Investors show interest in Article 9 continuation funds

When impact investor Summa Equity closed Summa Circular, believed to be the first Article 9 continuation fund in December, it broke new ground for the secondaries market. The €550 million single-asset deal for Nordic recycling player NG Group attracted strong LP interest, having reportedly performed at between a 2x and 3x MOIC over Summa’s five-year holding.

“The company has been on a good journey but we still see a lot of upside potential. We wanted to hold onto it but we did not have enough capital left in Fund I to support it,” says Hannah Gunvor Jacobsen, Summa COO and head of investor relations.

“We have welcomed frameworks, legislation and classifications that establish common standards for impact, so given how well we know NG’s characteristics it was natural for us to go down the Article 9 route.”

Sustainable focus

Mid-market manager Quilvest Capital Partners acted as principal lead investor, having backed NG alongside Summa from day one, alongside new and existing LPs. Summa also committed new capital from its third flagship fund, which closed on €2.3 billion in January 2022 and remains one of the largest Article 9 funds raised so far.

Charles Aponso, a principal at Quilvest Capital Partners, says: “There were a lot of things we liked about this deal: the market dynamics, the business model, the value-creation plan, the management team, the exceptionally strong alignment with Summa as lead GP and the sustainability focus.

“Having an Article 9 classification had absolutely no negative impact on the deal, in terms of fundraising, execution or legal documents. Cost-wise it also made no difference. What comes into play as a result of Article 9 is that Summa and management will likely need to dedicate some time and resources to the additional reporting and compliance requirements on an ongoing basis. But for us, sustainability is one of our core themes so having the Article 9 here was definitely a plus.”

Debevoise & Plimpton partner Patricia Volhard says that Article 9 requires managers to ensure the fund is fully invested in assets that qualify as sustainable investments under the EU’s Sustainable Finance Disclosure Regulation, which means they need to contribute to an environmental or social objective and do no significant harm. That needs to be checked at the time of the investment and on an ongoing basis.

“For a GP-led, where you are transferring a single asset or maybe several specific assets into a continuation fund, you have the advantage of knowing those assets and understanding what access you will have to the necessary data on an ongoing basis,” says Volhard. “That is usually the challenge for GPs considering blind pool Article 9 funds.”

Impact exposure

Impact firm Blue Earth Capital backed a multi-asset continuation fund process in November by RockPort Capital Partners, a venture firm focused on alternative energy and sustainability. Though not Article 9, that is another example of the growth of impact secondaries, according to Nicolas Muller, head of funds and co-investments at Blue Earth.

“We see more opportunities in the secondaries market for impact transactions,” Muller says. “If you only do direct fund investments it takes a long time to build a diverse impact portfolio, so these deals are a great way for us to get exposure to high impact assets. We now expect impact secondaries to grow in line with the growth of the impact market in general.”