Continuation Funds: Top 5 Considerations

For those who were unable to attend the recent Boston Private Equity Network (BPEN) panel and webinar on Continuation Funds – Moderated by Kari Harris, Investment Funds Chair at Mintz, and featuring Aly Champsi of DW Healthcare Partners, Dave El Helou of Evercore, and Chad Rucker of Valuation Research Corporation – below is a summary of key points from the conversation:

1. What is a Continuation Fund? A Continuation Fund or “CV” is used when a Private Equity sponsor recapitalizes an investment in a portfolio company and moves it to a new fund vehicle to continue holding and managing the portfolio company until the CV’s ultimate exit.

2. Why refinance a portfolio company through a CV rather than holding or selling it? In recent years, CVs have been used to refinance and provide additional capitalization to strong-performing portfolio companies for a number of reasons including the desire to provide liquidity to existing investors and lack of access to additional capital to further capitalize the portfolio company.

3. My firm wants to do a CV, what’s next?

   a. Line up good advisors early to ensure a smooth process, including the broker, counsel, and third party valuation expert.

   b. Socialize the CV with fund investors and advisory committee early in the process and identify and disclose inherent conflicts of interest to all stakeholders.  

   c. To satisfy investors that transaction pricing is fair, best practice to have a third party valuation of the portfolio company. The portfolio company valuation may change if the market moves dramatically while the CV transaction is in process.

4. What are some pitfalls to keep in mind?

   a. Investors consider whether a CV transaction is in the best interests of the manager or the investors. The best way to maximize the price is to ensure the sponsor has skin in the game and is incentivized to stay engaged in the management of the portfolio company.

   b. Some institutional investors and advisory committee members are declining to approve CVs because they are not given enough time to evaluate it and make an informed decision. 

   c. Data shows that approximately 90% of existing investors choose to sell in CV transactions, so capitalization by new investors is paramount. 

5. The Outlook for CVs

   a. Many fund strategies are predicated on M&A activity where the only thing lacking is capital availability, so CVs are likely to continue being popular. 

   b. Infrastructure, credit and venture are growing in the CV space. 

   c. Traditional institutional primary investors are considering CV investments because traditional fund co-investment opportunities have declined. 

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