Historically dominated by large secondary investors, CVs (“Continuation Vehicles”) are now attracting increased attention from smaller LPs (“Limited Partners”) who recognize them as promising investment opportunities. CVs not only provide investors with better access to high-quality and diversified assets but also offer competitive returns.
Continuation Vehicles: A Growing Force in Private Equity
CVs have gained substantial traction within the private equity (PE) landscape. In 2023, they accounted for 40% of GP-led secondary transactions, marking a 30% increase from 2021. This growth has been driven by GPs seeking to retain and continue managing their best assets while providing liquidity to existing LPs. By holding assets for longer periods, continuation vehicles give GPs an effective tool to extend the lifecycle of promising investments, offering both secondary and primary investors new opportunities to generate returns.
The Dominance of Secondary Investors
In 2023, secondary investors accounted for approximately 80% of all capital invested in CVs globally. However, this dominance is concentrated among a few major players, such as Ardian, Lexington Partners, and Coller Capital. Ardian alone represents around 15% of global secondary volumes, and together with Lexington Partners and Coller Capital, they contribute 40-45% of the estimated total global annual volume.
As a result, GPs are naturally keen to diversify their investor bases and leverage CVs as an opportunity to attract primary capital, opening the door for smaller LPs with primary capacity.
Why Smaller Investors Should Get Involved
One key reason smaller investors should consider CVs is the potential for higher returns. GP-led CVs often generate IRRs of 18-20%, surpassing the ~15% IRR typically expected in mid-market buyouts. These higher returns are thought to come from the superior quality of the assets—often later-stage with stronger track records. This lower blind pool risk, commonly associated with earlier-stage investment funds, makes CVs more attractive and worthwhile.
Another important reason is that CVs provide smaller LPs with access to assets that would typically be out of reach in traditional fund structures. GPs tend to transfer their best-performing assets into these vehicles, making them a valuable addition to an optimal private capital portfolio.
Overcoming Barriers for Smaller Investors
Historically, higher minimum capital requirements have kept smaller investors away from CVs. However, as GPs seek to broaden their investor base, they are offering co-investment opportunities with lower entry points, benefiting smaller LPs. According to Hamilton Lane, the segment of CVs targeting smaller LPs has grown by 15% over the past 24 months, demonstrating how GPs are embracing greater flexibility in capital commitments and liquidity requirements.
Some GPs are also creating specialized CVs tailored to smaller LPs, with more flexible capital commitments and investment horizons. These newer, more inclusive structures help level the playing field, making CVs more accessible to nimble LPs.
The Role of Quest in Continuation Vehicles
At Quest Fund Placement, we have developed a unique approach to raising capital for CVs. Our ability to syndicate smaller LPs into CVs positions us as an attractive partner for GPs looking to diversify their investor base and raise primary capital. We work closely with both secondary and smaller investors, ensuring that GPs can access a wide range of capital sources while enabling smaller LPs to invest in high-performing, top-tier assets.
CVs are no longer solely the domain of large secondary investors. As GPs increasingly seek capital diversification, smaller investors have more opportunities to participate in these lucrative vehicles. Offering the potential for higher returns, access to premium assets, and flexible investment structures, CVs are a compelling option for smaller LPs. As the market evolves, the opportunity set for smaller investors will continue to expand, and Quest is well-positioned to help them take advantage of this growing trend in private equity.