With Continuation Funds on the Rise, We Are Here To Help

Thinking of doing a continuation fund? Let us help with the fairness or valuation opinion.

Cassel Salpeter is a market leader in providing fairness opinions and valuation opinions, including providing various fairness opinions and valuations in connection with a continuation fund. Our advisory services team provides high quality and defendable deliverables to executives, boards, committee members, PE funds and their GPs, to fund advisory committees, owners and other interested parties in a variety of contexts and situations and have issued over 225 fairness or solvency opinions on transactions ranging from simple acquisitions, related party transactions, and sales to highly complex transactions. In addition, our team has completed over 675 valuation assignments covering a broad range of valuation services and requirements.

What was once seen as a path for tradability for an underperforming or difficult-to-exit portfolio company because of poor timing, has now become an increasingly attractive way to manage and extend the profitability of a fund’s best performing portfolio companies, while giving the LPs a liquidity opportunity.

continuation funds on the rise

A continuation fund is an alternative to a more traditional exit which involves a private equity fund selling one or more portfolio companies to a newly formed continuation fund that is formed for the purpose of acquiring or retaining these companies to be managed by the same sponsor. This trend is attributable to several factors, including the slowdown in the M&A and IPO market (reducing traditional exit opportunities), lower valuations, and the rise in the average holding period of portfolio companies in the United States, which has increased to 6.4 years, up materially from 5.1 years in 2021, according to PitchBook.

A continuation fund can provide a liquidity event for the limited partner investors in the original fund, but also offers the ability to not sell at what the GP might believe is an inopportune time. The formation of a continuation fund enables sponsors to keep well performing investments with additional valuation potential, while providing time for underperforming investments to stabilize or increase in value before an exit and gives the limited partners the opportunity to either roll over their equity or the option to sell their interest.

The increase in these fund-level affiliate transactions, which is estimated to have more than doubled as a percentage of overall sponsor-backed exits from 2020 to 2023, from 5% to 12%, according to Jefferies’ Global Secondary Market Review, presents challenges related to potential conflicts of interest. Primarily, private equity firms sit on both sides (buy and sell) of the transaction. As continuation funds have grown in popularity over recent years, the path forward, strategy, legal requirements, and diligence have evolved alongside the growth. Cassel Salpeter can help navigate these nuances.

In 2023, the SEC and ILPA issued new rules and guidance with the purpose of increasing transparency and ensuring processes are in place to limit inherent conflicts of interest. These mitigation methods include a requirement that a fairness or valuation opinion be obtained in connection with GP-led continuation fund transactions.

A fairness opinion is often considered the preferred financial opinion standard because it directly addresses the consideration to be received by a specific selling party (or to be paid by a specific buying party) in a transaction. A valuation opinion is conducted with a similar process and level of rigor as a fairness opinion but affords additional flexibility as to the securities or asset(s) addressed by such valuation conclusions.

Under the new regulations, these opinions are now required to be part of the corporate governance utilized in continuation fund transactions. By standardizing the use of valuation and fairness opinions, these regulations not only bolster investor confidence, but also promote ethical conduct within the industry. These consistent and transparent procedures facilitate the protection for both general and limited partners.

Cassel Salpeter monitors changing regulations and remains current with guidance and best practices recommended and used by the industry. We pride ourselves for understanding and respecting the process and specific needs of each client and situation. We are here to help. Contact our team members if you have any questions or if we can assist you in the process.