Continuation Funds have become a leading liquidity mechanism in private equity. You hear two different characterizations of them: They allow a sponsor to hold on to an asset that it believes still has room to grow, return capital to investors who need liquidity and bring in new capital to fund the next stage. But you also hear that they enable PE funds to kick the can down the road for potentially troubled assets that cannot be sold in a competitive market transaction at their stated valuations, and permit the fund to keep the assets on their books and collect fees for an additional holding period.
Either way, these transactions are fraught with conflicts. The PE fund is on both sides of the transaction: influencing the price, controlling the valuation narrative and, potentially, delivering different messages to the legacy investors who are cashing out and the new investors it is courting.
That conflict does not make the continuation transaction improper, but it does mean the safeguards around it – competitive process, credible valuation support, advisory-committee review and clear, consistent disclosure – carry the weight that arms length pricing normally would. Regulators and investors are increasingly testing whether these safeguards are real or merely cosmetic. The potential for legal exposure to fiduciary duty and fraud claims is real. The linked note discusses these risks and how a well-structured process can be designed to avoid challenges.
Read more here: https://www.quinnemanuel.com/the-firm/publications/client-alert-continuation-funds-come-of-age-process-conflicts-and-the-first-wave-of-disputes/
@jbqlaw