A rolling investor with €5 million of value in a four-year continuation vehicle pays roughly €400,000 more under blind-pool economics than under terms appropriate to a continuation fund. On a 1.8 times gross return, a 2 per cent fee with 20 per cent carry leaves a net multiple of 1.56 times. A 1.25 per cent fee with tiered carry leaves 1.64 times. Eight points of net multiple, same asset, same vehicle, same performance.
The two sets of economics
Take a rolling investor with €5 million of value at the transaction price, in a vehicle with a four-year expected life. Assume the asset returns 1.8 times gross over that life. The asset is the same in both cases; only the terms differ.
Scenario one is blind-pool economics carried across unchanged: a management fee of 2 per cent on invested capital, and carried interest of 20 per cent over an 8 per cent preferred return with full catch-up. Those are the terms of a fund that sources new investments, builds a portfolio and deploys over an investment period.
Scenario two is what a continuation vehicle should charge for managing an asset it already runs, to a defined plan: a management fee of 1.25 per cent on invested capital, stepping to 1.0 per cent after year three, and carried interest tiered at 12.5 per cent to a 1.5 times multiple, rising to 20 per cent above 2.0 times, over the same preferred return.
A €5 million rolling position in a four-year vehicle, at a 1.8 times gross return. Net figures approximate.
Item
Scenario one
Scenario two
Value at the transaction price
€5 million
€5 million
Management fee over four years
€400,000
€237,500
Gross value at 1.8 times
€9 million
€9 million
Net to the investor
€7.8 million
€8.2 million
Net multiple
1.56 times
1.64 times
The difference is roughly €400,000 on a €5 million position, or eight points of net multiple. Nothing about the company changed to produce it. The fee saving is the smaller half; the tiered carried interest does the rest, because a flat 20 per cent applies from the first euro of gain above the preferred return while a tiered rate does not.
Why rolling investors end up on the worse side
Incoming buyers negotiate the partnership agreement of the continuation vehicle. Rolling investors do not. They inherit the result, and in many transactions they inherit a different version of it: incoming buyers may receive a lower fee, a different carried interest arrangement, priority in distributions, or governance rights that rolling investors are never offered.
The advisory committee of the new vehicle is frequently composed of the largest incoming buyers, so the constituency most exposed to the standard terms is often the one with no seat at the table where they are set.
Suppose the incoming buyers negotiated scenario two for themselves, and rolling investors receive scenario one. Same asset, same vehicle, same performance — and an eight-point difference in outcome determined entirely by who was in the room.
The fee already paid on the same asset
There is a second calculation, and it is the one that gets skipped. Carried interest in the continuation vehicle is charged on value created above the new entry price. An investor who has held the company for six years through the original fund has already paid management fees on it, and has already paid carried interest on its appreciation up to the transaction price. Rolling means paying again on the next tranche of growth.
That is not necessarily wrong. The sponsor is doing new work, over a new period, with new capital at risk. But it should be quantified rather than assumed away. Over the two vehicles combined, the total fee and carry load on a single asset held for ten years can approach a quarter of the gross gain.
The framing that makes this tractable is to stop treating the election as “sell or stay”. The asset is leaving the original fund regardless. The genuine choice is to take cash at this price, or to make a new investment in this asset, at this price, on these terms, for this duration. Posed that way, the fee load becomes an input to a fresh underwriting rather than an inconvenience attached to continuity.
What to do before the window closes
The remedy is a single provision: rolling investors receive terms no less favourable than any incoming investor. It is simple to draft, it costs the sponsor almost nothing, and it is worth more to rolling investors than most of what they will spend their diligence time on. Its absence is the clearest signal that the transaction was structured for the buyers rather than for the fund's existing investors.
Three things follow.
Ask, in writing, whether rolling investors receive identical economics to the incoming buyers, and if not, what differs. Evasion on that question is itself the answer.
Calculate the total fees and carried interest payable under the sponsor's base case, in cash, and express it as a percentage of the equity value at entry. Most investors have never done this calculation and are surprised by the answer.
Check the fee basis before the rate. A fee on invested capital is appropriate; a fee on committed capital, in a vehicle with modest unfunded capacity, overstates the base; a fee on net asset value rewards a manager for carrying its own asset generously.
A sponsor that confirms matched economics in writing, states its reinvested carried interest in cash, and sets the default for non-responders to sell has settled the three questions that decide most of the value at stake. The eight points accrue to every rolling investor without any change to the asset's performance — but only where somebody asked before the election window closed.
The workbooks behind this article
Every figure above is a live formula in the free companion files for
The Continuation Fund Handbook. Each workbook ends with a Checks sheet
setting the printed figure beside the computed one. No account and no email address.
At what wealth does a family office pay?A five-person office costs the same $2,442,000 at $100m as at $2bn. Against a tiered multi-family schedule the two curves cross exactly once.
Does an undrawn revolver count as liquidity?67.4567 per cent of the headroom, and it leaves at a fall in annual revenue of 8.4127 per cent — not the 13.3333 per cent the board deck implies.
Does supply chain finance count as debt?66,049,315 released, and leverage of 2.7622× or 3.1362× depending on which balance the test is asked of — the second is a breach at today's EBITDA.
Does the fulcrum move with enterprise value?A worked capital structure at three enterprise values. The break migrates from the first lien to the subordinated notes without a single document changing.
How many companies does a reserve pool defend?Holding pro rata to the Series D costs $14.76m per company. A $40m reserve defends 2.71 of forty — and 61 per cent of the cost is the last round.
How much room a 1.15x downside actually leaves79 basis points of margin. The leverage covenant fails first, five basis points before the coverage covenant the chapter reports on, and 4.6 per cent of EBITDA is the whole cushion.
How the GP catch-up is actually solvedMost write-ups state the catch-up formula then hardcode the answer. Set it as a solve and it moves on its own when the carry rate does.
How do you set a minimum cash balance?Three components, 124,596,281 in total — and the double count that turns a margin of 27,403,719 into an apparent shortfall of -3,988,281.
Is a 2/10 net 60 discount worth taking?An annualised 14.8980 per cent against a revolver at 4.50 per cent — worth 5,471,890 a year, and 0.3132 turns of reported leverage.
Should corporate debt be fixed or floating?78.1818 per cent of gross debt fixed, and a net floating exposure after cash of -608,000.00 — the proportion, not the instrument.
Six ways to state the same fund's return7.12 per cent, 18.04 per cent, or 1.323 times the public market — one fund, one set of flows. The eleven-point gap is the valuation, and it is not cash.
The IRR at which a closed-ended fund merely tiesA drawdown fund advertising 13.25 per cent ties an evergreen netting 8.64. On committed rather than called capital, 78.7 per cent of the edge vanishes.
The month a remediation trigger has to be armed byMonth 8, on a one-year window and a 14-week hiring lead time. The date is 12W − L/4.33 and holds for any portfolio size — the book only changes the euros.
Two routes to the same NAVFive findings in one quarter-end close, and not one of them was a modelling error. Every one was a control that did not exist.
What a CBAM certificate buffer costs to holdCarry and protection are both linear in the buffer, so the break-even probability is identical at 5 per cent and at 30 — and 2027 costs exactly twice 2026.
What a clawback actually collateralises24 million recovers 13.20 net of tax and 7.20 is escrowed. The rule is e ≥ 1 − t, and every euro won on the tax clause lands uncollateralised.
What a co-investment programme actually saves37 basis points, and a 22.8 per cent total-loss rate erases it. At the usual per-deal cap a single failure is 37 per cent of the annual cohort.
What a diligence exercise actually recoversEighteen basis points is only the part that reaches the yield. Three of the four instruments never do, and the exercise is worth thirty-one.
What a follow-on reserve is actually worth0.019 turns under plain dilution, 0.285 under pay-to-play. The optimum is a property of the shareholders’ agreement, not of the portfolio.
What a lease mark-to-market is actually worth5,788,000 becomes 807,365 once the over-market stream, the expiry dates and the cost of re-letting are priced — and nothing at all below a 43.7 per cent renewal rate.
What a minimum payment actually does£81.53 leaves the account and £20.46 reaches the debt. On minimums alone the set clears in 258 months and repays 1.78 times what was borrowed.
What a month of delay costs in an enforcement463,000 euros of present value a month. No single error about enforcement, and no pair of errors, moves the indifference point from 58.7 cents to the 72 on the table.
What a pro rata cheque actually costsDefending costs 1.25 times the initial cheque across two rounds, not more in each — and below a 521 exit the follow-on dollars come back worth less than they cost.
What a subscription line does to the IRR20 per cent becomes 38.41 on the same asset while the multiple falls. Two dollars of interest buys 18.4 points, and the longer the line runs the cheaper each point gets.
What one point of fees actually costsOne point on the annual charge turns 738,846 into 567,961 over forty years — 23 per cent of the pot, and 2.43 of wealth lost per 1 of fee.
When the promote stops clearingCarried interest is not proportional to performance near the hurdle. It is a step function, and $2m of headroom is what stands between a promote and none.
Why a secondaries bid-ask gap has no zoneThe seller’s floor and the buyer’s ceiling are one formula at two rates. At equal required returns the zone is exactly zero — here it is 11.02 points apart.
Why refining a due diligence rubric makes it weakerThree of twelve managers carry a terminal flaw and the average approves all three. Splitting eight domains into sixteen makes it easier to hide, not harder.