HPE Miami 2022 PE Fundraising 3.0: Continuation, Single-Asset, and Secondary Funds | McDermott Will & Emery
During this session, Ian Schwartz, Partner and Head of McDermott’s Investment Funds Practice, moderated a discussion that explored fundraising strategies and deal structures that optimize liquidity and long-term returns. term of the strongest assets of private equity funds. Session panelists included:
- Rob Campbell, Managing Director, Co-Head of Americas, Intermediate Capital Group
- Tim Fitzsimmons, Managing Director, Lorient Capital
- Garrett Hall, Managing Director, Secondary Investments, AlpInvest Partners
- Ryan Rohloff, Senior Managing Director, Evercore
The panel’s top takeaways included:
1. To help ensure the audience is speaking the same language, Ryan Rohloff offered a brief description and overview of continuation funds and why they have become so popular in recent years. “A continuation fund, in fact, is a better mousetrap than doing a fund-of-funds sale or selling one of your best businesses to another sponsor. You take an asset from any vintage and move it into a continuation fund which generally has new life in terms of duration, follow-on capital, etc. Rohloff also noted that continuation funds have been around for several decades, but for most of that time, continuation funds were only applicable to sponsors, as their funds reached 10 years or were subject to extensions. 2021 was the first year in which more than half of continuation deals, or half of the overall market, were with funds six years old or younger.
2. Rob Campbell described the types of deals his company is looking for, where they can act as a side player, and what they’re looking for in terms of alignment with the general partner: “We’re very focused on alignment. We want to see proof that the GP is a buyer alongside us in the asset. He also described what they don’t want to see: they don’t pursue deals where the GP has tested the merger market and acquisitions and failed, and have therefore pivoted to a continuation vehicle.On the other hand, the list of favorable elements that the Campbell team is looking for includes an excellent management team in place, strong organic growth within the assets and mergers and acquisitions acting as a catalyst (in the sense that the asset may have exceeded the size of the building portfolio within the flagship fund, they don’t have the dry powder to support that asset, or they are out of their investment period).
3. Tim Fitzsimmons provided the GP/sponsor’s perspective on why to seek a continuation fund rather than a traditional sale. Noting that his firm operates in a smaller part of the market, he said his firm takes a two-pronged approach to making the decision to pursue a continuation fund: “We look at it at the firm level and at the business level. of the portfolio, or fund, level.” As examples, Fitzsimmons mentioned multi-site health services, clinical businesses focused on value-based care, and others, all with the goal of realigning the investors for the next stage of growth and development of the business. He stressed the importance of being clear about the expectations for the next stage (for example, the duration or duration of the investment opportunity, the new exit strategy).
4. Ian Schwartz has suggested that a continuation fund can help strengthen existing relationships between private equity sponsors and portfolio company management teams. Fitzsimmons agreed, saying, “A lot of them spring from the dynamics of the management team; they are good assets and very good management teams, and as everyone knows, management teams are a leading indicator of the success of an investment. A continuation fund allows this relationship and connection to continue. Rohloff noted that, from a process perspective, many of these transactions are relatively frictionless for management and allow them to continue executing the plan. “These transactions allow you to provide cash to management, reload it with a new management incentive plan, and really realign all constituents to the new cost base, without putting them through the exercise that they would do with a traditional release.”
5. Garrett Hall pointed out a distinction between the continuation fund and M&A processes, noting that his company spends a lot of time talking with GPs to get a sense of the quality of the business so that can reduce process risks and build collaboration. Campbell stressed the importance of frank and early discussions so that investors can be directed to appropriate opportunities and transactions that satisfy all players. Hall reiterated that multi-asset deals are much easier to negotiate and close than single-asset deals, and the secondary market demand is much deeper for the former. Therefore, you should think more holistically and bundle multiple chords together, rather than pursuing a series. unique pieces.
6. Fitzsimmons noted that healthcare has always been a specialized strategy and must respond to unique regulatory and other dynamics. That said, he added that the market is jam-packed, including new funds, spinoffs, relaunches and more, so limited partners (LPs) are currently feeling stretched. Public markets are likely to have an effect on fundraising and the availability of capital, and many LPs are waiting to see how things unfold. Hall suggested that people open their minds to the new ways capital is raised today (blind capital, secondary capital, etc.) and that these methods work on different cycles. Continuation fund opportunities are worth exploring, and as Schwartz concluded, the field is only going to grow.