To be or not to be (invested longer), that is the question!
What do the private equity firms: BC Partners, AUDAX Group, Phoenix Equity Partners, Ampersand Capital Partners & Nordic Capital have in common?
All of them have decided that the perfect exit option to their portfolio company is themselves. At first sight, this must leave some people curious. How can the perfect exit option be the PE firms themselves that invested in the company?
Actually, this is the theory of continuation funds, a phenomenon of secondary private equity deals that became very popular recently. Clifford Chance states that continuation funds are: ”new fund vehicles set up to acquire one or more assets from the original fund and are continued to be managed typically by the same GP/manager.”
The phenomenon to sell an asset to oneself is not completely new, but since wider acceptance emits, it gives private equity firms space to act, maintain their investment while giving LPs the chance of exiting.
There are two ways that may lead to such a decision: either an asset is strong which may not be exited yet or a temporary weaker performing asset with solid fundamentals.
For some, this might be a very useful tool. However, it should be taken with a grain of salt. Not only the structuring and process of such a method are complex, but it also blurs the boundaries of private equity and leads private equity firms to turn towards risk.
Practitioners say that this tool will be used more often in the future by GPs. According to PitchBook, in 2020 overall $96.6 billion were raised for new secondary funds. The facts that the sum of capital being raised increases and a lot of dry powder is out there underline the thesis of the rising importance of continuation as it allows to profit from the secondary market.
Continuation should be considered as an opportunity but sometimes you have to bite the bullet…
This newsletter is fully independently produced by the members of the Nova Venture Capital and Private Equity Club. This club is run by students of the Nova School of Business and Economics.
You can access directly the sources we used:
Ahern, Andrew M. , Anderson, Gavin , Ashton, Katherine & Borut, Ezra. (2020). Navigating the Nuances of Continuation Funds. Available at: https://www.debevoise.com/insights/publications/2020/12/navigating-the-nuances-of-continuation-funds
Clifford Chance. (2020). “Decoding” The Secondaries Market Part IV: Continuation Funds. Available at: https://www.cliffordchance.com/content/dam/cliffordchance/briefings/2020/09/decoding-the-secondary-market-part-IV-continuation-funds.pdf
Jeffrey M Bronheim; Daniel H Mathias; James R Mossetto (2021). A Guide to Continuation Fund. Available at: https://www.cohengresser.com/app/uploads/2021/04/A-Guide-to-Continuation-Funds.pdf
McCarthy, S & Saigol, L (2021). Continuation funds: the new way of doing PE Deals. Available at: https://www.penews.com/articles/continuation-funds-the-new-way-of-doing-deals-20211122
Woodman, A (2021). Continuation funds: How GPs are holding on for longer. Available at: https://pitchbook.com/news/articles/continuation-funds-secondaries-gp-buyouts
