How Do Continuation Vehicles Actually Perform?

This blog is a summary of IPEM's exclusive webinar series for LPs in partnership with Gottschalg Analytics, exploring critical topics for LPs in today's private equity market.

Continuation vehicles (CV) may be coming an established part of the liquidity toolkit, but investors have a burning question.... will their performance make them worth the effort?
 
In our recent webinar with Prof. Oliver Gottschalg, we went deeper into the performance data of CV deals, looking at what characteristics are most important across different asset classes.

Why are continuation vehicles on the rise?

The popularity of CVs has surged, driven by factors such as the exit drought and the need for extended value creation horizons in sectors like software and healthcare.

These vehicles offer a solution for capturing additional value from assets that would benefit from longer hold periods. The market for continuation vehicles has expanded rapidly, with significant capital from secondaries buyers flowing into single-asset CVs, which are often seen as less risky due to their later-stage nature and lack of blind pool risk. 

How do continuation vehicles perform?

Gottschalg's study, based on evidence from 2018-2023 vintages, indicates that CVs deliver returns comparable to primary buyout funds but with a more attractive risk profile.

This is attributed to the de-risked nature of the assets, which have already survived initial buyout stages, are well understood by GPs that are able to create robust, longer-term value creations plans. This makes continuation vehicles appealing to secondary buyers seeking downside protection and predictable returns. 

What challenges do investors face with continuation vehicles?

Despite their advantages, continuation vehicles face scrutiny regarding valuation transparency and governance.

The dual role of GPs as both buyers and sellers in these transactions raises concerns about the objectivity of pricing. Additionally, the tight deadlines for LPs to make decisions, which can be as little as 10 working days, can lead to governance challenges and many LPs being forced to sell due to not having the capacity to properly consider the deal.   

Based on our exclusive webinar poll, about half of LPs were already considering or investing in continuation vehicles.  

However, when asked about the default stance they take when presented with CV opportunities, most LPs answered that they prefer to sell or cash out rather than automatically roll over into new deals. This suggests that despite the proliferation of single-asset deals, LPs still favour distributions over future returns.  

Top concerns mentioned by investors include the potential conflict of interest and the independence of valuations. Time pressure was also cited, with short deadlines to evaluate opportunities contributing to the preference for selling.  

What's the bottom line?

Based on the data shared by Prof. Gottschalg, CVs represent a valuable tool for managing private equity assets, offering benefits to both GPs and LPs without systematically disadvantaging any party. 

As the market matures, the focus will likely shift towards refining governance standards and enhancing data transparency to ensure fair and efficient processes. 

How the CV space evolves in the coming years will depend on their ability to balance the interests of all stakeholders while continuing to deliver attractive risk-adjusted returns. 

LPs wishing to receive updates about future webinars may request to be added to our mailing list through our Investor Relations team on investor@ipem-market.com