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What are continuation funds in private equity?
Continuation funds are specialized investment vehicles that private equity firms create to hold onto assets that they might otherwise sell. Instead of exiting an investment, the firm transfers the asset into a new fund, allowing it to manage and potentially sell the asset later when market conditions are more favorable. This strategy helps firms manage their portfolios more flexibly amid challenging market environments.
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Why are firms like Clearlake using continuation funds?
Firms like Clearlake are using continuation funds to deal with a record backlog of unsold companies, valued at trillions of dollars. High interest rates and regulatory hurdles have made it difficult to sell assets quickly. Continuation funds enable these firms to hold onto investments longer, book paper gains, and avoid forced sales at low valuations, providing short-term relief while they wait for better market conditions.
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How do continuation vehicles work?
Continuation vehicles work by transferring existing assets from a traditional private equity fund into a new fund, called a continuation vehicle. This allows the firm to retain control over the assets, manage them longer, and sell them when the market is more favorable. Investors in the original fund may have the option to roll over their investments into the new vehicle or cash out, depending on the fund’s structure.
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What does this mean for investors and the market?
For investors, continuation funds can offer the chance to hold onto promising assets longer and potentially realize higher returns. However, they also raise concerns about transparency, valuation, and the true liquidity of investments. For the market, reliance on continuation funds may mask deeper issues like a persistent backlog of unsold assets and cautious deal-making, which could impact long-term industry health.
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Are continuation funds a sign of trouble in private equity?
Yes, many industry experts see the rise of continuation funds as a sign that private equity is facing structural challenges, such as high interest rates and a slowdown in deal activity. These funds are often used as short-term fixes to manage a backlog of assets, rather than a sign of a healthy, thriving market. They highlight ongoing difficulties in exiting investments and the need for more sustainable solutions.
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Will continuation funds become a permanent part of private equity?
It’s uncertain whether continuation funds will become a permanent fixture in private equity. While they currently serve as a useful tool for managing assets in tough times, critics worry they could lead to less transparency and distort valuation. The industry may need to develop new standards and regulations to ensure these funds are used responsibly and transparently in the future.