Single-asset CVs offer steadier returns than buyout funds – Evercore

Continuation vehicles across different geography, size and industry of underlying assets have generated similar return multiples.

Single-asset continuation funds provide more consistency in returns than buyout funds and similar performance, data from a leading investment bank has found.

A debut study by Evercore and the HEC School of Management in Paris, which was shared exclusively with affiliate title Private Equity International, offers a rare look into the return profiles of continuation funds – a rising yet relatively opaque sector of private markets due to a lack of data.

The report, “Continuation Funds” Performance and Determinants, compared 159 buyout funds of 2019-vintage that had a focus on Europe or North America, with 184 “simulated” funds, each of which comprised 10 single-asset continuation fund vehicles from vintages 2019 through to 2023.

Single-asset continuation vehicles between the 2019-23 vintages achieved an average total value to paid-in ratio of 1.499x, closely aligned with the performance of 2019-vintage buyout funds, which generated an average TVPI of 1.513x, according to the study.

However, single-asset CVs have exhibited lower return dispersion than their buyout counterparts, indicating lower return variability.

“The study confirms certain intuitions about the CV asset class,” Jasmine Hunet Lamourille, senior managing director at Evercore, told PEI. “When attempting to benchmark single-asset CVs against buyout funds, performance is similar, however, the dispersion of returns is lower for [single-asset continuation funds].”

The study states that the lower dispersion observed in single-asset CVs may be due in part to the fact that these assets have, on average, “already proven to perform well, hence generate less risky outcomes”, said Oliver Gottschalg, professor of strategy and business policy at HEC School of Management, who authored the paper.

“It will be telling to re-run this analysis as the asset class matures – 2019/2020 CVs are, in theory, due to be exited in the next 24 months,” Lamourille added.

Consistent performance across continuation funds

The study analysed the performance metrics – including distributed to paid-in, TVPI and internal rate of return – of 140 continuation funds formed between 2018 and 2022, a period when continuation funds increasingly became a viable exit path for GPs’ trophy assets. Such funds generated an average DPI of 0.345x, an average TVPI of 1.507x and an average net IRR of 54.1 percent as of 30 September.

TVPI is slightly higher for single-asset CVs than the multi-assets ones, “which is in line with the higher risk premium associated with underwriting concentration in [single-asset continuation funds]”, according to Evercore.

However, the study did not find a notable difference in TVPIs across geography, size, and industry of underlying assets. About one-third of the 2018-2022 CVs are mainly centred in Europe with 63 percent in North America. More than a third (34 percent) of the CVs invest in diverse sectors, followed by technology and media (17 percent), healthcare (17 percent), industrials (12 percent) and consumer (11 percent).

“Given the growth of the continuation vehicles, investors have been trying to understand the return potential,” Joy Savchenko, senior managing director at Evercore, told PEI. She added that the firm wanted to partner with an experienced and independent third party to study the return profiles of continuation funds so investors can have an early look into this asset class.

Transaction volume in the secondaries market reached $114 billion, up from $103 billion the year before, according to data from Evercore’s FY 2023 Secondary Market Survey Results. The period was the second-biggest year on record for transaction volume. GP-led transaction volume also rose last year, reaching $51 billion, up from $48 billion the prior year.

– Madeleine Farman contributed to this report