“The majority of GPs have observed some level of interest from their investors for continuation funds.” – Private Equity International Private Fund Leaders Survey 2023.

Besides the above survey, an article last month in Secondaries Investor cited Jefferies data showing 80% of LPs sought liquidity by selling into continuation vehicles. This is an extraordinary shift from investors getting realizations the old-fashioned way, i.e. private equity owners selling businesses to new strategic or sponsor buyers.

Of course, current market conditions are weighing on M&A activity. Higher rates make it tougher for buyers to achieve their desired equity returns through financing leverage. Credit providers are hampered by tight interest coverage at those debt-to-ebitda levels. And until recently, everyone worried about a potential recession in late 2023 or early 2024.

Continuation vehicles are but one of many innovations designed to provide investors in equity (and credit) funds with liquidity as other sources dried up. A multi-billion dollar industry has developed around the notion that enterprise values embedded in sponsor portfolios can be financed within vehicles designed to make room to buy other companies.