We document new empirical facts and develop a theory of private equity continuation vehicles (CVs), in which general partners (GPs) transfer portfolio companies from an existing fund to a new vehicle they continue to manage. CVs can improve efficiency by extending the holding period of high-potential firms, but they also allow GPs to extract rents by exploiting their informational advantage and intermediary position between legacy and new limited partners (LPs). CV formation may involve two informational frictions: adverse selection, where new LPs overpay for low-quality assets, and inverse selection, where they underpay for high-quality assets. These frictions intensify when fewer legacy LPs roll over their stakes.

The GP’s coinvestment and carry, and whether the legacy fund is in or out of the money, determine whether CVs arise and how they perform. The model links LP liquidity needs, GP coinvestment, and contract design to CV performance and distribution of value across investors.