LPs want a clear rationale for continuation funds
Of the $29 billion of GP-led transactions completed in the first half of this year, 85 percent were continuation vehicles, per Jefferies. In this environment, limited partners need to be comfortable with the sponsor’s rationale for the process and why it’s more value-accretive than a straight sale, according to Karin Hyland, a senior investment director at abrdn.
“More and more in the last few months, I’ve seen opportunities come to us that suggest, ‘Has the GP heard of a co-investment?’ or ‘Why is this a continuation fund rather than a co-investment?’” she said. “Because sometimes it just looks like a co-investment with economics attached and secondary players being involved.”
There’s a higher bar for continuation funds, Hyland added, including early engagement with LPs, transparency around the price discovery process and clear alignment from the GP in terms of a meaningful commitment to the vehicle.
GP-led track record starting to bear out
Although a young strategy, the GP-led investment thesis of backing known companies with proven managers is beginning to prove itself out, according to Valérie Handal, a managing director with HarbourVest Partners. “We have five, six, seven transactions that are either fully realised or partially realised that are showing those attractive returns that we believed in when we first invested,” she said.
While LPs are becoming more comfortable with concentration, helping carve out space in the market for concentrated secondaries funds, J-curve mitigation and diversification remain important for most secondaries investors. “They like the returns [of GP-led deals], they like the exposure but in moderation,” Handal added.
GP-leds are good – don’t wear them out
Some assets are being moved into their third or fourth continuation funds, noted Laura Shen, a partner with Headway Capital Partners. Wind Point Partners and CREO Capital Partners are among the firms to have run continuation fund deals on continuation funds in 2021, affiliate title Secondaries Investor has reported. Other sponsors have done single-asset continuation fund deals on multiple assets in their portfolio, such as Clearlake Capital.
“I think it’s very interesting to see how long that can last,” Shen said. “How many times can you take the same asset and do a continuation fund and how many times can you do it in your portfolio? I’ve seen portfolios where they’ve done it four times. This is their exit route, and at some point, it is not sustainable.”