Continuation Funds Lose Steam as PE Investors Opt for Liquidity

Most PE investors would rather cash out of their investments than wait for the possibility that valuations will rise further in continuation funds, according to a report from Bain & Company.


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Private equity investors are increasingly saying no to continuation funds, opting instead for the cash.

According to Bain & Company’s mid-year private equity report, a majority of investors (60 percent) said they would rather cash out than wait for valuations to rise further in the continuation funds.

Private equity managers set up continuation funds so they can buy one — or a few — investments from an existing fund. These funds, which became popular amid the run-up in private equity, allow managers to hold on to their prized assets for an extended period. Investors, known as “limited partners,” have the option to either continue investing in these assets through continuation funds or choose to liquidate their investments once the lock-up periods expire.

“The message to fund managers: LPs would prefer you to generate liquidity than try to squeeze another half-turn of multiple from every last portfolio company,” according to the report. But while liquidity plays a key role in PE investors’ decision to cash out, it’s not the only factor holding them back from investing in continuation funds. As Institutional Investor previously reported, some PE investors have opted out because managers left them little time to decide if they should roll over into a continuation fund or not.


The liquidity crunch faced by investors has been exacerbated by the sluggish exit environment. According to the report, buyout funds are now sitting on $2.8 trillion of unexited assets, almost four times more than the level during the global financial crisis. Dry powder managed by buyout funds also reached a record high of $1.1 trillion, 75 percent of which was raised in the last three years.

“Most exit channels have languished since last year, leaving buyout managers with a towering backlog of unrealized assets that has slowed distributions to investors,” the report said. “Weak cumulative distributions over the past five years have left LPs cash-flow negative on private equity allocations that represent a significantly larger slice of their overall portfolios than at the beginning of the current cycle… No surprise, then, that investors are intent on getting money back from GPs [general partners] before considering any new commitments.”

According to the report, private equity managers now need to evaluate whether they should free up more capital for investors now or wait for markets and the economy to shift.

“At a time when LPs are clamoring for liquidity solutions, the most effective [PE managers] are finding ways to move aging assets off their books at acceptable returns while recalibrating how to drive value for the portfolio companies they plan to hold,” the report concluded.