Continuation funds: Get’em while they’re hot

The secondaries market is more seller-friendly than ever, allowing sponsors to push terms that surprise even seasoned pros. This is unlikely to last.

“This isn’t sustainable; we deserve a holiday,” said a senior London-based secondaries advisor, half in jest. Since the coronavirus-enforced shutdown ended in late August, the secondaries market has exploded with GP-led deals. Most are highly concentrated or based around a single asset: intermediaries betting that it is easier to market a targeted set of companies than to convince buyers to take on diversified market exposure.

They have been proved right. In the words of one New York-based law firm partner, “there’s money stacked up like planes landing at Newark” to back these deals. Buyers who were frozen out during the lockdown feel the urge, or the pressure, to deploy. In September, sister publication Buyouts noted that the process to move Clearlake Capital portfolio company Ivanti into a continuation vehicle was probably the “fastest ever”, taking 45 days to complete.

Inevitably in such a market, terms and pricing will suit the seller. Documents are becoming more seller friendly with few reps and warranties, limiting the buyer’s ability seek redress if the reality of an asset proves at odds with the packaging.

Buyers are also being discouraged from doing too much due diligence, while being firmly reminded there are other willing suitors in the waiting room. “Sponsors are saying, ‘Trust us, we know the assets, we’re aligned economically so you’re getting comfort,” said the law firm partner. “We’ll tell you a bit about the asset but we’re not giving you all access. You can ask us questions, which we will evade.’”

Sponsors are also starting to take some cash off the table. “Gone are the days when buyers would say, ‘100 percent has to be rolled into the continuation fund,’” said Sunaina Sinha, managing partner of advisor Cebile Capital, adding that 50-70 percent was now the new normal.

For sponsors, there has never been a better time to consider a process. Limited partners are also benefitting, as fierce competition allows sponsors and advisors to drive top dollar for exiting LPs. According to one fund investor from a multi-asset manager, as long as LPs get a fair price on exit and the opportunity to reinvest on the same terms as new investors, they are generally happy.

This window is unlikely to remain open for long. Stabilising valuations will speed the return of the LP portfolio market, giving buyers a bigger universe in which to operate. Some secondary fund LPs are also beginning to push back, according to a London-based advisor, believing that the buyers are straying from their goal of providing diversification or that they are trampling on the toes of co-investment and direct investment platforms. GPs should seize the day while they still can.

What is the most eyebrow-raising term you’ve seen a seller propose on a GP-led deal? Tell the author at