- Goldman Sachs, Evercore, Jefferies, Raymond James and Lazard are pitching evergreen continuation vehicles to large private equity firms, structures that would let managers hold assets indefinitely. Conventional continuation funds run about five years with two annual extensions; the new versions would run 10 to 15 years or have no defined end at all.
- The fixed lifespan is the mechanism that forces realisation. A traditional fund must eventually sell and return cash, which is the only structural obligation compelling a manager to exit. Removing it means an asset can be held, and charged fees on, for as long as the manager chooses.
- The scale is already substantial. Continuation funds accounted for just under half of the $121 billion of secondary transactions in the first half, roughly $60 billion, and some assets are now rolling from one continuation vehicle into another in what the industry calls CV-squared deals.
- How investors actually get out has not been settled. Possibilities under discussion include distributions from underlying assets, money from new investors, tender offers, and staples, where an existing investor cashes out in exchange for committing capital to a new fund.
What Happened?
Managers have struggled to sell assets amid higher borrowing costs and weaker valuations. Sunaina Sinha Haldea, global head of private capital advisory at Raymond James, said the industry is at the very early stages of permanent capital continuation vehicles, which will have more unfunded capital to support asset growth with no pressure to exit. Holcombe Green, who holds the equivalent role at Lazard, said the funds will not have a defined structure because they will be customised. Bloomberg notes the structures could invite more scrutiny of carried interest and of investors’ ability to cash out, and that investors may expect higher revenue and growth potential. Goldman, Evercore and Jefferies declined to comment.
Why It Matters?
The industry is responding to an inability to sell by removing the obligation to sell, and that is the plain description of what is being proposed. Defined fund lives exist to protect investors by guaranteeing eventual realisation, whatever the manager would prefer. An evergreen vehicle converts a position with a known end date into one without, while fees continue and the manager retains control of the valuation at which the asset sits. Both of the practical concerns Bloomberg identifies follow from that: carried interest on an asset never sold is calculated against marks rather than proceeds, and liquidity becomes a matter of negotiated terms rather than contractual certainty. There is a direct contradiction with how capital is currently being raised. Blackstone just attracted $8.7 billion for an energy fund, 55% more than its predecessor, by demonstrating a distributed to paid-in capital ratio near two times, meaning investors received twice what they committed. Two Sigma failed to raise half of a $2 billion real estate target and shut the unit. Allocators are presently rewarding distributions above all else, and evergreen vehicles reduce distributions by design. Managers cannot simultaneously stop returning cash and raise new funds on the strength of returning cash. The exit mechanics deserve the most attention because they are being designed after the concept is being marketed. The staple arrangement in particular, where an investor retrieves capital by committing capital to a new fund, means liquidity is conditional on making a further commitment. Anyone evaluating one of these should treat the redemption terms as the entire question, and Lazard’s comment that the structures will be customised means those terms will differ from vehicle to vehicle with limited basis for comparison. CV-squared transactions are the existing version of the same problem, with assets passing between vehicles controlled by the same manager at valuations that manager influences.
What Next?
Watch which large firms adopt the structures first and what liquidity terms they publish, since the first few deals will set the template. Limited partner advisory committees are where resistance would appear, and carried interest arrangements on assets that are never sold are the provision to examine. For allocators the practical step is establishing how much of an existing private equity exposure already sits in continuation vehicles, and on what terms. Secondary market pricing remains the only external check on these valuations.
Affected Tickers and Coins: GS, EVR, JEF, RJF, LAZ
Source: Bloomberg
