A small but growing corner of the private markets secondary market — continuation funds — might expand as managers look for liquidity for limited partners in a time of few transactions.
In a continuation fund, general partners sell a portfolio company or other assets to a brand new fund that the GP creates. The GP tends to also bring new investors into the continuation fund, including managers that invest on the private capital secondary markets.
Limited partners in the original fund have the choice of cashing out or, if they like the asset, rolling over their interest into the new fund. For the manager, this starts up management fees all over again — and it also could create a conflict since the GP is both the buyer and the seller of the asset or assets.
The stars may be aligning for continuation funds, which are a form of GP-led transactions, a newer and smaller portion of the market than traditional secondary market sales of limited partnership interests, industry insiders said.
"We've seen a pickup in GP-led activity in the early part of 2023," said Eric Foran, New York-based partner at private market secondary market manager Coller Capital Ltd.
General partners that are not managers of funds of funds or secondary market funds accounted for 35.7% of the sellers in 2022 from 27.3% in 2020, according to data from Toronto-based private capital secondary market broker Setter Capital Inc.
The GP-led part of the private capital secondary market "allows GPs to partner with management teams for a longer period and raise follow-on capital to support the companies, while also providing LPs with a liquidity option should they want it," Mr. Foran said.
Eighty percent of GP-led transactions in 2022 sold for 90% of net asset value, while only 38% of LP secondary market deals priced at 90% of NAV or better, according to a report by Campbell Lutyens, a global secondary market advisory firm.
Some investors are pressing their private capital managers to offer them a way to get some of their money out, he said.
"Exit pace has dropped and hold periods are being extended, so LPs are asking for liquidity because they are not getting distributions," Mr. Foran said.
Coller executives are also seeing an increase in tender offers, he said. These offers are not for continuation funds but they are part of the GP-led market, Mr. Foran said.
"A tender offer is where a secondary market buyer offers to buy LPs' interests in a fund. LPs can sell or not sell," he said. If the LP decides not to sell, the LP remains in the original fund with the existing fund terms.
Many tender offers have what are called "staples" associated with them in which the secondary buyer not only buys the LP interests in the fund it made the tender offer for, but the buyer also makes a commitment to the GP's new fund," Mr. Foran said.
It is a way for a private capital manager to kick-start fundraising of a new fund, which is especially valuable now when GPs are having a harder time raising funds, industry experts said.