An auction process is typically the best way to set pricing in a continuation fund, because this ensures that conflicts of interest are managed. “The price is set by the bidders and is typically presented as a percentage of NAV,” explains Delphine Jaugey, a corporate international counsel at Debevoise & Plimpton. “In addition… there may also be a third-party validation exercise.”
A number of factors are considered when these new investors are setting the price, including historical valuations, public and M&A comparables, industry dynamics and market sentiment. “New investors conduct their own underwriting based on the underlying financial performance and projections of a business to determine price,” says Christiaan van der Kam, head of secondaries at Schroders Capital. “Given GP-leds are asset-heavy transactions, the price is typically determined by assessing EV/EBITDA or EV/revenue valuation metrics.”
Pantheon’s global head of private equity secondaries, Amyn Hassanally, agrees that the ideal situation involves secondaries buyers setting the price, but concedes that third-party buyout funds sometimes come in to take a minority stake at the same time as the secondaries buyers, in which case pricing is set by that third party.
“You also sometimes see cross-fund investing where the GP is selling a star asset to its new fund,” Hassanally adds. “Here, the new fund sets the price, but secondaries buyers are invited to validate that price. [But] these situations, where a non-secondaries third party [sets] the price, are in the minority.”
“Our view is that the buyside should be setting the price,” says Joseph Marks, a senior managing director and head of secondaries at Capital Dynamics. “However, we do see GPs coming to market with a deal where the price may have been set by a transaction in the recent past. We have even seen transactions where the GP has increased its own stake in the company. That, of course, has to be looked at very carefully given that the GP is on both sides of the trade.”