumes portfolio companies are eventually sold through strategic M&A, sponsor-to-sponsor transactions or public markets.
That remains fundamental, but it is no longer the only liquidity route.
Lazard estimated that the global secondary market generated $124 billion of transaction volume during the first half of 2026, including $61 billion of GP-led transactions. Lazard described secondaries as an increasingly structural source of liquidity and portfolio management even as broader M&A activity improved.
For a GP, that creates a more complicated capital-allocation question:
Should the fund sell a good company now?
Should it borrow against the remaining portfolio and distribute the proceeds?
Or should the GP create a new vehicle that buys the asset from the existing fund, allowing some LPs to exit while others retain exposure?
The answer depends less on which structure is fashionable and more on why the fund needs liquidity in the first place.
A continuation fund, or continuation vehicle, is a new investment vehicle formed to acquire one or more assets from an existing fund managed by the same GP.
Existing LPs may typically be given an opportunity to receive cash, roll their exposure into the new vehicle or use a combination of the two, subject to the transaction documents.
New secondary investors provide capital to purchase the interests of LPs that elect liquidity and, in some transactions, provide additional money to support the portfolio company.
The GP continues managing the asset.
That last point creates the fundamental attraction and the fundamental conflict.
The GP may believe an asset has another three to five years of significant value creation ahead of it even though the original fund is approaching the point at which investors expect distributions.
A continuation vehicle can resolve that duration mismatch.
But the GP is effectively involved on both sides of the transaction: selling an asset from one managed fund while continuing to manage it in another.
ILPA describes these conflicts as inherent to continuation transactions and emphasizes commercial rationale, transparent pricing, process integrity, LP engagement and a meaningful ability for existing investors to make informed sell-or-roll decisions. ILPA's updated 2026 continuation-vehicle guidance remained in draft as of September 2026, while its existing guidance and new disclosure template remain available.
A continuation vehicle is most defensible when the reason for retaining the asset is stronger than the reason for avoiding a conventional exit.
That can occur when a portfolio company:
A continuation fund is less persuasive when its primary purpose appears to be avoiding a weak exit valuation, extending fee-paying AUM without a strong investment case or manufacturing distributions without resolving underlying portfolio problems.
Existing LPs will often want to understand why a normal sale was rejected, how the transfer price was established and whether a genuine third-party market process tested that valuation.
The transaction should therefore be evaluated as an M&A transaction plus a fund formation plus a related-party conflict process, not merely another financing.
For portfolio-company acquisition structures, Mehmi's guide to M&A financing for Canadian business acquisitions provides a useful introduction to why purchase-price financing should be separated into the appropriate layers rather than treated as one debt request.
NAV financing is debt raised against the value and cash-generating capacity of a private fund's portfolio rather than against one portfolio company alone.
Depending on the structure, the borrower may be the fund itself or a special-purpose entity.
A lender may look to distributions, asset-sale proceeds, equity interests or other fund-level rights as its repayment support. Documentation varies substantially, so "NAV loan" is a category rather than one standardized product.
ILPA notes that NAV facilities have historically been used in secondaries, private credit and real estate and have become increasingly common in private-equity strategies. Its guidance highlights costs, transparency, governance and the possibility that older LPAs do not expressly contemplate the structure.
For GPs already considering non-bank capital, Mehmi's private credit in Canada guide explains the broader distinction between privately negotiated lending, senior debt, subordinated capital and special-situations financing.
A NAV facility can potentially finance several objectives.
A GP might use proceeds to support follow-on investments, fund portfolio-company acquisitions, repay existing fund indebtedness, provide additional reserves or create distributions for LPs.
Those uses should not be viewed identically.
Borrowing against a diversified portfolio to fund a value-accretive bolt-on acquisition creates one risk profile.
Borrowing $100 million simply to distribute $100 million to investors creates another: the fund has generated liquidity without monetizing an asset, meaning the distribution has effectively been brought forward while the portfolio remains responsible for paying the debt.
ILPA recommends enhanced LP engagement around NAV borrowing and specifically recommends LPAC consent for a distribution-funded NAV facility regardless of LPA language. It also recommends standardized disclosures explaining the facility's rationale, terms and conflicts. Those are ILPA recommendations rather than statutes, but they illustrate why fund documentation and LP alignment matter alongside lender underwriting.
The central question is whether the remaining portfolio provides sufficient protection for the loan.
Credit analysis can include:
This is where a diversified $1 billion portfolio can underwrite very differently from a $1 billion fund whose value is concentrated in two companies.
The headline LTV does not capture that difference.
At the portfolio-company level, the same principle appears in collateral-based financing. Mehmi's asset-based lending guide explains how financeable value can differ materially from reported asset value once eligibility, concentration and recoverability are considered.
NAV financing creates leverage without creating an exit.
That can be powerful when the portfolio continues appreciating.
It can become problematic when NAV declines.
Suppose a fund borrows $100 million against $600 million of NAV.
Initial gross loan-to-NAV is approximately 16.7%.
If portfolio NAV later falls 25% to $450 million while the $100 million loan remains outstanding, gross loan-to-NAV rises to approximately 22.2%.
Nothing about the loan changed.
The equity cushion did.
Depending on the documents, declining NAV or asset dispositions can trigger repayment requirements, cash sweeps, borrowing-base pressure or restrictions on further distributions.
The GP therefore has to model leverage at today's valuation and at a meaningful downside valuation.
An outright portfolio-company sale is normally the most direct route to permanent liquidity.
The asset is monetized.
The fund receives sale proceeds.
Debt attached to the transaction is repaid according to the relevant documents.
Net proceeds move through the fund waterfall.
There is no new fund-level loan that must eventually be repaid and no new continuation vehicle required simply to retain the same asset.
That simplicity is economically valuable.
An asset sale often makes the most sense when:
The cost is obvious: once the company is sold, the legacy fund generally gives up the future appreciation.
This is why the correct comparison is not today's sale price versus today's NAV.
It is today's realizable net proceeds versus the risk-adjusted, after-cost value of holding the asset longer.
Tax treatment can materially alter the amount of liquidity that actually reaches investors.
An asset sale can generate different tax treatment across different classes of business assets. The IRS notes that a business sale is generally treated as the sale of individual assets, with potential capital, ordinary and Section 1231 treatment depending on the asset involved.
A continuation transaction can involve partnership transfers, rollovers and other structuring issues. It should not simply be described as "tax-free." Whether an LP can roll exposure without current tax depends on the entities, transaction mechanics and investor circumstances.
NAV borrowing can avoid an immediate portfolio-company sale, but that does not mean the structure is tax-neutral. Interest allocation, deductibility, blocker entities, partnership allocations and cross-border investors all require transaction-specific analysis.
Canada applies different rules.
The CRA notes that selling business assets can result in capital gains, recapture of capital cost allowance or terminal losses depending on the property. Certain qualifying sales of a business can also use the GST/HST election rules where the statutory requirements are satisfied.
Transfers into Canadian corporations or partnerships can sometimes use elected amounts or rollover provisions when requirements are met, but continuation transactions should not be assumed to qualify automatically.
Cross-border continuation funds can become considerably more complicated once U.S., Canadian and other LPs are inside the same structure.
Tax counsel should therefore model each liquidity alternative before the GP compares headline proceeds.
This is where continuation funds differ most sharply from ordinary debt financing.
The GP is involved in establishing the price at which an asset moves from a fund it manages to another vehicle it will also manage.
The GP may also receive new management fees, carry or other economics in the new vehicle.
That does not make the transaction improper. It makes conflict management central to execution.
The primary conflict question may concern why the debt is being incurred and who benefits.
A distribution funded with NAV debt can improve near-term DPI while shifting repayment obligations onto the remaining portfolio.
ILPA therefore focuses heavily on LP transparency and LPAC involvement.
A genuine third-party sale removes much of the same buyer-versus-seller conflict because the fund disposes of the asset to an independent buyer.
Other conflicts can still exist, including allocation among affiliated vehicles, management incentives, transaction fees or rollover participation.
U.S. managers should be careful with outdated commentary on continuation-fund regulation.
The SEC's 2023 private-fund adviser rules included a specific adviser-led secondaries rule that would have required fairness or valuation opinions in certain transactions.
However, the U.S. Court of Appeals for the Fifth Circuit vacated the private-fund adviser rules effective June 5, 2024. The SEC subsequently amended its rules to reflect that vacatur. The specific adviser-led secondaries rule is therefore not currently in effect.
That does not eliminate conflicts obligations.
Where an investment adviser is subject to Advisers Act fiduciary duties, the SEC continues to focus on material economic conflicts and appropriate disclosure. Its June 2026 examination alert again emphasized compliance programs and disclosure around economic incentives and conflicts.
Fund documents, state law, federal securities laws, investor side letters and the specific adviser structure also need to be reviewed.
Canadian requirements depend on the fund, manager, investors and applicable provincial or territorial securities laws.
For registered firms subject to National Instrument 31-103, Canada's Client Focused Reforms require material conflicts of interest to be addressed in the client's best interest, not simply disclosed. The Canadian Securities Administrators describe those reforms as requiring registrants to identify and address material conflicts and put client interests first in applicable registrant relationships.
A Canadian GP should not assume that a process designed for a U.S. fund can simply be replicated by changing the jurisdiction in the documents.
Registration status, partnership structure, investor base, offering exemptions, tax and provincial securities rules all need to be considered separately.
Assume a North American private-equity fund has $600 million of remaining NAV and wants to create at least $100 million of liquidity for investors.
This is illustrative only. The rates, fees and transaction values are assumptions, not Mehmi Financial Group financing terms or market quotations.
Assume the fund borrows USD $100 million for three years at an assumed 10.5% annual cash interest rate with a 1.5% upfront fee and bullet principal repayment.
Annual cash interest is $10.5 million.
Three years of interest total $31.5 million.
The upfront fee is $1.5 million.
If the facility remains outstanding for all three years, total cash required for interest, the fee and principal repayment equals approximately $133 million, excluding legal expenses, hedging, unused fees and other costs.
The fund creates $100 million of liquidity today but retains the entire portfolio and the future upside.
It also retains the entire downside and adds a $100 million repayment obligation.
Assume one portfolio company is valued at USD $250 million.
Existing investors elect to cash out 60% of their economic exposure and roll 40%.
In simplified terms, approximately $150 million of value would need to be funded for cashing-out interests, while approximately $100 million of exposure rolls into the new vehicle.
If new secondary investors also contribute $25 million of fresh growth capital, the transaction would require approximately $175 million of new investor capital, before fees and transaction adjustments.
The original fund receives liquidity without selling the company to an unrelated third party.
The GP retains control of the investment.
But pricing, new fund economics, carry, management fees, rollover treatment and conflicts must all withstand LP and new-investor scrutiny.
Assume the same portfolio company receives an arm's-length USD $250 million sale offer.
If illustrative transaction expenses equal 2%, the fund receives approximately $245 million before taxes, debt repayment, carry and other waterfall adjustments.
That is substantially more immediate gross liquidity than the $100 million NAV facility.
The trade-off is finality.
The fund no longer participates in the company's future appreciation.
The important point is that these are not three versions of the same transaction.
NAV financing sells no asset and adds leverage.
A continuation fund creates partial liquidity plus continued exposure.
An asset sale creates realization and removes the asset.
Yes, and this is sometimes overlooked.
Before levering the fund or selling an entire business, the GP can ask whether individual portfolio companies have financeable assets that can raise capital directly.
A manufacturing company with substantial receivables and inventory could consider ABL. For Canadian portfolio companies, Mehmi's asset-backed lending versus traditional business loans guide explains the distinction.
An equipment-heavy company may be able to raise liquidity against machinery. Mehmi's equipment refinancing during a restructuring or turnaround guide discusses how productive assets can support recapitalization liquidity.
Owned equipment can also sometimes support a sale-leaseback financing structure.
Where senior capital does not completely solve a project, mezzanine financing can illustrate how junior capital fits between senior debt and equity.
These portfolio-company tools are not substitutes for a true fund-level NAV facility or continuation vehicle. They can, however, reduce the amount of capital the GP needs to raise at fund level.
Temporary financing can be appropriate if a conventional exit or longer-term transaction is already visible but will not close in time.
The important word is visible.
A GP expecting a signed asset sale to close in four months faces a different financing problem from one saying, "We think the M&A market will improve next year."
At the operating-company level, Mehmi's commercial bridge financing guide and its separate bridge-loan guide explain why a credible takeout is central to bridge underwriting.
The same logic applies at institutional scale: temporary capital becomes dangerous when the expected exit is merely a forecast.
Start with the purpose of the liquidity.
If the fund has completed its value-creation plan and a strong third-party bid exists, a traditional sale provides the cleanest realization.
If the GP wants temporary liquidity but remains comfortable owning the existing portfolio, NAV financing can avoid selling assets, provided the portfolio can safely support the additional leverage.
If one or more assets still have a compelling multi-year investment thesis but the legacy LP base needs liquidity, a continuation vehicle can separate investors who want to exit from those willing to extend duration.
The decision should then be stress-tested against six questions:
A liquidity solution should improve the fund's position rather than merely improve one near-term metric.
No. Subscription facilities are generally supported by investor capital commitments, particularly earlier in a fund's life. NAV facilities rely principally on the value and economics of the existing investment portfolio.
It can. A GP can potentially borrow at fund level and distribute proceeds without selling a portfolio company. Economically, however, the fund has substituted debt for an asset realization, and that debt ultimately has to be serviced and repaid.
It is a liquidity event for LPs that elect to sell, but it is not a complete economic exit for the GP if the same manager continues owning and managing the asset through the new vehicle. Rolling LPs also remain exposed.
Do not rely on outdated descriptions of the SEC's 2023 adviser-led secondaries rule. That rule was vacated with the broader private-fund adviser rules in June 2024 and is not currently in effect. Other fiduciary, antifraud, contractual and conflict-management obligations can still apply.
Potentially. A NAV facility can sometimes provide interim liquidity or portfolio support while another transaction is being evaluated. The lender must be comfortable with the planned takeout and the fund documents must permit the structure.
Potentially. Fund-level borrowing, CV financing, preferred equity and acquisition facilities can coexist in sophisticated transactions. Layering them increases structural complexity, so priority, cash sweeps, leverage and repayment sources need to be modeled together.
Not necessarily. A sale may avoid new fund-level leverage, but taxes, transaction expenses and surrendered future upside still matter. Continuation funds have their own secondary-investor return requirements, transaction costs and potentially reset GP economics. Compare net proceeds and risk-adjusted future value rather than one headline fee.
For a fund-level liquidity transaction, expect to assemble the LPA and amendments, investor and LPAC materials, current portfolio valuations, fund financial statements, ownership structures, portfolio-company debt schedules, realization history, underlying company performance and a clear sources-and-uses and repayment model.
Continuation vehicles, NAV facilities and asset sales solve different problems.
Before approaching capital providers, define the required liquidity amount, whether the fund and underlying businesses are U.S. or Canadian, the relevant states or provinces, intended use of proceeds and required timing.
For a fund-level transaction, the portfolio NAV, concentration, existing fund and portfolio-company leverage, remaining fund term and expected realization path are also important.
Mehmi Financial Group operates as a financing brokerage/intermediary and does not control lender or investor underwriting or guarantee transaction availability. For institutional-scale opportunities, Mehmi can review the financing requirement and determine whether it fits its current network or requires a specialist institutional capital solution.
Call 833-863-4644 or contact Mehmi Financial Group.
.svg){kind=small}