Continuation vehicles (“CVs”) have emerged as an innovative tool for private equity firms, offering a means to extend the life of their investments beyond the traditional fund horizon. This article explores the concept of continuation vehicles, reasons for their increased popularity, and an outlook of their future use. Additionally, we examine how sale leasebacks can be integrated into CV arrangements in order to optimize portfolio management for sponsors and drive value creation for the fund’s stakeholders. If you're interested specifically in the European market, check out Mathew Wainwright's blog post where he dives deeper into the continuation fund strategy as it relates to the European private equity landscape.
Continuation vehicles, also known as secondary funds or continuation funds, are vehicles created by private equity firms to hold investments beyond the original fund's lifespan. As many funds have a lifespan of seven to ten years, these vehicles allow firms to maintain ownership of promising assets, providing additional time to enhance value and optimize exit opportunities. Additionally, the structure prevents a sponsor from having to become a forced seller if timing is such that the end of their fund life coincides with a down market or a challenged liquidity environment.
A continuation fund, according to State Street Global Advisors, “allows the GPs to retain and re-invest in quality assets with growth potential, while providing a choice to LPs to cash out (“sell”), take an equivalent ownership interest in the newly created fund (“roll”), or to do a bit of both (“sell and roll”). CVs are a tool to offer flexible liquidity solutions to stakeholders, inject capital in known and high-quality assets, allow sponsors to reset the carry, allow new LP’s to get immediate and concentrated exposure to assets with a shorter duration and tapered J-curve. ”
For private equity firms, continuation funds allow sponsors to maintain ownership and management of performing assets that may not be ready for an optimized exit. The sponsor can bring in new capital and can also have existing investors “roll” into the new fund. Typically, these structures are viewed favorably by the existing investors as they are already familiar with the management team and the business, and they are excited for the next stage of growth for the company. Thus, this is why many investors will choose to roll their interests into the new fund. For existing investors who do not want to roll their interests forward and instead seek a liquidity solution, they can choose to cash out at that time.
CVs have demonstrated success in various market conditions. They have enabled private equity firms to take advantage of longer investment horizons, navigate market fluctuations, and realize enhanced returns by holding investments through favorable market cycles.
Continuation funds didn’t always have the best reputation, however. These vehicles used to have a negative connotation as they were associated with struggling assets whose sponsors needed to lengthen the hold period in order to have more time to turn the company around. However, in recent years, continuation vehicles have increased in popularity for high-quality assets and today are a mainstream solution that often carry a positive reputation.
According to PitchBook, as of December 2023, there were 71 exits into continuation vehicles, totaling $6.1 billion. This year, PitchBook expects more than 100 of these types of exits.
Sale leasebacks can be a valuable component of structuring a continuation vehicle, specifically as an additional tool to generate liquidity for existing investors, especially for asset-intensive portfolio companies. The Ascension Advisory team recently executed a portfolio sale leaseback in which the proceeds from the transaction helped to provide the capital needed to close a sponsor’s continuation vehicle. You can read about that case study here.
The outlook for CVs in the private equity landscape remains positive. As market dynamics evolve, these creative structures are expected to play a crucial role in helping sponsors maximize value for their investors.
Continuation vehicles represent a strategic tool for private equity firms to optimize their portfolios, successfully navigate market volatility, and generate maximum value for their investors. By integrating strategies such as sale leaseback financing, these vehicles can further enhance liquidity solutions. To dive deeper into the private equity secondaries market, check out this month’s article, “The Rise of Continuation Funds in Private Equity Secondary Markets”.