Private equity's latest trend: What are continuation funds?

Yahoo

a day ago

Companies are staying private longer, rather than going public in a traditional initial public offering (IPO) or merger and acquisition (M&A) deal. Yahoo Finance Senior Reporter David Hollerith explains that continuation funds, or continuation vehicles (CVs), make up most of this year's activity as private fund managers flip older assets from their maturing funds into new pools of capital.
To watch more expert insights and analysis on the latest market action, check out more Asking for a Trend.
Well, Wall Street's hottest trend this summer isn't about flashy IPOs, it's about staying private longer and in private markets, a record amount of big funds and their customers are struggling to exit positions, but they're finding a new way out. Here with more, we got Yahoo Finance's David Hollerith. David, walk us through what's going on here.
So Josh, they're called continuation funds. And effectively, you know, if you take the traditional private equity model, it's taking funds in from investors and then purchasing companies or stakes in companies and then trying to make the companies better and then eventually realizing or exiting the position to return money to investors. That's the traditional model. What we're seeing more often now, at least in a record capacity this year, is the use of these funds where they're sort of the managers are not actually selling these assets, these sponsored companies. Instead, they're holding on to them and starting a new fund, so it's effectively a rollover mechanism. And so we've seen that volume occur at a record pace in the first half of this year, and that generally means, according to Jeffries, that we'll see the rest of the year look even bigger.
And you point out, David, in your piece, the use of these funds reaching records, right? How come?
Yeah, I mean, I think it goes back to what you said in the intro, which is that there's been a slower pace of deal exits for these companies. And that means either trying to sell them like an M&A merger or also doing an IPO. And we have seen the M&A market and the IPO market sort of improve rebound this year. But the truth is that there's a lot of private equity companies with sponsored companies that are effectively that they binged on buying during like right out right around after the pandemic, and now they're sort of struggling to exit those positions. And you know, one reason is, you know, people talk about wanting companies wanting to stay private for longer, not go public. The other is that maybe these companies were overvalued when they were initially bought. So, you know, a lot of people have different opinions about it, but it's a debate, and you know, as we move through the year, it'll be interesting to see if we we see more sales in this area or more use of continuation funds.
Finally, in your piece, Dave, you also mentioned some stock performance this year and names like KKR, our parent Apollo. What what is going on there exactly?
Yeah, it's not exactly clear, but the one clear thing is that in the second quarter overall sales or exits were down about 10%. And so fear of maybe sales continuing to slow is sort of what's driving that because once these firms, at least in their private equity divisions, once they can't exit their positions, they can't raise money, new money as quickly to basically do it all over again. So their engine slows. And I think that's the concern is that there's more headwinds.
Interesting. All right, big important story. Thank you, David. Appreciate it.
Peace.