Private equity (PE) firms are increasingly adopting continuation funds as an exit strategy, reflecting a significant shift from traditional routes like initial public offerings and mergers and acquisitions. In recent years, the favorable conditions that once supported high transaction volumes have diminished, leading to longer holding periods for PE investments. According to McKinsey, the average buyout holding period rose to 6.7 years in 2022, up from the previous two-decade average of 5.7 years, as the backlog of exits reached its highest level since 2005.
Continuation funds, which transfer assets from older funds to newly created vehicles managed by the same general partner, have gained popularity. They enhance liquidity for investors and allow firms to retain valuable assets in a capital-constrained environment. In 2024, the number of these vehicles grew by 12.9%, comprising 14% of all PE exits. Analysts forecast that continuation funds could represent up to 20% of PE exits in the near future, driven by a challenging exit landscape.
While continuation funds provide flexibility, they also introduce governance and valuation concerns due to potential conflicts of interest. Critics warn that without adequate regulations and transparency, these funds could resemble circular financing structures. Recent rulings have relaxed some regulatory oversight, placing an increased responsibility on investors to perform due diligence.
To navigate risks associated with continuation funds, investors are encouraged to obtain independent valuations, negotiate governance terms upfront, and maintain open communication with general partners. As the landscape continues to evolve, success in private equity will hinge on robust oversight and alignment between investors and managers.
Why this story matters
- It highlights the changing dynamics of private equity exit strategies amid economic challenges.
Key takeaway
- Continuation funds offer new liquidity options but raise important governance and conflict of interest concerns.
Opposing viewpoint
- Critics argue that the lack of regulatory oversight may lead to unethical practices in transactions involving continuation funds.
