Continuation funds: What are they, and why now?
Christiaan van der Kam explains why continuation funds, otherwise known as GP-led secondaries, have become a key driver of record secondaries investment activity – and why we believe the market will continue to expand in the years ahead.
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Continuation funds, otherwise known as GP-led secondaries, have become a key investment trend in the private equity landscape, accounting for between 45-60% of all global secondary market deal flow in each of the last five years.
Of the record total of $160 billion worth of secondaries deals completed in 2024, $71 billion was accounted for by continuation funds – itself a record total.
In a new video interview, the first in the three-part series, Christiaan van der Kam, Head of Secondary Investments at Schroders Capital, explains why continuation funds have become such a popular liquidity solution for fund managers – and why we believe the market will continue to expand in the years to come.
Among other things he discusses:
What continuation funds are, and how these transactions are structured and executed
How these deals provide a valuable liquidity option for existing investors – and a new lease of investment life for underlying investee companies
Why GP-led transactions offer a compelling opportunity for secondary investors, with the benefits of traditional secondaries risk mitigation
How a shortage of exits has propelled the segment in recent years – and long-term growth drivers related to fundamental limitations of private funds.
Look out for parts two and three in the series, which will delve into the specific continuation fund opportunities that can be found in the lower mid-market, and highlight a case study showcasing how these deals can provide access to compelling growth companies.
Transcript:
Continuation funds are a vital tool in a private equity fund manager's toolkit. They enable managers to crystallise returns for either a single asset, or a small selection of assets, to provide liquidity to their existing investors.
What makes these deals different from other exit options, is that the transaction also allows the manager themselves to retain control over the company being sold. Hence they allow for ‘continuation’ of ownership and growth strategy.
Deals are structured using a continuation fund, which is a new vehicle set up by the fund manager. These vehicles are backed by new capital from the manager themselves, the management team of the company being acquired, and new secondary investors.
This continuation fund buys the asset, or assets, from the manager's existing fund, with proceeds being used to provide distributions to existing investors.
Additional capital in the continuation fund is a source of new growth capital for the business that has been acquired, which is given a new lease of investment life in a new fund structure.
As these deals are initiated by private equity fund managers, referred to as general partners or GPs, they're also known as GP-led secondaries. GP-led secondaries have become a mainstay of the broader secondaries market in recent years and have helped to drive the industry to new records in terms of transaction volume.
2024 was the biggest year ever for the secondary market globally, with approximately $160 billion transacted, and it was the biggest year ever for continuation funds as well, which accounted for $71 billion of the total.
Around half of all secondary transactions every year since 2021 have been continuation fund deals, and by some estimates, the volume of these deals could reach into the hundreds of billions of dollars by the end of this decade and beyond.
Why have these transactions become so popular?
In the past couple of years, GP-led secondaries have provided a valuable exit option at a time when public market listings have declined due to market volatility and economic uncertainty has limited appetite from large corporates for M&A.
But they're also part of the longer-term growth story of secondaries. As the private equity market has continued to mature and grow, so has the secondaries market by providing innovative liquidity solutions for investors.
In this context, continuation funds represent an important evolution, as they solve for some fundamental limitations of private funds.
Put simply, there are times when a star portfolio company's growth potential extends over a longer time horizon than a typical private equity fund's investment period, or requires more investment than a fund is able to provide.
Continuation funds enable the manager to own these high-quality assets for longer and realise the full growth potential of their most prized companies. Existing investors can take advantage of the liquidity option or roll over their investment into the new transaction.
New secondary investors are given access to exciting investment opportunities with the benefit of buying into proven assets and growth plans, and established fund manager and management team relationships.
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