Continuation funds are increasingly becoming an important instrument in the private equity market. They enable general partners (GPs) to retain and develop successful portfolio companies beyond the usual life of a private equity fund without having to sell them prematurely to third parties under pressure. The background to the growing importance is the persistently difficult conditions for company sales. Many investments remain in the funds’ portfolios for much longer than originally planned. According to the Ypsilon Group, private equity companies are therefore increasingly reacting with so-called continuation vehicles in order to provide investors with liquidity and at the same time to exploit further value appreciation potential of their investments.
Tobias Hangl, Partner and Munich Branch Manager at the Ypsilon Group, comments: “Private equity funds are generally designed for a limited term. Investors (limited partners, LPs) expect their capital to be repaid at the end of this term. While companies used to be sold after three to four years, holding periods are now often six years or more. On the other hand, there are investors who want to invest in existing funds or investments. These are not weak portfolio companies or residual companies, but companies with further development potential that are simply not to be sold below value at the moment. A continuation fund is often a good solution for both sides. In our client structure, around one in three private equity firms now has a continuation vehicle or is considering introducing one. This shows how strongly this instrument has established itself in recent years.”
Institutional investors as an important target group
According to Ypsilon, traditional institutional investors such as insurance companies, pension funds and pension funds in particular are showing great interest in such structures. For many of these investors, investments in continuation vehicles are easier to map from a regulatory point of view than traditional primary fund investments.
Hangl comments: “Many new investors in continuation funds today are institutional investors. They gain access to portfolios that have already been built up and at the same time can benefit from the further development opportunities of the investments.”
Thematically focused funds are increasingly being created, for example with a focus on technology companies or artificial intelligence. This makes it easier for institutional investors to allocate targeted to specific market segments.
Continuation funds become an integral part of the market
Although continuation vehicles have been around for several years, they have long been considered primarily a niche solution. According to Hangl, this is changing: “Continuation funds are not a short-term trend. They are increasingly becoming an integral part of the private equity ecosystem. Current market conditions have accelerated this process, but the benefits of the structure will remain in the future.”
