Continuation Funds Gaining Momentum in Private Equity Exit Strategy
Private equity firms increasingly using continuation funds as a primary avenue for exiting investments.
The secondary market for private equity funds is growing, with continuation funds emerging as a significant exit channel. This trend will be discussed at the upcoming industry conference "Superreturn" in Berlin, slated for next week.
According to investment bank Jefferies, the global secondaries market reached an unprecedented volume of $160 billion in 2024, a figure expected to rise this year. Approximately half of this volume can be attributed to continuation funds.
These funds allow private equity firms to extend their investment period, maximizing value creation, while also providing liquidity to investors. Investors in older funds seeking an exit are typically paid out, with their shares acquired by new investors. Major players in this field are entering the scene, such as the French private equity firm Ardian, which recently closed a secondaries fund with a staggering $30 billion in assets.
In the German market, Main Capital, a Dutch financial investor specializing in software, has announced a continuation fund comprising three software companies with a total value of €520 million. The portfolio includes SDB, a Dutch healthcare software provider, Mach, a German public sector software provider, and Björn Lundén, a Swedish financial management software company. The transaction was financed by a consortium of new and existing investors, led by Lexington Partners and Stepstone Group. The objective is to develop these companies into leading European players through restructuring and acquisitions.
Other examples of continuation funds in Germany include vehicles from Deutsche Beteiligungs AG (DBAG), Oakley, and Deutsche Private Equity (DPE), amassing several billion euros collectively. Deutsche Private Equity transferred the two tech consultancies Eraneos and Valantic, valued at €708 million, to a continuation fund, while DBAG moved its transport logistics company Solvares, valued at €130 million, to a continuation vehicle with existing and new investors in December 2024.
According to Skip Fahrholz, head of the London office of Jefferies, the business with continuation funds has grown rapidly, with around 13% of all participation sales by financial investors in 2024 occurring through continuation funds.
In the broader Private Equity landscape, continuation funds offer several key features. They provide an alternative to Initial Public Offerings (IPOs) and trade sales by allowing private equity firms to manage assets beyond the typical lifespan of a fund. Limited partners in the original fund may choose to cash out or reinvest their commitments in the continuation fund, while new investors often provide additional capital. However, since private equity firms act as both buyers and sellers, conflicts of interest can arise, raising questions about the fairness of pricing in these transactions.
The growth of continuation funds has been driven by increased use, particularly in regions like Asia, and potential expansion beyond the private equity sector into private credit. Despite the potential for growth, challenges such as managing conflicts of interest and maintaining fair valuations during asset transfers persist.
- In the expanding secondary market for private equity funds, continuation funds are playing a significant role as an exit strategy for private equity firms, enabling them to prolong their investment period, optimize value creation, and offer a liquidity option to investors.
- Major financial institutions are investing in continuation funds, as evident by Ardian's recent $30 billion secondary fund, while in the German market, Main Capital recently formed a continuation fund with a value of €520 million, focusing on developing software companies into leading European players.
