Private equity (PE) firms in Kenya often face a familiar challenge: how to exit investments when traditional routes are limited. With IPO markets largely inactive, corporate buyers cautious, and economic conditions uncertain, many fund managers struggle to return capital to their investors within the typical fund lifecycle. In such situations, continuation funds are an increasingly relevant tool that Kenyan PE firms should consider.
A continuation fund is a structure that allows a PE firm to transfer one or more portfolio companies from an older fund to a newly created fund, which is also managed by the same firm. This offers a new route for liquidity and can extend the ownership period of promising assets. Original investors in the older fund are given the choice to either cash out or roll over their investment into the new vehicle.
For Kenyan PE firms, continuation funds can provide several advantages. First, they create a clear path to liquidity when external buyers are scarce or offering lower-than-expected valuations. Rather than selling a quality asset at a discount due to a constrained market, a firm can hold onto it for longer, giving it time to grow and potentially achieve a better exit outcome in the future.
Second, continuation funds allow for better alignment of timelines. Many fund managers find themselves holding attractive businesses that have not yet reached their full potential by the time the fund is nearing its end. Instead of rushing a sale to meet the fund’s timeline, a continuation structure provides more time to maximise value, especially important in sectors like healthcare, education, and manufacturing, where scaling is often gradual.
Third, these funds offer flexibility to investors. Some may want to exit and realise their gains, while others may believe in the long-term potential of the asset and prefer to stay invested. Continuation funds accommodate both preferences, giving limited partners (LPs) more choice and fund managers a chance to maintain relationships with those looking to remain involved.
However, using continuation funds requires careful planning. The assets being transferred must be independently valued to avoid conflicts of interest. The process should be transparent, with clear communication to investors about the rationale for the transaction, the terms offered, and the structure of the new fund. New capital typically needs to be raised, either from existing LPs or new institutional investors willing to back the continuation vehicle.
While some investors may be sceptical, viewing continuation funds as a way for PE firms to avoid genuine exits, proper governance and third-party validation can address most concerns. When structured responsibly, continuation funds can be a strategic extension of the investment lifecycle rather than a shortcut.
In Kenya’s evolving private equity environment, where exits remain one of the most difficult parts of the deal cycle, continuation funds deserve serious consideration. They offer a way to manage timing mismatches, unlock liquidity, and preserve long-term value tools that can help local firms navigate uncertain markets while continuing to deliver for their investors.
