2022 Highlights: Continuation Funds

“From a sponsor perspective, you don’t want to sell a crown jewel asset to a third party if you believe there’s room for significant additional growth and you’re best placed to realize it over an extended hold period,” says Boyagi. “At the same time, LPs are subject to their own internal drivers, and so offering them an option to lock in gains at an attractive price can carry a lot of value. At its best, a continuation fund deal is an ‘everybody wins’ kind of transaction.”

In most cases, LPs elect to sell instead of taking part of the continuation fund, adds Boyagi. “Sell rates at the moment are high, which I think is a reflection of macro conditions and the desire for liquidity among LPs,” says Boyagi.

Changing market conditions could slow deal flow in the short term, says

QHP’s Edwards, since in a downturn, it takes time for prices to fall in the private markets. “You may have a period where fewer deals are being done because investors and sponsors may not be willing to take a reduced price for an asset, especially when you have market conditions that could turn right around,” he says. That means sponsors with single-asset continuation vehicles might be more likely to wait to lock in the desired return for investors, if they can.

There’s a difference of opinion at present between secondary buyers and GPs on valuation, Boyagi explains: “There’s been a bit of a staring contest in the last six to eight months between the buy-side and the sell-side on these deals. I think it’s a temporary phenomenon—the underlying rationale for these transactions isn’t going anywhere, whether you’re a GP, a secondary buyer or an existing LP.”

In the first half of 2022, before macro conditions worsened, there was movement back toward multiasset deals, he says, largely because of secondary fund LPs’ desire for diversification. Single-asset deals are still getting done, just not with 2021’s frequency.

In any case, Boyagi points out that GPs overall remain incentivized to do deals, LPs want the transactions to be offered to them for accelerated liquidity, and secondary buyers are dedicating pools of capital to it: “We think it is just going to continue to grow.” //