continuation funds

Extracted Attributes

• Market Segment

  Private Equity Secondary Market

• Benefit for GPs

  Extended control over assets, additional management fees, opportunity for additional carry, avoids sponsor-to-sponsor deals

• Primary Purpose

  Allows private equity fund managers (GPs) to retain high-performing assets beyond the original fund's life

• Secondary Purpose

  Provides liquidity to existing investors in the original fund

• Benefit for New LPs

  Opportunity to invest in more 'mature' assets for a shorter period, full visibility of assets, ability to develop GP relationship

• Type of Transaction

  GP-led Secondary

• Key Challenges/Risks

  Conflicts of interest, one-sided valuations, unfair expense allocations, power dynamics between players, limited disclosure and regulation

• Traditional PE Fund Term

  Typically 10 years

• Transaction Volume (2022)

  108 billion USD

• Projected Transaction Volume (2024)

  150 billion USD

Timeline

• GP-led secondaries, which include continuation funds, began to grow significantly. (Source: Wikipedia)

  2012

• GP-led secondaries comprised over one-third of the total secondary market. (Source: Wikipedia)

  2017

• GP-led secondaries grew to comprise upwards of 50% of the secondary market. (Source: Wikipedia)

  2020s

• The private equity secondary market reached a transaction volume of $108 billion. (Source: Wikipedia)

  2022

• Annual secondary market volume is estimated to reach roughly $150 billion. (Source: Wikipedia)

  2024-12-31

Private-equity secondary market

In finance, the Private Equity Secondary Market (also often called Private Equity Secondaries or Secondaries) refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds or the underlying private equity assets (e.g., credit secondaries). Unlike public markets, private-equity interests lack an established trading exchange, making transfers more complex and labor-intensive. Sellers of private-equity investments sell not only their holdings in a fund but also their remaining unfunded commitments. The private-equity asset class is inherently illiquid and is designed for long-term investment by institutional investors, such as pension funds, sovereign wealth funds, insurance companies, endowments, and family offices for wealthy individuals. The secondary market provides these investors with an avenue for liquidity, enabling them to manage their portfolios dynamically. The secondary market reached a transaction volume of $108 billion in 2022. Buyers seek to purchase secondary interests in private equity assets for multiple reasons, including shorter investment durations, potential discounts on valuations, and greater visibility into the assets held by the fund. Private equity secondary funds are typically marketed as delivering attractive annualized returns (IRR), with limited j-curve issues, shorter duration and enhanced diversification across multiple metrics relative to other forms of private equity funds. Conversely, sellers engage in secondary transactions to create early liquidity in an otherwise illiquid asset class, which may be attractive to reduce over-allocation to private equity, balance private equity exposure by strategy or vintage, meet regulatory requirements or to achieve other strategic objectives. As private equity has matured, two main segments of the secondary market have emerged: LP Interest Secondaries – In these transactions, buyers acquire limited partnership (LP) interests in private-equity funds. The buyer assumes all rights and obligations of the seller, including future capital calls and distributions. Because of the flexibility of cash flows from private equity fund portfolios, these transactions can utilize highly customized structures. GP-Led Secondaries – In these transactions, a private-equity fund's general partner (GP) leads a process to provide liquidity to existing investors by selling assets from an existing fund into a new vehicle. In the case of continuation funds, this can be used to allow a manager to retain high performing assets it might otherwise feel required to realize as part of its portfolio management responsibilities. Alternatively, fund recapitalizations can afford early liquidity to investors in more mature funds. GP-led secondaries have grown significantly since 2012, comprising over one-third of the secondaries market as of 2017, and upwards of 50% in the 2020s. The private-equity secondary market has evolved into a dynamic and essential component of private equity, offering liquidity solutions to investors. As GP-led transactions grow and institutional participation expands, the secondary market is expected to continue increasing in volume and complexity. For the year ended December 31, 2024, market participants estimate annual secondary market volume of roughly $150 billion.

Web Search Results

• The Rise of Continuation Funds in Private Equity

  Continuation funds are a type of secondary market private equity (PE) fund created and managed by a PE firm. These continuation funds buy assets from existing funds that are managed by the same PE firm. So rather than a PE fund selling an asset it is invested in to a third party, as is usually the case, the fund sells an asset it currently holds to this new continuation fund that the PE firm also manages. [...] Historically, continuation funds have been seen as a solution to the constraints of the traditional private equity model by enabling PE fund managers to keep hold of assets beyond the typical 10-year fund term. Continuation funds remain a way for current investors to potentially reap more rewards from an asset for longer or see it reach its full potential . [...] This is because, as well as providing liquidity to limited partner investors, continuation funds offer an alternative to the practice of PE firms selling to rival PE firms – sponsor-to-sponsor deals – which, according to Bain, account for nearly 30 percent of all buyout-backed exit activity. Instead of these deals, continuation funds could provide PE firms a second bite of the cherry, rather than having to sell their best assets to a rival and hand over the benefit of future returns.

• Private equity's new frontier: The promises and challenges of ...

  Required field Submit Close this modal Share Share this article on Linkedin Share this article on X Share this article by email Copy link A continuation fund is a secondary vehicle established by private equity managers to transfer one or more assets from an existing fund nearing the end of its lifecycle in a bid to extend ownership beyond the original fund’s term. [...] 1. Extended Life of a Trophy Asset: For GPs, continuation funds provide an opportunity to extend the life of high-quality assets when market conditions or asset valuations may not support an attractive exit. This flexibility allows GPs to continue managing and optimising the asset, with the opportunity of realising greater value in the long term. [...] Similarly to traditional private equity funds, continuation fund financing serves a variety of strategic purposes, supporting both the operational needs of the fund, and the growth of the portfolio. This includes financing acquisitions for the initial asset(s) transaction, providing additional liquidity to meet fund distributions or to cover a capital gap, and support portfolio growth initiatives where additional capital can be used for further investments such as follow-on investments in the

• The Rise of Private Equity Continuation Funds

  The study of continuation funds is an important setting for examining the power dynamics in the private equity industry, particularly the differences in sophistication and bargaining power between various players. It also sheds light on the institutional and agency problems many investors face, their limited power to mitigate sponsors’ conflicts, and the limits of reputational markets in an industry lacking extensive disclosure and regulation, or any effective underlying threat of litigation. [...] The private equity business model has reinvented itself over the years, with continuation funds now serving as its latest development. These funds offer a creative solution to circumvent the constraints of the traditional private equity model by enabling fund sponsors to retain assets beyond the customary 10-year fund term. In the past, funds’ investments were expected to be liquidated once the fund term lapsed. With a continuation fund, instead of liquidating an asset that has not yet realized [...] We make three key contributions to the existing literature. First, we provide a systematic analysis of the web of conflicts continuation funds generate. We show that continuation funds guarantee substantial benefits for sponsors, including additional management fees, an option to receive an additional carry in the future (or to earn carry on previously non-qualifying investments), an opportunity to control the fund’s assets for a longer period, and in the case of early-stage continuation funds,

• [PDF] The Rise of Private Equity Continuation Funds

  Continuation funds offer a creative solution to circumvent the constraints of the traditional private equity model by enabling fund sponsors to retain assets beyond the customary 10 -year fund term . In the past, funds’ investments were expected to be liquidated once the fund term lapsed. With a continuation fund, instead of liquidating an asset that has not yet realized its full potential and selling it to third parties , the same [...] Draft November 2023 23 Extended control . Continuation funds also enable the private equity sponsors to control the fund’s assets for extended period of time, while deviating from the traditional 10 -year timeframe and delaying a real market check on GPs’ valuations .122 Carry c rystallization in early -stage continuation fund transactions . When a continuation fund is established early in the life cycle of the legacy fund , it enables the GP to crystallize [...] Draft November 2023 17 For incoming LPs , continuation funds offer an opportunity to invest in more “mature” assets for a shorter period than the portfolio company’s lifec ycle . They enjoy full visibility of the asset they are buying into and the ability to develop a GP relationship. C. The Growing Prevalence of Continuation Funds and their Importance Continuation funds have been one of the most popular trends in the private

• Regulatory Considerations for Continuation Funds

  -led secondary transactions. In these transactions, a sponsor arranges for a new investment vehicle to acquire assets from another sponsor-managed vehicle to continue the control and management of assets that are either difficult to exit or not ready to be liquidated. (The new funds are also commonly referred to as continuation funds.) [...] The main regulatory risk concerning continuation funds is simple: one fund and/or adviser getting an advantage at the expense of another fund. This can be attained through the transfer of an asset that disproportionately benefits one fund, one-sided valuations, and unfair expense allocations, among other things. Many funds participating in these affiliated transactions are considered principal accounts due to advisers’ ownership, also triggering the requirements of principal transactions, as [...] GP-led secondary transactions are not entirely new, but they continue to gain popularity with asset managers given the difficult environment in capital raising and limited liquidity. The U.S. Securities and Exchange Commission (SEC) has taken notice of advisers’ use of continuation funds and the conflicts of interest and risks of potential investor harm that can come with private equity continuation funds. Continuation fund risks -----------------------