Continuation Funds are gaining increasing importance in the private equity market. These instruments enable fund managers to retain successful portfolio companies beyond the regular fund term and continue their development. Premature sales to third parties or sales below value are thus avoided. This development is driven by persistently difficult market conditions for company sales, which mean that holdings remain in portfolios longer than originally planned.
As a result, the Ypsilon Group observes an increased use of Continuation Vehicles by private equity firms. The aim is to offer investors liquidity while simultaneously exploiting the further value appreciation potential of the holdings. Tobias Hangl, Partner and Head of the Munich office at Ypsilon Group, explained that private equity funds generally have a limited term, and investors expect the return of their capital at the end of this period.
While companies were often divested after three to four years in the past, holding periods now average six years or more. Hangl emphasised that the holdings transferred into Continuation Funds are not underperforming companies, but rather those with further development potential that should not be sold below value. A Continuation Fund often represents a bilateral solution. According to observations by the Ypsilon Group, approximately one in three private equity houses within their client base currently has such a vehicle or is evaluating its introduction. This demonstrates the instrument's establishment.
According to Ypsilon, institutional investors such as insurance companies, pension funds and Versorgungswerke (occupational pension schemes) show particular interest in such structures. For these investor groups, investments in Continuation Vehicles are often easier to account for regulatorily than classic primary fund investments. According to Hangl, many new investors in Continuation Funds today are institutional investors. They gain access to already developed portfolios and can benefit from the further development opportunities of the holdings. Furthermore, thematically focused funds are increasingly emerging, for example with an emphasis on technology companies or artificial intelligence, which facilitates targeted allocation into specific market segments.
Although Continuation Vehicles have existed for several years, they were long considered a niche solution. This perception is changing, says Hangl. He explained that Continuation Funds are not a short-term trend but are developing into an integral part of the private equity ecosystem. Current market conditions have accelerated this process, but the advantages of the structure will continue to exist in the future.
