From hype to reality: continuation funds bear fruit for LPs

A recent continuation fund exit by TPG is further evidence that such vehicles can reward investors with the capacity and desire to roll over, or those who opt to back funds investing in these deals.

Continuation fund transactions completed since the strategy found favour prior to the pandemic are beginning to exit their assets, giving the secondaries market – and LPs considering such opportunities – a sought-after track record.

Investors in TPG‘s continuation fund for Creative Artists Agency will make a return of around 2x multiple of invested capital on the company’s exit to Artémis, the family office of French billionaire François-Henri Pinault, as affiliate title Secondaries Investor reported last week. This will be accompanied by an IRR of more than 30 percent.

TPG completed a continuation fund transaction on CAA in 2021; buyers in the $1.5 billion vehicle included Goldman Sachs Asset Management, ICG Strategic Equity, Neuberger Berman, Pantheon, Blackstone Strategic Partners, Temasek and Whitehorse Liquidity Partners, sources told Secondaries Investor. TPG agreed to sell the business in September, with the sale set to close by year end.

The exit of Creative Artists Agency is the latest example of the returns that investors in continuation funds, including rolling LPs, can achieve. Healthcare specialist ArchiMed’s exit of Polyplus, a developer of technology used in gene and cell therapy, netted investors in its €242 million continuation fund PolyMED a return of between 4.5 and 5x, Denis Ribon, chairman and managing partner of ArchiMed, told Secondaries Investor in April.

Nordic Capital’s 2018 multi-asset continuation fund, for its part, exited UK diagnostics business The Binding Site last year at a 19x MOIC on its original 2011 investment. While that is not based on the return made for continuation fund investors, participants in the GP-led process still received a “very strong outcome,” one of the backers told Secondaries Investor.

Though affiliate title Private Equity International says it has has heard anecdotally of instances where GP-led transactions have not yet delivered on their expected returns, these are understood to be in the minority.

Of course, with exits few and far between these days, cash-strapped LPs in dire need of liquidity don’t always have the luxury of rolling over into a continuation fund. What’s more, as evidenced by Massachusetts Pensions Reserve Investment Management‘s decision to grant investment staff more flexibility around continuation funds, many LPs struggle to commit to continuation funds due to governance processes.

There are other ways, however, to gain exposure to these returns. PEI’s latest LP Perspectives Study, which is not yet published, shows an LP sentiment shift towards GP-led strategies happening in real time. A third of LPs said they have backed one or more GP-led secondaries vehicles this year, compared with 28 percent last year. The share of LPs planning to back these funds has also risen from 11 percent to 16 percent.

This will be welcome news for firms like Blackstone Strategic Partners, Carlyle’s AlpInvest and Pantheon that have raised standalone GP-led vehicles alongside their flagship strategies.

Many LPs have to date adopted a wait-and-see approach to GP-leds, wanting to see whether the returns match the hype. If these recent examples are anything to go by, those with the means and the appetite to back such funds and standalone vehicles may find themselves well rewarded.

– Alex Lynn contributed to this report.