In recent years, sponsors have been preoccupied with finding ways to hold on to good portfolio companies for longer. This is evident in the explosion of the GP-led secondaries market, which grew by 113 percent between 2020 and 2021, according to investment bank Evercore, and the spike in popularity of preferred equity and NAV-based lending. Another dimension is the proliferation of follow-on, or double-down, funds.

“If the fund that’s selling doesn’t want to roll because of differing investment horizons, it allows us to [buy the minority stake]”

Christiian Marriott
Equistone Partners

There are two loose types of follow-on funds. The first is a pool of capital raised to re-invest in businesses owned by a sponsor’s flagship funds, as typified by Insight Partners. The tech investor is in market with two follow-on offerings: one targeting $3 billion to make minority investments on a primary and secondary basis in businesses held by its 2019 Fund XI; the other targeting $1.25 billion to invest in businesses held by its 2018-vintage Fund X.

According to an LP speaking with affiliate title Buyouts, Insight saw the need for such a fund because of the speed with which it invested Fund X. “Typically, where they would have had $1 billion in reserve, they deployed most of it, and so they’re raising this vehicle to basically double down on the winners in Fund X,” the source said.

The second type of vehicle takes minority positions in companies being sold by a sponsor’s flagship fund. TA Associates was a pioneer in this area with its Select Opportunities funds, the second of which closed in June on $1.5 billion. The Select Opportunities funds co-invest alongside the new control buyer, allowing TA to create liquidity for investors while remaining exposed to an asset that has room to grow.

Skewed timelines

Over the past few months, these funds have moved out of the tech world into mainstream private equity. In March, European mid-market firm Equistone Partners said it had made the inaugural investments from its Reinvestment Fund, which follows the model associated with TA Associates’ funds. Private Equity International is aware of two European PE managers that are exploring similar vehicles.


Growth in the GP-led secondaries market between 2020 and 2021, per Evercore

Equistone has often maintained minority positions in businesses that it sold to other sponsors, partner and head of investor relations Christiian Marriott tells PEI. The problem is that the fund selling the asset tends to be five to 10 years into its life, while the buying fund is still in its investment period, leading to misaligned time horizons between the control and minority buyer.


Number of months it took TA Associates to raise its first follow-on fund

“We thought, why not raise a specialist vehicle?” says Marriott. “If the fund that’s selling doesn’t want to roll because of differing investment horizons, it allows us to [buy the minority stake] and have our flagship fund, where we’re getting paid full fee and carry by our LPs, be fully focused on our own lead investments, rather than other sponsors’ deals.”


Amount Insight Partners is targeting for its primary follow-on offering

LPs appear to appreciate the chance to maintain or grow their exposure to top-performing assets. It took TA just two months to raise its first follow-on fund and less than six to raise its second, according to PEI data. Insight’s big step up in size for its second follow-on fund suggests investor appetite is there, with LPs such as the Massachusetts Pension Reserves Investment Management Board getting on board.

The deal is sweetened by favourable terms. Insight and TA’s follow-on funds do not charge a management fee, PEI understands. TA collects fees from portfolio companies, while charging carried interest of 20 percent. Equistone’s fund has a management fee that Marriott describes as “materially lower” than the fee for the flagship fund, and has a lower rate of carried interest.

Navigating exposure risks

The strategy is not without risk. At least until this year, the tech-focused TA and Insight would have been buying into their own businesses at record-high valuations, making it harder to generate a big pop on exit. If tech stocks stay at their current depressed levels and feed through to private markets, LPs in follow-on funds may find themselves doubly exposed to assets that are worth less than they were a year ago.

As is the case with continuation funds, the sponsor is on the buy- and sell-side, making it imperative that the chance to reinvest on a minority basis does not influence the pricing of the control stake. In Equistone’s case, the conversation around reinvesting is not allowed to happen until the M&A process has been signed and approved by the investment committee, Marriott adds.

Follow-on funds are probably not going to eat a lot of anyone else’s dinner. The model is suited to firms that invest in and exit a lot of portfolio companies, allowing them to be selective in what they will double down on. For firms that make fewer investments, a single-asset continuation fund may be a more effective way of holding onto an asset.

“It’s interesting how much the old model of ‘buy companies, sell companies’ is out the window. People realise, ‘Hey, these assets are growers and the management teams are solid and they print money, you can kind of keep making money on them,’” said an LP who has seen Insight Partners’ fund pitch. “Maybe the merry-go-round stops at some point.”

Maybe, but that doesn’t look likely to happen anytime soon.