Liquidity Under Pressure: Redemption Challenges, Continuation Vehicles, and GP-LP Disputes in Private Equity Funds
Introduction
Private equity (PE) funds have long been synonymous with high-stakes, high-reward investments, deploying trillions of dollars into private companies to foster growth, enhance operational efficiencies, and secure profitable exits. As of October 2025, the sector manages over US$8 trillion in assets globally, fuelled by institutional and increasingly retail investor demand. However, the core illiquidity of private equity, in which limited partners (LPs) commit capital for extended periods without easy exits, has emerged as a critical pain point and area of potential contention during times of economic volatility, such as we are seeing today. Redemption issues, where LPs seek to withdraw funds, have intensified due to sluggish exits, geopolitical uncertainties, and a buildup of unrealised investments.
This is where continuation vehicles, specialised funds that allow general partners (GPs) to extend the life of high-performing assets by transferring them from maturing funds to newly established funds, enter the picture. These vehicles offer LPs liquidity options while enabling GPs to capture further potential upside. While these vehicles have increased in both popularity and use, representing a potential US$3.8 trillion opportunity for GPs, they have the potential to also amplify conflicts, particularly shareholder disputes between GPs and LPs over fairness, valuations, and alignment of interests. [1] This article examines these redemption challenges, the mechanics and issues surrounding continuation vehicles, the resulting GP-LP disputes, and strategic approaches GPs can undertake to mitigate these risks. Drawing on 2025 market trends, it underscores the need for transparency and innovation in a sector navigating post-pandemic recovery, geopolitical tension, and increasing regulatory scrutiny.
Redemption Issues in Private Equity Funds: A Growing Liquidity Crunch
The illiquid nature of PE is a key design element as it allows GPs to invest in long-term opportunities without the pressures of daily market fluctuations. LPs typically lock in capital for 5-10 years, with redemptions being contractually limited (or in some cases non-existent), as exits depend on M&A, IPOs, or recapitalisations. However, in 2025, this model faced heightened pressure from a convergence of factors. Global M&A activity in PE saw a modest rebound in Q1 2025, with buyout volumes and values rising year-over-year, yet overall dealmaking remains constrained by high interest rates, shifting policies, and trade tensions. McKinsey's 2025 Global Private Markets Report notes that midmarket funds (US$1-5 billion) have bucked fundraising declines, but the industry grapples with a massive unrealised investment backlog exceeding US$3 trillion, delaying distributions and heightening unfunded commitments. [2]
The increased accessibility of PE, extending access to retail investors through semi-liquid or evergreen structures, while pooling capital from multiple investors in a more open-ended structure, has intensified these issues, potentially creating "systemic risk" as mismatched liquidity expectations could trigger redemption surges during downturns. For instance, evergreen funds, which typically offer periodic redemptions, have attracted significant capital, but depending on the structure, may limit redemption amounts, likely to prevent fire sales amid economic instability.
Private credit, a growing PE subset now valued at US$2.5 trillion, adds another layer of complexity. [3] Its mass appeal has drawn retail inflows, but large redemption requests in crises could pose fundamental risks, as managers struggle to liquidate without negatively impacting value. Regulatory developments could additionally compound the challenge. The United States Security and Exchange Commission’s August 2025 order against an adviser for misleading liquidity disclosures signals heightened enforcement. [4]
Continuation Vehicles: A Solution with Embedded Challenges
Continuation vehicles, also known as continuation funds or GP-led secondaries, have emerged as a critical tool to address redemption pressures. These vehicles are established by GPs to acquire one or more assets from an existing fund nearing the end of its term, effectively "rolling over" high-potential holdings to extend value creation. By transferring assets, GPs provide LPs with liquidity options by selling their stakes for cash or rolling into the new vehicle, all while retaining management fees and carried interest on extended investments.
In 2025, continuation vehicles have seen significant growth, with forecasts indicating the market could quadruple, driven by the growing backlog and slowing exits, as well as LP demands for liquidity. Dakota's June 2025 report tracked 145 such vehicles, highlighting their centrality in secondaries. Benefits include faster liquidity and the ability to reset terms, shielding assets from market downturns [5]. For GPs, they offer a lifeline amid sluggish exits, allowing continued ownership of valued assets.
Yet, challenges abound. These structures could worsen information disconnects, as GPs control valuations and deal terms, potentially leading to conflicts of interest. LPs must decide whether to roll-over, sell, or re-commit, often under time pressure and potentially with limited and incomplete information, raising substantial concerns.
Additionally, in cross-border contexts, co-investment in continuation vehicles adds layers of complexity for GPs and LPs. The added complexity stems from the need to align diverse stakeholder interests across jurisdictions, where a single misstep can lead to regulatory violations, operational governance challenges or diminished returns. While promising, these vehicles have the potential to transform redemption solutions into dispute catalysts if not managed carefully.
Shareholder Disputes: Tensions Between GPs and LPs Fuelled by Redemption and Continuation Dynamics
Redemption issues and continuation vehicles could converge resulting in shareholder disputes and negative impacts to GP-LP relationships. At the heart is a fiduciary disparity as GPs manage assets and decisions, while LPs bear liquidity risks with minimal control. In 2025, these conflicts have escalated, with LPs prioritising co-investments, clawbacks, and succession plans, while GPs focus on financial and operational improvement, fundraising and returns.
Valuation disputes are becoming more prevalent, where LPs accuse GPs of undervaluing assets to facilitate continuation transfers at favourable prices, prompting allegations of self-dealing. In continuation funds, GPs must navigate dual responsibilities, notably maximising value for exiting LPs while attracting new investors, which often require Limited Partner Advisory Committee (LPAC) waivers for conflict of interest. Private Equity Law Report's series details rising LP interest but highlights pitfalls like unfair terms. Clawback negotiations have intensified amid delayed distributions, with LPs seeking protections against overpaid carried interest [6].
Broader frictions include preferential treatment in redemptions, leading to regulatory scrutiny. For example, in real estate PE, minority LPs clash with majority strategies amid liquidity squeezes. Schroders Capital’s Q&A on continuation funds highlights potential conflicts and misalignments. LP behaviour in 2025 shows increasing leverage, with smaller GPs conceding on governance to secure commitments. Litigation, though rare, can arise from perceived breaches, as in cases of misleading liquidity promises. These disputes risk fundraising delays, reputational harm, and broader market instability if unresolved.
Effective Strategies for GPs: Mitigating and Managing Redemption-Related Disputes
GPs can proactively mitigate disputes through a combination of governance, communication, and structural innovations, transforming potential conflicts into strengthened partnerships.
First, enhance transparency and governance. Regular, detailed reporting on valuations, cash flows, and exit plans, strategies and timelines addresses disconnects and helps build trust. Establishing independent LP advisory committees (LPACs) for oversight in continuation vehicles ensures impartial conflict resolution, often requiring waivers but fostering fairness. Robust limited partnership agreements (LPAs) with clear redemption clauses, arbitration mechanisms, and clawback protections can assist in preventing disputes.
Second, continuation vehicles, when combined with independent valuations and LP options to roll over investments or exit, offer balanced liquidity solutions that maintain portfolio continuity while addressing stakeholder needs. It is, however, imperative that such valuations are truly independent and effectively communicated with LPs.
Third, prioritise open communication and alignment. Conduct thorough LP due diligence to match expectations and address potential friction points proactively. Early settlements in disputes minimise costs and mitigate value destruction and can enhance mutual trust.
Finally, GPs must prioritise regulatory compliance and quickly adapt to evolving market conditions to safeguard operations and investor trust. Specifically, adherence to the Alternative Investment Fund Managers Directive (AIFMD) rules on risk management, such as establishing independent risk functions, conducting stress tests, and setting exposure limits, not only mitigates potential vulnerabilities in deal seeding and portfolio execution, but also ensures robust oversight in complex, multi-jurisdictional structures like continuation vehicles.
Conclusion
In 2025, redemption issues and continuation vehicles underscore PE's progress, offering liquidity amid economic uncertainties, geopolitical stress, and regulatory changes, while at the same time having the potential to cause GP-LP disputes over fairness and transparency. As the sector opens up, proactive mitigation by GPs, such as robust governance, independent valuations, enhanced financial transparency, and dialogue, is essential to sustain growth and trust. Ultimately, addressing these tensions will define the industry's trajectory in an increasingly volatile world.
[1] https://www.harbourvest.com/insights-news/insights/research-validates-growing-adoption-of-continuation-transactions/
[2] McKinsey & Company Global Private Markets Report: Braced for Shifting Weather (May 2025).
[3] Moody's Private Credit 2025 (January 2025)
[4] SEC.gov SEC Charges Empower Advisory Group, LLC
[5] https://www.dakota.com/resources/blog/june-2025-continuation-vehicle-report-top-pe-secondary-funds
[6] https://www.pelawreport.com/21130241/gp-clawbacks-and-related-risk-mitigation-tactics-lps-pursue-to-prevent-overpayment-of-carried-interest-partone-oftwo.thtml