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Private equity investors choose to cash out rather than defeating investments when acquisition managers try to hold portfolio companies beyond the survival of their funds.
According to investment bank Houlihan Lokey, 85-92% of investors have chosen to sell this year if private equity groups transfer portfolio companies to so-called continuing vehicles, rather than resigning portfolio companies to so-called continuing vehicles.
Private equity companies are now able to hold portfolio companies beyond the fund’s typical 10-year lifespan by inviting new investors and providing existing investors with the opportunity to sell their shares.
Buying Managers claim that the continuing vehicle will help them retain their best assets and gain more value creation.
However, their critics say the popularity of the vehicle is partly partly as sellers struggle to get a good valuation of their assets from external buyers in tricky trading environments.
According to Matt Swain, co-head of Equity Capital Solutions, global co-head at Houlihan Lokey, many private equitybackers are taking advantage of the opportunity to instead involve the portfolio company’s stake in new funds.
Investors in private equity funds such as pension funds and donations are “welcome from continuing vehicles (continued vehicles)” because they “experienced a lack of liquidity in recent years,” Swain said.
He added that some supporters known as Limited Partners are “cautious about rolling into these vehicles as it has proven not all vehicles will be winners.”
Last year, the private capital company sold $62 billion in assets to continuing funds. This was an almost 50% increase from the previous year, according to advisory firm Campbell Lutyens.
Swain predicted that 10-15% of all private equity exits will be through such vehicles this year. Jeffries recently calculated that the vehicle had nearly 20% sales in the first half of the industry.
Continuing vehicles usually combine capital from three sources. Cash committed by a private equity manager. And money supported by the original buyout fund supporters.
The vehicle can only accommodate one portfolio company. This is the approach used in prize assets, but it becomes a centralized risk profile – or the assets can include bets that are more diverse in risk, but with lower performance.
At least two continuous vehicles failed last year. This is the first major explosion in the industry. Wheel Pros, an auto parts manufacturer that earned nearly $1 billion in profits when Buyout Group Clearlake previously sold to the Continuity Fund, filed for bankruptcy, leaving stock investors in the new fund with a huge loss.
Mustafa Siddiqui, founder of Secondary Investment Firm Sq Capital, said that if the acquisition fund does not “give anyone else any future value growth,” and that a “lemon” continued vehicle that cannot be sold to traditional buyers was used.
The limited partner’s trick was to consider the option of rolling into the asset investment into a continuing vehicle, and for secondary investors, considering entering such vehicles along such vehicles was to decipher the “the latter is dressed to the former.”
