Alignment is key to getting buyside attention on continuation fund transactions. Do managers feel that’s being reciprocated on their side?
Two GPs that had recently completed continuation funds took to the stage at Kirkland & Ellis’s Liquidity Solutions Summit held under the Chatham House Rule at its New York office last week to address a packed room of secondaries professionals. Secondaries Investor was of course there.
Here are some key pain points where the GPs believe the market could evolve practices as competition to back these deals increases:
- When someone began explaining the concept of a reference date to one of the GPs on the panel, they didn’t realise it was going to be the driving factor for valuation across the next three to nine months. “That was the one where I really had to intellectually get my mind and heart around [it],” one of the panellists said. Despite good or bad performance, there was no opportunity for check-in bids over a period of time, unlike traditional M&A processes, which panellists believe is in need of improvement.
- In the M&A world, there is usually alignment to get a transaction done quickly, one of the panellists said. A GP wants to buy an asset as quickly as possible to get going on its valuation plan and remove execution risk. If you’re selling, you want to lock in your internal rate of return. That dynamic doesn’t really exist in a continuation fund transaction. A potential mismatch in desires to close a transaction quickly is “a real consideration when you think about other options out there”, the other panellist agreed.
- It took one of the GPs three months to negotiate with three lead secondaries buyers, which was “very frustrating” from a time perspective. In a typical M&A transaction, negotiating with the winning bidder can be done in a week, the person added. In the continuation fund process this GP ran, lawyers for the lead buyers were also asking for closing conditions that the sponsor felt were “way off market [and] completely not commercial”. The other panellist said both the GP and management teams are rolling over in continuation fund transactions. The firm itself had rolled over “a lot” into the transaction. “You’ve got to tell your lawyers that this is your partner… for the next five years. So don’t be an a***hole. Just ask for the things that you really need because we’re going to be shaking hands the very next day.”
- It’s worth noting that the panellists both saw the benefits of continuation funds. Rather than including them as a fourth exit option, one of the panellists said they would continue to use continuation vehicles in an opportunistic way. The other said it was key to be prepared going into the deal with a compelling rationale.
While one of the panellists did say continuation funds can be “really terrific solutions”, for an industry that touts the importance of alignment, that message has clearly fallen flat for some managers who feel they have experienced the opposite. Addressing GPs’ concerns, such as those outlined above, will be key to ensuring high-quality managers are repeat customers.
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