In a challenging environment for exits, private equity firms can find themselves facing the uncomfortable prospect of needing to sell their best performing assets prematurely. As Investec’s recent Private Equity Trends Report reveals, buyout-focused funds are at present holding four times more unrealised capital than during the 2008 crisis – a strong signal of an unappetising exit landscape. Fewer exits mean a material drag on liquidity and major challenges for fundraising in general.
Fortunately for GPs, continuation vehicles provide a way to avoid this problem. Continuation funds see GPs partnering with a range of secondaries investors to extend the life of a given asset, relieving selling pressure, releasing liquidity and allowing the manager to support the holding with a mixture of new and established investors. Existing LPs can choose to stick with the asset and roll their interests into the continuation fund or receive cash proceeds for their interests.
Because continuation vehicles effectively address a number of significant concerns for private equity funds and secondaries buyers, they have become massively popular; they enable GPs to lengthen their exposure to strong holdings and LPs to access liquidity. Even when liquidity is less challenged, market participants expect that GP-led transactions will continue to dominate.
Continuation funds are now seen as a “fourth exit option” alongside IPOs, secondary sales and trade deals. Single-asset continuation funds now drive a majority of activity in GP-led deals, and as GP-leds account for around half of the overall secondaries market.
Private equity professionals expect interest in GP-leds to increase; more market participants are becoming educated on the field, and investor appetite for liquidity remains strong. Investec’s 2024 Secondaries Report – a rigorous survey of 50 global secondaries managers in the US, UK and Europe – helps to convey the likely scale of the growth of GP-leds; nearly 75% of managers surveyed reported that they would become more active in GP-led deals over the next 12 months.
Speak to an expert
Stefano Manna
Head of GP Advisory
Stefano leads the GP Advisory team at Investec and provides strategic advice to financial sponsors, offering a comprehensive range of private capital raising and liquidity solutions.
