Continuation funds: Putting the theory into practice
In the third and final video in our series focusing on GP-led secondaries, Christiaan van der Kam shares an example of a recent investment that highlights the opportunity in the lower mid-market to access high-quality companies with transformative growth potential.
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The market for continuation funds, otherwise known as GP-led secondaries, has been growing over a number of years – and we have highlighted previously the wide range of opportunities we see in the lower mid-market in which we specialise that we believe offer compelling potential for premium returns.
In the third and final episode in our video series looking at this rapidly evolving market segment, Christiaan van der Kam, Head of Secondary Investments at Schroders Capital, shares a case study of a recent investment that highlights the opportunity we see in this space to gain exposure to high-quality companies, with transformative growth potential.
He begins by outlining the unique proposition of GP-led secondaries, which represent concentrated, alpha-driven bets on select companies and that, as such, can be considered as being similar to direct buyouts from an underwriting and target performance perspective.
This stands in contrast to traditional, portfolio-based secondaries, which involve purchases of investor interests in established and generally fully, or near fully, invested funds – often including numerous funds and hundreds of underlying portfolio company exposures. Return profile for such deals can equate to a levered beta play on private equity buyouts.
Despite this distinction, GP-led secondaries still benefit from the classic secondaries approach and related risk mitigation, in that they involve investing in existing assets, proven growth stories, and established manager and management team relationships.
He then goes on to share the example of healthcare software company Corilus, highlighting:
Why this is an exciting company in a key growth sector, highlighting the asset-level considerations and assessments for these investments.
Corilus’s historic strong performance under private equity ownership, and strong future potential as it continues to execute its established growth strategy.
Transaction economics that offered an attractive return to existing investors – and at the same time a compelling value opportunity for new secondary investors.
Alignment created with the existing manager – and the benefits of our positioning as a lead investor on the transaction.
Click here to watch the first part of the series on the growth and appeal of continuation funds in the current market.
Click here to watch the second part, which highlighted the specific opportunities to invest in continuation funds targeting portfolio companies in small and mid-sized buyout funds.
Click here to read our recent article providing further insights on why we see compelling continuation fund opportunities in the lower mid-market.
Transcript:
Continuation fund transactions often involve a single concentrated investment in a particular company and sector.
From an underwriting and performance potential perspective, they have much in common with direct buyouts. At the same time, they benefit from classic secondaries risk mitigation associated with investing in existing assets, proven growth stories, and established manager and management team relationships.
This differentiates GP-leds from traditional LP-led secondaries, which involve purchases of investor interests in wider private equity portfolios, often encompassing many different funds and hundreds of underlying portfolio companies. In many cases, the return profile for these deals equates to a levered beta play on large cap private equity.
By investing in individual assets through continuation funds, you're seeking to generate alpha returns from high-quality companies. And to access that growth, you need to be able to source and execute on these complex and relationship led transactions.
That's especially true in the lower mid-market in which we operate, where there is a wide universe of potential transactions that are often not widely marketed.
A good case in point is a company we invested in recently called Corilus, which is a market-leading software provider across all healthcare verticals in Belgium, covering both administrative and clinical processes. Its solutions also support digitalisation of the healthcare sector by connecting providers with patients virtually.
The company is expanding into France, providing substantial growth potential. It's been a top performing company in its existing fund demonstrating strong and increasing revenue and EBITDA growth.
In addition, while the new continuation transaction realised an attractive return multiple for existing investors, the implied valuation of the company was still several turns lower than other competitors.
Importantly, the continuation fund transaction creates strong alignment between us as the new investor and the existing fund manager, Rivean Capital, which has rolled over all of its proceeds from the original investment – and invested significant new capital as well.
We were the sole lead in the continuation fund, having been selected by Rivean Capital as their preferred counterparty through a limited process. This is important for us as a lower mid-market specialist. Leading on continuation fund investments enables us to have a key role in shaping the transaction for the benefit of all parties.
It also allows us to secure full allocation rights, which is especially important in our end of the market, as competition for the smaller attractive transactions is often fierce.
This is also where our broader investment platform plays a key role as our partners in these transactions, being the investment managers, recognise the attractiveness of working with a firm that has a sizable primary and co-investment presence in the lower middle market.
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