After a so-called “lost year” in which private equity volumes slumped amid soaring interest rates, buyout executives are making large sums of money, even if they are essentially just moving money around. is keen to leverage its capital.
Entering a “continuation fund”: A method of rolling assets from one fund to another within the same company. Clients of private equity firms, commonly referred to as limited partners or LPs, typically have the ability to liquidate their holdings if a particular fund fails to exit their investment over a period of time (usually three to five years). can.
However, there is a second option for continuation funds. The idea is to continue investing and bet on a higher paycheck in the future.
In these increasingly popular deals, private equity firms sell their assets at a legitimate maximum price set by a private equity firm to a new fund that it also manages.
The company's distributed funds charge a hefty 20% advance interest fee, and it also manages continuing funds, which are typically able to carry out capital activities at higher valuations than distributed funds and enjoy a 2% management fee. can. It's in their book.
Last year, L. Catterton A continuation fund has been established Selling its healthcare platform, Patent Point Health Technologies, to itself.
Arclight Capital Partners A continuation fund has been established The company will transfer its investment in midstream infrastructure platform Third Coast to another fund. BV Investment Partners A continuation fund has been established This is to hand over the cloud solution company to a new fund.
Experts predict that the same kind of craze that SPACs had in 2020 and 2021 could occur in the coming years.
“Continuance funds are the hottest thing in the industry,” said Jeffrey Houck, senior finance lecturer at Johns Hopkins Carey School of Business. “Continuation funds are a way to sell trades and make a profit.”
“The products are just sitting on the shelves and cannot be sold,” he added. “It’s really important for these funds to show they’re making progress on their investments.”
The PE market has swelled to nearly $2.6 trillion, according to S&P Global Market Intelligence, and there is plenty of capital to create new funds to acquire these assets.
But some market watchers worry that continuing funds could push valuations to artificially high levels because the companies in their portfolios don't need to be valued in IPOs or other more public forums. ing.
“The way they maintain the fiction is by bringing very few of their companies to market,” said Irene Appelbaum, co-director of the Center for Economic Policy Research. “If any of these funds were to bring them to market, they would have to revalue all the companies in their portfolios.”
Mikkel Svenstrup, CIO of Danish pension fund ATP, has already said that all circular trading puts PE firms at risk of becoming “pyramid schemes.”
“It's clear to everyone that this is just financial engineering,” Hook added. “But all the people who work in these pension funds and investment institutions have to justify their existence.”
“There is more money in PE funds than ever before,” Appelbaum added. “But the future is not bright for investors.”
