Under the hood
So what’s the truth of the matter? Two new academic papers that examine CVs provide some insights. The first, ‘From Exit to Extension: The Rise of Continuation Vehicles in Private Equity‘, looks at who is engaging in CV transactions, the assets these vehicles contain and the potential for conflicts of interest.
It finds that it is typically more established GPs with strong track records that launch CVs and that the assets involved are also often of high quality – realised returns at the point of transfer sit at a median gross IRR of just over 36%. “We had expected to find, given the prevailing narrative around CVs, that the performance of the assets transferred would be high,” explains Leon Luepertz, one of the study’s authors. “But it really looks as though these are often stellar assets – we were surprised how strong the effect was.”
The second paper, ‘Selling to Yourself: Continuation Funds in Private Equity‘, also looks at CV characteristics and examines LPs’ responses – the extent to which they roll their investment into the new vehicle or sell. It confirms that strong GPs tend to launch CVs, but finds that, among legacy LPs, fewer than 6% opt to roll.
LPs are opting to sell because, while they are comfortable doing due diligence on a fund, they are not comfortable analysing direct deals. They don’t have the wherewithal to do that. Recent liquidity pressures only add to the desire to sell.
Michael Weisbach, The Ohio State University, Fisher College of Business
“If you think about CVs from first principles, they don’t make a lot of sense because you are adding a whole set of additional transaction costs, information asymmetries, plus extra time and effort for the GP to continue owning an asset it already owns,” says Michael Weisbach, a co-author of the paper. “From the outside, they also look like quite unattractive deals from an existing LP’s perspective because 94% choose to sell.”
On closer inspection, however, they make far more sense, adds Weisbach, especially from an LP perspective. “LPs are opting to sell because, while they are comfortable doing due diligence on a fund, they are not comfortable analysing direct deals,” he says. “They don’t have the wherewithal to do that. Recent liquidity pressures only add to the desire to sell. But actually, the policy of many LPs is to sell, so they couldn’t roll even if they had the resources to do so.” The Weisbach et al paper also finds that the decision to sell or roll has evolved over time. In 2018, around 15% of LPs rolled; by 2025, this had fallen to below 5%. Some of this may well have to do with the liquidity squeeze that many LPs experienced in the recent exit-constrained market, but the researchers have another theory. The market for GP-led deals has become increasingly competitive as more buyers have emerged. This naturally leads to higher prices for CV assets, which makes selling an attractive option for existing LPs.
GPs may not always be mindful enough of the constraints on LPs and may not give them sufficient time.
David Jolly, Coller Capital
It’s a dynamic that Gregorio Marini Clarelli, investment director, alternatives, at PFC, recognises. As a family office, PFC has been involved in two CVs: one in which it committed as a new investor because there was a strong strategic logic to the deal; and the other where it opted to sell, in part because the same structural terms and governance as the original deal were not on offer, but also because “the valuation was a little higher than we’d be willing to pay”, he says. Overall, he adds: “The market has become competitive for single-asset CVs, which means the discount has compressed over the years.”
Yet Marini Clarelli also offers a different reason for LPs selling in such high numbers. “Many LPs opt to sell not just for resource or liquidity issues,” he says. “If they have made a return, they can take capital off the table and deploy it elsewhere in investments that make sense to them. If they roll, they might put at risk their investment, or they might, having originally invested in the mid-market, become investors in a larger buyout that offers a different risk-return profile from the one they were seeking. I’m not surprised many opt out. It doesn’t mean it’s a bad investment; it’s just not for them any more.”
But there is another variable that the Weisbach et al paper highlights: it finds that LPs are more likely to roll when given longer timeframes to make their decisions. “GPs may not always be mindful enough of the constraints on LPs and may not give them sufficient time,” says David Jolly, partner at Coller Capital. “There are often just two or three people managing large portfolios of LP positions and if multiple CVs land on their desks at once, it can be challenging to work through them. LPs need a fair amount of time.”
