Application of Continuation Funds in Private Banking, Wealth Management, and Family Offices and Opportunities for Affluent Investors

Disclaimer: The views and opinions expressed in this article are solely my own and do not necessarily reflect the official policy or position of my employer.

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Continuation funds, traditionally the domain of institutional investors, are increasingly catching the eye of private affluent investors and becoming a focal point in the wealth management strategies of private banking and family offices. This segment, comprising high-net-worth individuals and family offices, finds unique value in these vehicles. For these investors seeking bespoke investment solutions, continuation funds offer a unique blend of benefits that align well with the goals of wealth preservation and growth. In this article I explore the potential use and strategic benefits that continuation funds offer to these private affluent investors.

What are Continuation Funds?

Continuation funds are specialized investment vehicles in private equity, designed to hold one or more existing investments from an older fund. Their primary purpose is to extend the holding period of these assets beyond the typical 10-year lifespan of a traditional private equity fund. This extension allows for further maturation of the assets, potentially leading to enhanced returns.

Generally, Continuation Funds offer the following advantages:

- Extended Investment Horizon: They provide the much-needed flexibility to hold onto assets longer, allowing them to reach their full potential.

- Liquidity Solutions: Limited partners (LPs) in the original fund get an opportunity to cash out if they desire, offering liquidity that is often scarce in private equity.

- Alignment of Interests: By focusing on fewer assets, fund managers can align their efforts more closely with the performance of these assets, potentially leading to better outcomes.

- Risk Mitigation: These funds can reduce the pressure to sell assets at suboptimal times, mitigating forced-sale risk.

General Drawbacks of Continuation Funds:

-?Complexity and Costs: Setting up a continuation fund can be complex and costly, involving legal, administrative, and transactional expenses.

-?Potential for Conflict of Interest: The interests of the original and new investors may not always align, leading to potential conflicts.

-?Performance Uncertainty: The extended holding period does not guarantee improved performance and may lead to stagnation or depreciation of assets.

Latest Trends in Continuation Funds

Recent years have seen a surge in the use of continuation funds, driven by the growing need for flexible liquidity solutions. According to Private Equity Insights (Dec 2023) these funds accounted for 80 percent or ca. USD 14.4bn of total sponsor-initiated secondaries market deal volume in H1 2023. The continuation fund market broke new ground in 2023 with the creation of the first such vehicle in Japan in a joint deal between J-Star and Neuberger Berman. The scale of continuation fund transactions has been growing, with some deals reaching billions of dollars, like AlpInvest Partners announced the closing of its lead investment in a USD 2.2bn continuation fund of Leonad Green & Partners. Originally dominated by institutional investors, the investor base for continuation funds is diversifying to include family offices and high-net-worth individuals. As such funds gain prominence, they are coming under increased scrutiny from regulatory bodies, necessitating transparent and compliant practices.

Integration into Private Banking and Wealth Management

Private banks and wealth managers are leveraging continuation funds to offer their affluent clients a differentiated avenue for portfolio diversification. The main purpose of this trend is to provide access to mature, high-potential private equity assets that are not readily available in traditional investment channels. Given their extended investment horizons, continuation funds fit well into the long-term wealth planning strategies often preferred by high-net-worth individuals. They cater to the demand for investments that can deliver sustained growth over extended periods. Wealth managers also utilize continuation funds as a tool for risk management. By investing in more mature assets, these funds can potentially offer a balance between high returns and reduced risk, a combination sought after in wealth preservation strategies.

Use Cases for Family Offices

Family offices often have specific investment philosophies that focus on long-term value creation and capital preservation. Continuation funds align with these philosophies by offering investments in mature, stable companies with a track record of performance. Unlike traditional private equity funds that pool investments in multiple companies, continuation funds can offer direct (co-)investment opportunities in specific companies. This is particularly appealing to family offices that prefer direct control and influence over their investments. This investor group often has the resources and expertise to conduct in-depth due diligence. Continuation funds, with their focus on individual or a small number of assets, allow for a more thorough understanding and assessment of investment opportunities.

Challenges and Considerations

This type of funds often requires substantial minimum investments, which may be a barrier for some private investors. The nature of these investments demands thorough due diligence, necessitating a deep understanding of the specific assets and the market dynamics surrounding them. Despite offering a solution to liquidity challenges in traditional private equity, these funds are still relatively illiquid compared to public market investments, a factor that private investors must consider. Private affluent investors must navigate the regulatory and tax implications of investing in continuation funds, which can vary significantly depending on the jurisdiction and the structure of the fund.

The Growing Appeal in the Current Market

For private affluent investors, continuation funds represent an evolving opportunity to engage with private equity in a more targeted and flexible manner. While these funds offer distinct advantages, they also come with their own set of complexities and risks. As such, affluent investors must approach these opportunities with a comprehensive understanding and strategic foresight.