If ever there was a year when the issue of sponsors holding onto assets for longer came to the fore, it was 2021. At least one-third of the top 50 GPs in the PEI 300 ranking of biggest industry fundraisers have used continuation vehicles, according to estimates by Private Equity International and affiliate title Secondaries Investor. By the look of things, the presence of such vehicles is only going to increase in 2022.
In a continuation fund process, existing assets held by a GP are moved into a special purpose vehicle, which typically has a shorter time horizon than a blind pool vehicle. Such deals allow LPs who wish to cash out to do so by taking liquidity provided by secondaries buyers. They can also allow the GP to crystallise any carried interest on the assets when they’re sold from one fund to the other, as well as reset economic terms with the introduction of a new fund. Crucially, they allow a GP to retain exposure to assets they may not want to part with.
While continuation fund technology has been utilised in private markets for more than a decade, the increased market share of these deals jumped significantly in 2021. Such deals were worth roughly $23.4 billion in the first half of the year, up from around $19 billion for full-year 2020, according to data from investment bank Greenhill.
This trend has caused some influential industry participants to take note. In its latest annual review, Abu Dhabi Investment Authority, the world’s fourth-largest sovereign wealth fund by assets, said the rise of continuation funds was creating more competition for assets in the private equity market. For Paris-headquartered investment giant Ardian, continuation vehicles will be an important part of its strategy: the firm is already examining potential opportunities to extend its partnerships with some of its portfolio companies in this way, president Dominique Senequier wrote in Ardian’s latest activity report.
The sea change in this market has been the rise of single-asset continuation funds: moving a sole asset or concentrated group of assets into a special purpose vehicle.
“Two or three years ago, single-company secondaries were not a thing,” Nigel Dawn, global head of private capital advisory at Evercore, one of the biggest intermediaries in the continuation fund market, told PEI in August. “This year, the majority of our GP-led dealflow is single companies,” he said, adding that this year the market could hit $30 billion of single-company deals, up from around $2 billion three years ago.
What does the next year herald for the continuation fund market? According to market sources, continuation funds will become an even more common element of private markets as more sponsors realise their utility. The mid-market is also likely to see growth: Audax Private Equity and Argosy Capital are examples of GPs plotting ways to enter this sector, as Secondaries Investor reported this year.
It’s a global phenomenon, too: participants in PEI‘s Asia roundtable in September said they were seeing a proliferation of such opportunities in the region.
“We’re going to see a lot more multibillion-dollar deals in the space, and a lot more well-known sponsors entering the space because of the size of the dealflow and how attractive it is,” said Nicole Washington, a partner at Kirkland & Ellis who works on continuation fund deals.