Continuation funds that have been formed since the tool was reimagined for prized assets are beginning to bear fruit.
Investors in healthcare specialist ArchiMed’s €242 million continuation fund PolyMED have netted a return of between 4.5 and 5x, Denis Ribon, chairman and managing partner of ArchiMed, told me in an interview this week. The vehicle was set up to house the majority of the firm’s stake in Polyplus, a developer of technology used in gene and cell therapy, in 2020.
The vehicle had an abnormal characteristic compared with other continuation funds closed: no investor was able to commit to Polymed if they weren’t already an investor in one of the existing ArchiMED funds.
The vehicle received backing from existing Med I LPs, which had originally backed Polyplus in 2016, and other existing ArchiMed investors, Ribon explained.
The price was set by a full sale process managed by Jefferies, which saw Warburg Pincus emerge as buyer of approximately half of ArchiMed’s stake in 2020.
In 2018, Nordic Capital made waves with what was at the time the largest-ever GP-led transaction. Nine assets were moved from the Scandinavian buyout firm’s 2008-vintage Nordic Capital VII into the €2.5 billion vehicle Nordic Capital CV1.
Coller Capital and Goldman Sachs Asset Management acquired around €1.5 billion of NAV in the deal, with the remaining NAV backed by the existing LPs who chose to roll over their exposure.
Last year, Nordic Capital secured a 19x multiple of invested capital on its exit of one of those assets when it sold UK-headquartered diagnostics business The Binding Site to Thermo Fisher Scientific.
Secondaries Investor understands that 19x relates to Nordic’s original investment in 2011 and is not based on the return made for continuation fund investors. Investors in the GP-led process still received a “very strong outcome”, according to one of the investors in the continuation vehicle.
Some market participants do voice concern around where continuation funds created during the 2020 and 2021 peaks – at which point GP-leds were commanding par or even premium pricing – may land.
Indeed, one brave buyer disclosed to attendees at the IPEM industry conference in January that they had a couple of continuation funds they had backed in recent years that were valued at just under cost. They had closed with par pricing and there were subsequent currency issues, for example, they said.
They also had a couple of continuation funds that were below their planned budget articulated to the buyers at the time of the transaction. This was due to staffing costs, for example.
Since the assets within these funds are good companies in good spaces, balances sheets are healthy and managers have the money to deploy into these businesses, the buyer said they were “not overly worried about it”.
It remains early doors for prized asset continuation funds when it comes to returns on eventual exit. Secondaries Investor doesn’t anticipate it’ll be getting firms shouting from the rooftops if returns aren’t stand out for these vehicles. As impressive examples of returns from continuation funds continue to be broadcast by their GPs, there may be a spate of sellers’ remorse among those LPs that chose to take the liquidity instead.