The reputation of continuation funds has undergone a “remarkable transformation”, having emerged as an important alternative source of liquidity in private markets, according to a new report from the CFA Institute.
Yet, continuation vehicles raise heightened conflicts of interest for general partners (GPs), the CFA Institute has pointed out in its new study, ‘Continuation Funds: Ethics in Private Markets’.
According to the CFA Institute, continuation funds have gained significance in private markets by meeting increasing demands for liquidity, helping them grow to an estimated $63bn (£26.6bn) in deal volume in 2024.
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The increased need for liquidity comes amid a lack of traditional exits via mergers and acquisitions, or initial public offerings.
The “drought” has left private equity buyout funds globally with 29,000 unsold portfolio companies valued at $3.6tn, and distributions to investors at their lowest level in more than a decade, the CFA Institute said, pointing to Bain & Company research.
As a result, continuation funds which were once seen as “zombie funds”, are now “a perceived repository of trophy assets”.
“Continuation funds are designed to give investors choice: Those who want liquidity can cash out, and those who want to continue their investment can roll over into the new continuation fund,” said Stephen Deane, chartered financial analyst, senior director, capital markets policy at the CFA Institute and lead author of the report.
“Many investors are happy to take the money, but some dismiss continuation funds as merely a transfer of economic benefits to the fund managers. The GP sits on both sides of the deal, stands to reset carry and extend fees if successful, and may even improve the track record of the legacy fund – all factors that can give rise to conflicts of interest.”
“Continuation vehicles make for a central case study in how liquidity, alignment and governance come together in private markets,” he added.
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The report notes that conflicts of interest can also arise among different limited partners.
Olivier Fines, chartered financial analyst, head of policy and advocacy research at the CFA Institute, said that while the UK government has stated its ambition to channel more capital into private markets to support economic growth, finance is “rarely an ‘everybody wins’ event”.
“With exit options more difficult to find and valuations under strain, continuation funds are a clear sign of the pressures building in these markets – pressures that justify paying attention to the specific conflicts of interest and information asymmetries present in the sector,” Fines added.
Read more: Continuation funds mark next stage of growth in private credit
