Key Takeaways

  • Secondaries offer portfolio flexibility, but Erik Hirsch notes that trading stakes between balance sheets does not create genuine cash liquidity at the underlying asset level.
  • Sponsor demand to form continuation vehicles far outpaces buyer capital, creating an imbalance with far more assets seeking extension than secondary investors willing to finance them.
  • Regulatory mandates from agencies like the SEC cannot substitute for experienced LP buyers and advisory boards evaluating transaction terms.
  • Evaluating whether a fund restructuring is legitimate requires testing it against Hirsch's Criteria for a Healthy GP-Led Continuation Transaction.

The Hirsch's Criteria for a Healthy GP-Led Continuation Transaction

Continuation vehicles have shifted from an emergency fix into a regular balance-sheet tool. Yet as distributions slow across private equity, general partners increasingly turn to secondary structures to hold assets past standard ten-year fund lives. Hirsch points out that moving an asset into a new entity does not generate real realization. As Hirsch put it, “the secondary industry in and of itself doesn't create ultimate liquidity at the asset level. It simply allows pieces to be moved from one investor to another.”

Because available secondary capital covers only a fraction of GP demand, capital providers can afford to be strict. Sponsors cannot expect to clear transactions without meeting distinct governance tests:

  • Asset and GP Quality: Good asset owned by a good GP who sees an ability to extract additional value over time, wants to continue to work that.
  • LP Liquidity and Rollover Optionality: Provides an opportunity to the existing LPs to either get out and have liquidity and/or roll some portion or all into the new transaction.
  • Sponsor Economic Alignment: Where the GP also economically aligns themself in that deal.
  • Transparent and Defensible Valuation: And then you have a transparent pricing mechanism, and you have an environment where the LPs who are selling can be assured that the price is reasonable and fair.

When This Works (and When It Doesn't)

This framework applies when a general partner seeks to move an existing portfolio company into a continuation vehicle to hold it longer while providing an optional exit path to legacy fund investors. It functions best for high-performing, cash-generative companies where the sponsor has exhausted fund life or capital reserves but maintains a clear operational thesis for the next ownership phase.

The framework collapses when sponsors try to run continuation processes on mixed assets or underperforming businesses. If a GP bundles troubled assets alongside a single performing company to manufacture an exit, buyers walk. Similarly, if the GP refuses to roll over accrued carry into the new vehicle, it signals a desire to de-risk personal capital while asking incoming secondary investors to bear downside exposure.

Why It Matters

The secondary market has run into a hard structural ceiling. Hirsch notes that “if you look at capital available to finance and interested capital to finance relative to the amount of opportunity that wants to be financed, there's a pretty big imbalance. So a lot of want and a lot less desire.”

This capital deficit reveals that secondary buyers, not regulators, now dictate private market liquidity terms. Sponsors holding aging assets cannot rely on continuation vehicles as an automatic liquidity valve to appease restless LPs. Only top-tier companies with clean pricing and heavy GP reinvestment clear the market. Everything else stays trapped on legacy balance sheets, compounding the problem of sluggish distributions across private equity.