New analysis forecasts that the global continuation investment market – also known as GP-led secondaries – is set to more than quadruple in size over the next decade, potentially redefining value creation in private equity.
The Schroders Capital private equity team forecast as a base case that, by 2034, annual exit values from continuation investments will reach over $300bn (£222bn) – up 329% from 2024 levels – boosted by growing investor demand, structural supply-side factors and a shift in strategy across the buyout landscape.
Nils Rode, chief investment officer at Schroders Capital said: “Even our conservative estimates show significant growth for the continuation investment market. Under more optimistic assumptions, this growth could be even higher.”
While some commentators suggest that the growth of the continuation fund market is merely cyclical, driven by a temporary drought in traditional exit routes against a challenging macroeconomic and market backdrop, Schroders Capital analysis suggests that 80% of the 2024 transaction volume for continuation investments is driven by structural growth, not cyclical effects.
“Continuation investments allow the successful transformation of portfolio companies to continue under the same fund manager when no change of control is needed,” added Rode. “These transactions are made possible by lead underwriters, such as Schroders Capital, who team up with GPs [general partners] and often inject new capital to help underlying portfolio companies accelerate growth and scale.”
Schroders Capital believes there are five key structural factors that are driving the growth of this segment, reflecting a combination of long-term market evolution and short-term dynamics.
One, is an established route for company transformation, with continued private equity ownership beyond initial holding periods enabling further value creation without the disruption of changing owners.
Two, not all assets require new owners. Based on Schroders Capital analysis of 2,600 buyout investments, a significant share, up to 31% of portfolio companies can be further improved under the same fund manager, making continuation investments a natural progression.
Three, is cost-effectiveness. Continuation funds have lower fees and more efficient structures than traditional buyouts – about half the fees – with investor lifetime fee savings for the 2024 vintage years estimated at close to $4bn.
Four, is predictable returns and faster liquidity. These investments tend to generate more stable outcomes, and a 25% faster time to liquidity, benefiting investors seeking more predictable returns and cash flow.
And five, the current slow exit environment acts as additional tailwind. Macro headwinds and reduced traditional exit routes have increased the availability and appeal of continuation investments.
However, structural factors remain the primary growth driver. Importantly, exit markets are expected to recover in the coming years.
Nils Rode added: “The most profound disruption is not in the concept of holding companies longer under private equity ownership, that has been common for years. It instead lies in who retains ownership.”
“The term ‘GP-led secondaries’ is a misnomer that leads to significant misunderstandings as the fund managers typically retain, and often even enhance, their interest in a portfolio company and do not realise performance fees,” said Rode. “We believe that ‘continuation investments’ is a better term to describe this new kind of investment.”
Rather than selling to another fund manager, more portfolio companies now remain with the same manager through the use of continuation vehicles, typically including new capital, enabling the continued execution of successful transformation strategies beyond traditional holding periods.
As a result, continuation investments allow lower mid-market managers to maintain control for longer, providing greater continuity and fresh capital to portfolio companies, while also offering more attractive terms to lead underwriters and other new investors compared to traditional sales from one fund manager to the next.
This development is disrupting deal flow, particularly for mid and large buyouts, where secondary buyouts, one fund manager selling to the next, have historically comprised about half of transactions.
As continuation investments become a more attractive and cost-effective option, large private equity firms and secondaries managers are increasingly launching dedicated continuation strategies.
This trend is already driving innovation, such as hybrid arrangements where a fund manager retains ownership for the continuation of the transformation of a portfolio company, while an additional fund manager joins and shares partial ownership to bring in specific skills for the next phase of company transformation.
While continuation investments are proliferating across the private equity spectrum, Schroders Capital’s analysis highlights the lower mid-market – defined as companies with enterprise values below $1bn – presents a “particularly compelling proposition”, offering a broader and more diverse set of opportunities than the large buyout space.
Over the past two years, more than two-thirds of continuation fund opportunities evaluated by Schroders Capital involved companies valued under $750m.
This segment is especially attractive due to more favourable transaction economics, noted Schroders, including lower entry valuation multiples and greater potential for transformational growth. Smaller businesses tend to have more avenues for operational improvement, geographic expansion and product innovation, enhancing the scope for value creation.
The lower mid-market also benefits from a wider range of exit routes – notably including sales to other private equity fund managers – greater resilience during periods of market stress, and less dependence on volatile public markets for liquidity.
Furthermore, these companies are often more domestically focused and service-oriented, providing portfolio diversification and reducing exposure to global market shocks.
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