Data on how continuation funds have performed has been scant… until now.
Research by Morgan Stanley shared exclusively with Secondaries Investor shows that continuation funds present the potential for outsized returns compared with blind pool secondaries funds, and even buyout funds.
The investment bank took a set of 71 continuation funds of vintages between 2018 and 2023 and compared them against pools of returns data for secondaries and buyout vehicles. The data set comprised single-asset continuation vehicles (60 percent), with the remainder being multi-asset CVs.
The continuation funds delivered a median 1.4x multiple-on-invested-capital – on par with secondaries funds, and higher than buyout funds’ 1.2x median MOIC. Interestingly, the upper quartile of continuation funds slightly outperformed that of secondaries funds, with 1.7x versus 1.6x. They also outperformed buyout funds’ upper quartile of 1.5x.
Continuation funds’ potential outperformance was even more pronounced when it came to single-asset vehicles, with more than a 400 basis point difference in outperformance between the upper quartile of single-asset funds versus multi-asset ones.
“If you get it correct – and there’s a big if – the upper quarter of the single-asset strategy has the potential to outperform the secondaries strategy and the multi-asset strategy,” Chad Carroll, Morgan Stanley’s global head of private capital advisory, told Secondaries Investor.
While multi-asset CVs slightly outperformed their single-asset counterparts in Morgan Stanley’s research, the multi-asset funds were more mature on average by one year than their single-asset cousins, meaning they have had more time to compound in value.
It’s important to note that the returns in Morgan Stanley’s data set are largely unrealised, with roughly 85 percent of the MOIC remaining largely on paper.
Investors evaluating returns data should not focus solely on the return potential, they should look at the risk-adjusted return. Speaking to us recently for a podcast recording to celebrate the 10-year anniversary of Secondaries Investor, Verdun Perry, global head of Blackstone’s Strategic Partners unit, said a blind pool fund and a continuation fund have very different risk profiles.
“Are they created equal? I would argue no,” Perry said. In a continuation fund, the GP knows the asset, has held it for multiple years, is familiar with the value creation levers and the management team’s business plan. “I would argue that the standard deviation on [a continuation fund] should be lower, the risk should be lower.”
Morgan Stanley’s research appears to support this thesis. When it comes to losses, continuation funds appear to be a moderate bet, performing better than buyout funds and worse than secondaries funds: just 8 percent of CVs in the cohort had a loss of principal capital, versus 19 percent for buyout funds and only 4 percent for secondaries funds.
There are multiple reasons why a continuation fund may outperform funds of other strategies, with a major one being the pre-identification of strong-performing assets married with the alignment mechanisms secondaries market technology can offer.
Carroll stresses that he and his team weren’t surprised by the research findings – they have generally observed that continuation funds offer compelling risk-adjusted returns. What was surprising was the availability of the data.
“We think that more data in this market, all else being equal, helps to facilitate the growth of the market,” Carroll said. That is both for LPs allocating to secondaries strategies that focus on continuation funds, and for LPs looking to roll into continuation funds. “More data is needed in the market to better inform decisions.”
Amen to that.
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