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Kohlberg and Co latest to launch inaugural $1bn+ continuation vehicle

BlackRock, GIC and Lexington Partners co-led the deal, the third inaugural continuation vehicle this month.

Mount Kisco-based mid-market shop Kohlberg and Company is the latest firm to join a growing list of managers creating first-time, billion-dollar-plus continuation vehicles.

The Continuation Fund, the KKR spin-out’s first-ever such vehicle, closed $1.1 billion of capital that will be used to support the continued growth of four remaining assets in the 2012-vintage Kohlberg Investors VII, which the firm sees as platform investments. This was the firm’s first-ever GP-led transaction, according to a spokesperson.

Kohlberg offered Fund VII LPs the opportunity to exercise a full liquidity option, a status-quo rollover option at existing terms or an option to re-invest to participate in the new capital commitments of the Continuation Vehicle under the new terms, according to the spokesperson.

The transaction was co-led by BlackRock, GIC and Lexington Partners, which have agreed to contribute their pro-rata share of additional capital to support and enhance the value creation initiatives of the remaining assets, according to the release.

Fund VII initially closed $1.6 billion in capital commitments, according to Secondaries Investor data, and was generating a 16.85 percent internal rate of return as of 30 March 2020, according to performance information from Santa Barbara County Employees’ Retirement System.

News of the transaction was first reported in February by affiliate title Buyouts.

“We continue to see secondary capital being well-positioned to provide flexible liquidity solutions and resilient investment outcomes for LPs and GPs alike,” said Konnin Tam, managing director and co-head of secondaries and liquidity solutions at BlackRock.

There have been a spate of first-time $1 billion-plus continuation fund closes in recent months. Earlier this month, growth equity shop General Atlantic closed its inaugural continuation vehicle. At over $3 billion in size, it is the fifth largest to date. Energy-focused Arclight Capital Partners also closed its first continuation vehicle this month, focused on renewables.

Other big deals include TA Associates, which closed $1.5 billion in June for its second continuation vehicle; Georgian Partners, which closed a $1.1 billion restructuring in May that involved four assets being moved out of various vehicles into a continuation fund; and Leonard Green, which moved assets out of its 2007 fund and into a continuation pool in April.

GP-led deals, of which continuation funds are a prominent type, have taken precedence over other secondaries deal types during covid. Total market volume in 2020 was estimated at around $60 billion, versus a record high $80 billion the year prior, with GP-led deals comprising 53 percent, according to Evercore’s 2020 full-year volume report.

These transactions will have to contend with the LP side of the market, which is poised to return in 2021. LP stake deals represented 45 percent of planned deployment for the back half of the year, while GP-leds constituted 43 percent, according to M2O’s latest survey. Capital raised in 2021 for LP stake transactions (55 percent) edged out GP-leds (33 percent).

Secondaries could split into a two-speed market, according to Cebile Capital founder and head Sunaina Sinha, with GP-led transactions able to stand on their own with robust volume, and LP stake sales on the other side. The two types of transactions have different duration and risk, and it makes sense to treat them in their own right, Sinha told Secondaries Investor.

Lazard and Ropes & Gray advised Kohlberg & Co on the deal.

-Chris Witkowsky contributed to this report