The heady days of manager domination in continuation fund terms are over… for now

Fewer continuation funds are charging super carry and there has been a decrease in average management fees, according to Paul Hastings, as buyers take a more selective approach.

The pendulum swing in favour of secondaries buyers in transaction is starting to show through in continuation vehicle fund terms.

Fewer continuation funds are charging super carry and there has been a decrease in average management fees to between 0.5 percent and 1 percent, according to a report from Paul Hastings this week.

Comparing management fees between 2022-23 and 2021-22, 52 percent of vehicles charged a fee of between 0.5 percent and 1 percent of invested capital this year compared with just 4 percent of vehicles securing management fees in that range in the preceding period. In 2021-22, 43 percent of vehicles saw management fees of 1 percent.

Readers of the report will see 9 percent of continuation funds secured 0 percent management fees in 2022-23 compared with 28 percent in the prior period, but those figures need some context. Those vehicles within the 9 percent instead charged either an ongoing monitoring fee and/or a one-off transaction fee at the portfolio company level – a point that was also noted in Paul Hastings’ prior report.

Looking at tiered carry, 46 percent of continuation fund carry waterfalls have been tiered in the 2022-23 period compared with a whopping 77 percent of all vehicles in 2021-22.

It’s all a result of the market factors colouring investments more broadly – more GPs are coming to the market in a bid to doing a continuation fund while buyers, on the whole, have less dry power to deploy and they’re being more selective as a result.

The findings highlight the shift in market dynamics under which GPs are trying to get continuation fund processes over the line. “Effectively it’s just the market functioning,” Ted Craig, a partner at Paul Hastings, tells Secondaries Investor.

Following a strong run for continuation funds in 2021 at a time when the supply and buyside demand for continuation funds to hold prized assets was at a high, managers with red-hot companies held more sway to negotiate GP-friendly terms. All good things must come to an end; for buyers the balance of power has shifted back in their favour.