The rise of continuation funds and secondary transactions in Latin America

Nicolás Santana
PPU, Santiago
nicolas.santana@ppulegal.com

Introduction: the global context and Latin American relevance

The global secondary market for private equity (PE) interests has undergone a dramatic transformation over the past decade. Transaction volumes have surpassed USD 150bn in recent years, with general partner (GP)-led secondaries representing approximately 50 per cent of all secondary market activity, a remarkable shift from their 30 per cent share that they held as recently as 2018. This growth reflects a fundamental evolution in PE liquidity management: GPs increasingly view continuation vehicles not as emergency measures, but as strategic portfolio management tools that allow them to extend their stewardship of high-performing assets, while providing optionality to their investor base.

For Latin America, this global trend carries particular significance. The first generation of institutional PE/venture capital (VC) funds, established in the region between 2010 and 2015, is now reaching the end of its contractual life, generating considerable pressure on GPs to deliver liquidity solutions beyond traditional exit routes, such as initial public offerings (IPOs) or strategic sales, both of which have faced significant headwinds since 2022, due to a contraction in traditional exit corridors, volatile public markets and a limited universe of strategic acquirers. This dynamic has forced managers to turn to secondaries to recycle capital, while a generation of high-growth companies in the region are staying private longer, creating a ‘late-stage financing gap’ that secondary transactions are uniquely positioned to fill. According to Latin American Venture Capital Association (LAVCA) data, the total PE and VC fundraising in Latin America exceeded USD 8bn in recent vintages, with private credit investment peaking at USD 8.5bn in 2022 and maintaining robust activity through 2025, creating a substantial and diversified pool of assets that will require liquidity pathways in the coming years. Although Latin America still accounts for only approximately four per cent of global GP-led transaction value, the region’s trajectory suggests that a period of rapid acceleration is on the cards.

Chile represents a particularly compelling case study in this context. As one of the most sophisticated private capital ecosystems in Latin America, anchored by the seven private pension fund administrators (AFPs) managing approximately USD 190–200bn in assets, Chile offers both a developed regulatory infrastructure under Law No 20,712 (Ley Única de Fondos or LUF) and a growing universe of maturing fund vehicles. The AFPs have increasingly utilised the secondary market as a sophisticated tool for portfolio rebalancing, liquidity management and capital recycling. This is a trend that was accelerated by the three rounds of pension withdrawals that occurred during the Covid-19 pandemic, which reduced savings by around 20 per cent of gross domestic product (GDP). This article provides mergers and acquisitions (M&A) counsel with a structured guide to the legal, regulatory and practical dimensions of continuation funds and secondary transactions in the Latin American context, with a particular focus on Chilean law.

Conceptual framework: defining the key structures

Continuation funds

A continuation fund (or continuation vehicle) is an investment vehicle created by a GP to acquire one or more assets from an existing fund (the ‘legacy fund’), thereby allowing the GP to retain management of a high-performing asset, while simultaneously offering liquidity to limited partners (LPs) who wish to exit. The fundamental mechanics involve the legacy fund selling the relevant asset(s) to the continuation vehicle; existing LPs then elect between (a) receiving a cash consideration (cash out) or (b) rolling their interest into the new vehicle (rollover). This structure must be carefully distinguished from a simple fund term extension, which merely postpones the wind-down without creating a new vehicle or offering cash liquidity to LPs.

GP-led secondaries vs LP-led secondaries

The fundamental distinction lies in the initiating party. In GP-led transactions, the GP initiates and structures the secondary event, whether through a continuation fund, a strip sale or a GP-organised tender offer. In LP-led secondaries, conversely, it is the LP who seeks liquidity by selling its fund interest on the secondary market, typically to a dedicated secondary fund buyer. LP-led transactions are primarily used for portfolio rebalancing, meeting regulatory requirements or generating immediate liquidity, a function of particular relevance for Latin American institutional investors, such as Chilean AFPs, which have used LP-led secondary sales to address overallocation issues arising from the ‘denominator effect’, where public market valuations drop faster than private market valuations, causing investors to become inadvertently overallocated to private equity. GP-led secondaries have grown from representing approximately 30 per cent of the market in 2018 to roughly 50 per cent currently, reflecting GPs’ increasing comfort with, and investor acceptance of, these structures.

Single-asset vs multi-asset continuation vehicles

Continuation vehicles may be structured to acquire either a single portfolio asset (single-asset vehicles) or multiple assets (multi-asset or ‘portfolio strip’ vehicles). Single-asset continuation funds have experienced more rapid growth, primarily because they allow the GP and incoming investors to align their investment thesis around one specific asset, typically the fund’s ‘trophy’ asset, with focused diligence and tailored economics. In Latin American emerging markets, secondary assets often trade at a ten per cent to 30 per cent discount to the net asset value (NAV) due to valuation opacity and lower liquidity. However, trophy assets in single-asset vehicles can often clear at par or even a premium, reflecting the quality and growth potential of the underlying business. Multi-asset vehicles, while providing portfolio diversification, introduce complexity in regard to the valuation and investor alignment.

NAV financing

NAV financing refers to credit facilities extended to the fund itself (rather than to portfolio companies), secured against the NAV of the fund’s portfolio. Its intersection with continuation funds has grown significantly: NAV lending may be deployed to partially finance the liquidity offered to cashing-out LPs or as a leverage tool within the continuation vehicle to enhance returns. In Latin America, while NAV lending remains nascent compared to developed markets, these facilities are becoming increasingly relevant tools for fund managers to support follow-on investments or meet LP distribution needs without forcing asset sales. The credit secondaries market, closely related to NAV lending, nearly doubled between 2023 and 2024 as investors sought liquidity for existing loan portfolios, with transactions often priced near par, reflecting the defensive nature and stable cash flows of the underlying assets. Practitioners should be aware of the structural subordination risks that NAV facilities may create for LPs, particularly where the facility is drawn at a level senior to LP distributions.

Practical analysis for M&A counsel

Conflicts of interest between the GP and existing/incoming LPs

The structural conflict inherent in continuation fund transactions requires careful attention by M&A counsel. The GP simultaneously occupies the role of seller (acting on behalf of the legacy fund in disposing of the asset) and buyer (as manager of the continuation vehicle acquiring it). This dual role creates incentives for the GP to set a transfer price that maximises the carried interest in the legacy fund, while also structuring favourable economics in the new vehicle. Market standards for mitigating these conflicts include: (1) competitive processes involving multiple bidders for the lead secondary investor position; (2) limited partner advisory committee (LPAC) approval with full disclosure of the GP’s conflicts; (3) independent fairness opinions on the transfer price; and (4) the right of each LP to elect between cash out and rollover without economic penalisation for either choice.

Fairness opinions and asset valuation processes

Fairness opinions issued by independent financial advisers serve as the primary protective mechanism for LPs in GP-led transactions. The valuation challenges are significant: assets are typically illiquid with no observable market price, GP projections may be optimistic given the GP’s interest in continuation and applicable discounts or premiums are inherently subjective. M&A counsel should insist on the engagement of independent valuators with relevant sectoral expertise and should scrutinise the assumptions underlying any fairness determination.

Illustrative example: consider a GP proposing a continuation fund for a 200 MW renewable energy portfolio in Chile, the legacy fund’s highest-performing asset. The GP’s internal valuation reflects a 12x earnings before interest, taxes, depreciation and amortisation (EBITDA) multiple based on contracted phased payment arrangement (PPA) revenues, while comparable infrastructure transactions in the region have ranged between 10x and 14x. An independent valuation company is retained by the LPAC, which determines a fair range of between 11x and 13x, and the transaction proceeds at 11.5x - a result that provides comfort to both cashing-out and rolling-over LPs, while demonstrating process integrity.

Negotiation of continuation terms

Key negotiation points in the continuation vehicle documentation include: (1) management fee structures, typically reduced relative to the original fund or structured with fee offsets; (2) carried interest terms, including whether the carry resets or continues from the legacy fund, and applicable waterfall mechanics; (3) details on the governance of the new vehicle, including advisory committee composition, information rights and key person provisions; and (4) vehicle duration and extension options.

Role of the LPAC and consent mechanisms

The LPAC plays a critical role in transaction approval. Contractual frameworks vary considerably: some require LPAC consent, others require a majority-in-interest vote of all LPs and others employ an ‘elect or default’ mechanism where LP inaction results in either automatic rollover or automatic cash out. Best practices include transparent processes with comprehensive information disclosure, reasonable decision-making timelines and independent counsel for the LPAC.

Due diligence considerations

Due diligence in secondary transactions differs materially from primary acquisitions. Key considerations include: (1) information asymmetry favouring the GP regarding portfolio company performance; (2) GP track record and key person analysis; (3) review of the legacy fund limited partnership agreement (LPA) for transfer restrictions and change-of-control provisions; (4) analysis of portfolio company commercial relationships that may be affected by the vehicle change; and (4) regulatory due diligence in both the fund jurisdiction and portfolio company jurisdictions.

Latin American and Chilean focus

Regulatory framework: Chile’s LUF and Financial Market Commission (Comisión para el Mercado Financiero or CMF) regulations

Chile’s regulatory framework for investment funds is governed by the LUF, published on 7 January 2014, and its implementing regulations. Several aspects are critical for continuation fund structuring: (1) the distinction between public funds (fondos públicos) subject to CMF supervision and private funds (fondos privados), defined under Article 84 of the LUF as funds with fewer than 50 non-family investors (partícipes que no sean integrantes de una misma familia), with the latter enjoying significant regulatory flexibility under Article 85, as they are governed primarily by their internal regulations and the specific provisions set out in Chapter V of the LUF; (2) CMF rules on the investment regime, related-party transactions and valuation/disclosure, notably under regulation (Norma de Carácter General or NCG) 376 and complementary regulations, together with NCG 390 on eligible assets and pricing sources for subscriptions/redemptions; (3) the possibility of creating continuation vehicles as private investment funds subject to bespoke internal regulations (reglamento interno), whose minimum content is regulated by Article 45 of the LUF and whose modifications must follow the procedures set forth in Article 51; (4) transfer restrictions and mechanisms for the assignment of fund units (cuotas) in private funds, governed by the terms of the reglamento interno and the general rules on assignment established in the LUF’s regulations; and (5) the role of AFPs as limited partners subject to additional investment regime regulation under Decree Law (Decreto Ley or DL) 3,500, Article 45 (letters h) and n)), and Central Bank of Chile (Banco Central de Chile)/the pensions regulator (Superintendencia de Pensiones) rules, including the phased alternative assets ceilings established in Chapter III.F.4 of the Central Bank’s Compendium of Financial Regulations.

Typical investment vehicle structures

The most common structures in Chile and the region include: (1) Chilean private investment funds as the primary investment vehicle; (2) combinations of a local feeder fund with an offshore master fund (typically domiciled in the Cayman Islands or Delaware); and (3) intermediate SPVs channelling investments into portfolio companies. These multi-jurisdictional structures complicate continuation fund implementation, particularly regarding cross-border asset transfers, tax treatment (exit taxes, withholding) and the need to coordinate consent at multiple structural levels.

Regulatory barriers and market opportunities

The principal barriers include: (1) the absence of a specific regulatory framework for GP‑led secondaries in most Latin American jurisdictions; (2) restrictions on the transfer of units in Chilean private funds that, depending on each fund’s reglamento interno and the need to preserve the ‘private’ status under Article 84 of the LUF (ie, maintaining fewer than 50 non-family partícipes) and complying with the minimum aportantes and ownership requirements of Articles 91 and 92, may impede the cash out mechanism; (3) regulatory or tax approvals required for the underlying asset transfers; and (4) limitations on AFP participation in continuation vehicles under the pension funds’ alternative assets regime. Regarding the latter, under DL 3,500, Article 45, letter n), which authorises AFP investment in instruments representative of PE, private debt, infrastructure and real estate assets, and as updated by subsequent Central Bank regulations, AFPs may invest in ‘alternative assets’ subject to the maximum ceilings set in Chapter III.F.4 of the Central Bank’s Compendium of Financial Regulations (Circular N° 3013-984, Acuerdo N° 2772-01-260226). Those ceilings are being phased upwards between 2024 and August 2027 as follows: for fund type A, from 13 per cent (until July 2024), to 15 per cent (August 2024–July 2025), to 17 per cent (August 2025–July 2026), to 18 per cent (August 2026–July 2027), reaching the statutory maximum of 20 per cent from August 2027; with proportionally lower caps for funds B–E (reaching 16 per cent, 12 per cent, seven per cent and six per cent, respectively, by August 2027). These ceilings remain a binding constraint for certain vehicles, notwithstanding the expanded investable universe. Additionally, it should be noted that Law No 21,735 (the ‘Reforma de Pensiones’), published on 26 March 2025, introduces generational funds (Fondos Generacionales) that will replace the current Multifondos system beginning 1 April 2027, potentially reshaping the institutional demand landscape for secondary transactions as the new fund structure adjusts portfolio compositions based on age cohorts and investment horizons.

The opportunities, however, are substantial: (1) increasing the sophistication of Chilean capital markets, supported by the CMF moving to modernise valuation governance and disclosure for public funds and aggressive growth funds (AGFs) and, under a proposal out for public consultation in late 2025, requiring the use of the CFA Institute’s Global Investment Performance Standards (GIPS) when disclosing historical returns or comparisons, thereby enhancing transparency for international secondary capital; (2) growing interest from international secondary funds in Latin American assets, with companies such as Lexington Partners, StepStone and HarbourVest establishing regional coverage; (3) the flexibility of private funds’ reglamentos internos to design bespoke mechanisms adapted to continuation transactions, including, under Article 67 of the LUF, the possibility of effecting fund mergers, divisions or transformations (fusión, división o transformación) subject to the requirements and procedures established by the CMF, which may facilitate structural reorganisations ancillary to continuation fund transactions; and (4) the Central Bank’s phased expansion of AFP alternative asset ceilings under Chapter III.F.4, towards 20 per cent for fund A by August 2027, which supports incremental institutional demand for secondary solutions, particularly given that the investment regime, established by the Superintendencia de Pensiones pursuant to Article 45 of DL 3,500 with the prior opinion of the Banco Central de Chile, may authorise indirect investment through fund-of-funds structures that channel capital into continuation vehicles.

For the transferability of private fund units, Article 84 of the LUF provides that a fund with fewer than 50 investors who are not members of the same family (integrantes de una misma familia) is classified as a private fund (fondo privado), which is not subject to CMF supervision and cannot make a public offer of its units. Under Article 85, private funds are governed exclusively by the provisions of their reglamento interno and by Chapter V of the LUF and are not subject to the rules applicable to public funds (with the exception of Articles 57 and 80). Article 93 further prohibits any public offering of private fund units and any public promotion of the fund’s administration services or investment returns. In practice, transfers are permitted to the extent and on the conditions set in the reglamento interno (often including manager consent and qualified‑transferee requirements), so as to preserve its ‘private’ status and comply with the concentration limits of Articles 91 and 92. There is no statutory lock‑up beyond these legal and contractual constraints.

Local market trends

The current market environment is propitious for secondary activity: vintage 2012–2016 funds are reaching maturity; GPs face increasing pressure to generate returns and return capital; and established secondary buyers (Lexington, Ardian, HarbourVest) are demonstrating growing appetite for quality Latin American assets, while local platforms, such as Patria Investments and Spectra Investments, have launched dedicated secondary strategies. The infrastructure and renewable energy sectors are particularly suited to continuation fund structures, given the long asset lives, contracted cash flows and value creation opportunities that align with extended holding periods. In the private credit space, companies like Vinci Partners and Patria Investments have scaled up their local credit offerings, with Chilean fixed-income strategies seeing strong inflows, further deepening the pool of assets amenable to secondary liquidity solutions.

A pivotal evolution in 2024–2025 has been the strategic shift by Chilean AFPs from passive fund-of-funds structures towards direct secondary and co‑investment acquisitions. In a landmark transaction, AFP Habitat agreed to acquire a 49 per cent stake in Parque Arauco’s outlets platform (Todo Arauco SpA) in 2024, executed directly on behalf of its pension funds, as disclosed in Parque Arauco’s CMF filings. This trend reflects a broader rationale: direct acquisitions allow AFPs to target specific, de-risked mature assets, while potentially reducing the fees associated with traditional primary fund structures. Chilean companies such as Genesis Ventures and HMC Capital are promoting secondaries as part of a broader ‘exit superhighway’ concept, where secondary buyouts by PE companies provide liquidity to early-stage venture capitalists, allowing startups to scale further while remaining private, creating a continuous liquidity chain across the private capital lifecycle.

Secondary transactions are particularly attractive for Chilean institutional investors because they exhibit an ‘inverted J-curve’ pattern. Unlike primary funds that experience negative returns in the early years due to management fees and capital calls during the deployment phase, secondary funds bypass this period by acquiring mature assets midway through their lifecycle. The inverted J-curve benefit is driven by three factors: (1) immediate positive returns through NAV discounts, if a fund interest valued at USD 100 is purchased at a ten per cent discount, the investment is immediately recorded at fair value, resulting in an instantaneous uplift; (2) accelerated distributions to paid-in capital, as the underlying assets are already being prepared for exit, with secondary portfolios typically self-liquidating in approximately six years compared to ten years for primary funds; and (3) de-risked exposure that eliminates ‘blind-pool risk’, allowing investors to assess known companies with established track records before committing capital. For AFPs, this return profile has become an interesting tool for portfolio rebalancing following the pandemic-era withdrawals, and local specialists, such as HMC Capital, have pioneered advisory services to help institutional clients leverage these inverted return trajectories to stabilise their alternative investment programmes.

Key transactional aspects: documentation and negotiation points

LPA amendments

Amendments to the LPA (or reglamento interno in the Chilean context) typically required include: (1) modifications to duration and extension clauses; (2) adjustments to distribution provisions to accommodate cash out mechanics; (3) amendments to conflict-of-interest provisions; and (4) required approval thresholds (unanimity vs supermajority versus simple majority). Under the LUF, amendments to the reglamento interno of Chilean funds require specific quorums depending on the subject matter, a factor that must be carefully analysed at the transaction’s inception. Article 51 of the LUF provides that all modifications must be communicated to fund investors and incorporated into a consolidated text (texto refundido) deposited with the CMF, with the timing of notice and entry into force governed by CMF regulations. For funds with Asambleas de Aportantes, certain material modifications, such as changes to investment policy, fee structure or duration, may require assembly approval, adding a further layer of procedural complexity to continuation fund transactions.

Side letters

Side letters play a significant role in continuation fund structuring: (1) most favoured nation (MFN) provisions that may complicate differentiated offers among LPs; (2) pre-existing co-investment rights that must be respected in the new vehicle; (3) individually negotiated fee discounts or waivers; and (4) enhanced information rights for rolling-over LPs.

Transfer restrictions and preferential rights

Transfer restrictions in the legacy fund LPA, including rights of first refusal (ROFR), rights of first offer (ROFO), competitor transfer restrictions and tag-along/drag-along mechanisms, may significantly complicate GP-led secondary mechanics. This complexity is amplified where multiple LPs hold bilaterally negotiated preferential rights under separate side letters. In the Chilean context, transfer restrictions on fund units contained in the reglamento interno. Practitioners should note that under Article 33 of the LUF, all fund units within a series must have equal value and characteristics, and their assignment is governed by the formalities and procedures established in the LUF’s regulations. Additionally, Article 93 prohibits the public offering of private fund units, meaning that any transfer mechanism must be structured as a private placement to preserve the fund’s regulatory status. The prohibition on AFP investment in instruments issued or guaranteed by related parties (Article 47 bis of DL 3,500) may further constrain the transfer options where the acquiring vehicle is managed by a GP related to the AFP’s existing fund manager.

Conclusions and practical recommendations

The Latin American secondary market is poised for significant growth as the first generation of institutional PE/VC funds reaches maturity. The convergence of maturing fund vehicles, evolving regulatory frameworks, including Chile’s upcoming transition from Multifondos to Fondos Generacionales under Law No 21,735 beginning in April 2027 and the phased expansion of alternative asset ceilings under Chapter III.F.4, increasing institutional sophistication exemplified by the AFPs’ strategic shift towards direct secondary acquisitions and growing international appetite for regional assets suggests that continuation funds and GP-led secondaries will become standard tools in the Latin American private capital toolkit. M&A counsel who develop expertise in these structures, combining familiarity with global market standards, a deep understanding of local regulatory frameworks under instruments such as Chile’s LUF, DL 3,500 and their implementing regulations and practical knowledge of the interplay between onshore and offshore vehicles, will play an essential role in facilitating this market’s development. The practitioners who will add greatest value are those who can navigate the tension between Anglo Saxon market conventions and civil law structures, ensuring that the protective mechanisms that have become standard in mature secondary markets are effectively adapted to the Latin American legal and institutional context.