What happens when ESOPs meet continuation funds?
The treatment of co-investments in continuation vehicles could provide guidance on how things may play out when PE-backed portfolio companies with a broad-based employee stock ownership plan are rolled into a CV.
Employee stock ownership plans are gaining traction amid an increasing focus on value creation in the private equity industry. While the jury is still largely out on the effectiveness of these schemes to investors in private equity funds, as we explored in this Deep Dive , what happens when portfolio companies with these plans are moved into a continuation vehicle?
This question is especially relevant in today’s environment as leading PE firms push for a wider adoption of ESOPs. In September, more than 50 financial institutions launched Expanding ESOPs, an initiative founded by KKR ’s co-head of private equity Pete Stavros. The initiative aims to dramatically increase the use of ESOPs across industries. Blackstone also launched a more systematic firm-wise initiative this year to expand the coverage of ESOPs.
They’re also relevant because the use of continuation funds is rising. The tool was cited as the most preferred exit route by UK mid-market GPs in a survey by Numis last year, and countless blue-chip sponsors such as Advent , GTCR LLC and others are exploring the use of CVs to hold onto assets for longer. Could a longer hold mean a delayed liquidity event for equity-holding portfolio company employees, and thereby threaten the alignment mechanisms that...
Read the full commentary piece here .