On the market of a slow Venture Capital output, they turn to the fluidity strategy often used in private equity. One of them is to create a continuation funds to increase the life of investments outside the 10-year fund period and ensure a refund from the limited partners.
Crunchbase News recently talked to Mathew EaPenPartner and Shane GoudeyPartner and chairman of Practice Funds Funds at the Law Firm Sidley Austin. They advise private investment funds, including Venture and Private Equity, in terms of their creation and current operations.
“Private Equity is very well oriented in secondary transactions,” said Goudey. “The world of the undertaking is quickly caught, and the continuation funds are an example.”
He said that #1 for the Venture fund managers in this market is the pressure of liquidity.
“Project funds are collected every three to four years, if not faster. And the fuel in the tank is payments from the basic managers of the fund or some liquidity.”
This pressure of liquidity has increased in recent years, because enterprises have collected funds value many billion dollars from equipment, retirement plans, sovereign financial funds, funds and organizations of guards with their very own obligations related to trusting assets management. In 2022, Andreessen Horowitz collected $ 9 billion for three funds LightSpeed Partners He collected $ 6.7 billion for three funds. New Associates Enterprise collected $ 6.2 billion for two funds in 2023.
“The horizons of the undertaking are very long and day by day they become longer from the point of view of liquidity,” said Goudey.
The continuation fund allows the manager to keep up longer relationships with portfolio firms, which they think are still maturing.
Lightspeed and Nea, among others, perform continuation fund strategies, as The last report with Axios. Insight partners Closed Continuation Fund 3 In October 2024, the $ 1.5 billion fund led by Harbourvest partners.
For smaller managers, these funds are not an option because they are so expensive and laborious. Smaller funds looking for liquidity are likely to sell some of their portfolios to secondary buyers.
“PE-IFICATION” of the undertaking
“Continuation funds began with a great financial crisis, and then became larger in Private Equity in 2016 to 2019 and have been exploded since then,” said Eapen.
“In private equity, where you have 100% of the company, and you have 10 to 15 portfolio companies in your fund, this is a completely different analysis – because the amount of time, energy and communication with LPS is a different bill,” he said.
“While in the case of an undertaking, when you have hundreds of portfolio companies – they have avoided complexity for some time, because of complexity, because it is basically perceived as what private equity does,” said Eapen.
Structure
To arrange a continuation fund, Venture should be a registered investment advisor. The company creates a latest vehicle, throws some resources at it and finds a latest buyer.
Current investors of the Fund can proceed to keep up their interest, sell the whole lot or sell a part. They may resolve on a latest commitment, said EaPen.
These transactions are complex and may be structured in many alternative ways.
“The best synergies here are when the general partner, LPS and the new buyers agree that this is what we want to do, these are commercial factors. And everyone is on the same side where the risk is assigned, how conflicts are revealed and how the costs are divided,” he said.
Intensive fee
“It is very intense, but also intense time,” said Eapen. Many service providers are involved, from legal firms to accountants. Companies must engage with all LP in the Fund to acquire permission, review the fund’s documents, cooperate with a valuation expert, create a fund, find a buyer, negotiate a contract and manage all payments.
“This is a really complicated merger and acquisition transaction,” he said.
Early days
“The secondary market is now very solid, but we are still at the beginning to penetrate many different managers of investment strategies,” said Eapen. “I think that as the number of secondary buying companies increases, because the adoption becomes more main, the cost of the entry will continue to be reduced.”