Financing continuation vehicles: key insights for Fund Managers

We explore how continuation vehicles are reshaping private markets and key strategies for fund financing, risk management, and debt structuring

By Penelope Rance

5 minute read time

Arising in the aftermath of the 2008 financial crisis and popularised during the pandemic’s economic uncertainty, continuation vehicles (CVs) offer fund managers a route to further develop, and increase value from, promising investments. With market volatility continuing to impact private market exit terms, CVs allow GPs to retain favourable assets, while giving LPs the choice of either maintaining or increasing their stake, or cashing out.

“Closed-ended funds have a finite life, but if you have a strong asset with further growth opportunities, you may not want to sell it and allow someone else to capture the additional upside,” points out James Hamelin, Director, Institutional Banking at RBS International.

“Continuation vehicles can also offer time for an asset to recover or reach its full potential,” adds Pierre Bean, Director, Institutional Banking at RBS International. “Fund managers might want to work on a troubled asset or freshen its investor base, so spin it into a continuation fund.”

These options mean the popularity of CVs is growing: the CFA Institute reports that over the last five years, global CVs have tripled in value, reaching an estimated $63bn in 2024. As a result, the need for financing for such vehicles is also increasing. But while the security used for CVs is essentially the same as for standard sub-lines, any uncalled investor commitments, GPs need to understand the particular nuances of fund financing for CVs. These centre around capital composition, debt structuring, asset valuation and risk.

Capital composition considerations

Lenders use the balance of rollover to incoming capital to gauge investor conviction and liquidity dynamics. High rollover (e.g. existing investors wishing to retain a stake) may signal stability, but low levels of new capital raise concerns over financial flexibility and future fundraising. “There’s no magic ratio of existing to new investors,” says James. “It’s great if existing LPs believe in the asset – but we also like to see new capital coming in.”

The source of new investment is also important to lenders, with institutional capital sending a positive signal. “We want high-quality institutional money coming into the investor base because ultimately, where the finance package is a subscription line, our recourse is back to those underlying investors. We also know large, well-versed secondary funds will assess the risk, do the appropriate levels of due diligence, and validate asset valuations,” outlines James.

Demonstrating investor diversification is also desirable, but can be challenging for CVs. “Secondaries tend to come in with big commitments, meaning a smaller pool of investors,” points out Pierre. “Although, because they’re fund of funds (FOFs), we recognise that they represent capital from lots of different investors on a look-through basis, which does help with the question of diversity. On the other hand, some secondaries FOFs can operate with over-commitment strategies and we would want to understand what impact that might have on the risk profile, such as where the FOFs is in its lifecycle and deployment strategy.”

He adds: “It’s also important for lenders to see a good level of day one investor equity paid into the structure to help de-risk the facility, as this ensures there is good investor impetus in the transaction at the time the lender goes on risk.”

Fair asset valuation

Unlike new funds, CVs are acquiring assets which are already under the control of the sponsor – and lenders will interrogate the valuation methodology. “Because some investors are being paid out from the existing pool, some are rolling up, and new investors are coming in, lenders want to see fair market pricing for both buyer and seller, based on due diligence and sector comparables in the market,” says Pierre.

Independent third-party validation ensures transparent valuations and assures lenders that conflicts of interest are being addressed. “If a sponsor is both liquidating an existing fund and managing the CV acquiring the assets, there’s a potential conflict,” explains James. “External pricing validation means liquidating investors get a fair market value for their position.”

Assessing risk

Historic manager and asset performance can help banks evaluate lending risk. “It’s preferable if we provided financing to the original fund, so we’ve got a lending track record with the sponsor, and access to investor reports,” points out James.

The number of assets being transferred to the CV also impacts lenders’ risk assessments, with greater inherent risk in more concentrated vehicles. “More assets mean more diversification, which lenders are happier with. In a lot of CVs, however, there’s just one or two assets,” says Pierre. When structuring a deal against a concentrated asset pool, increased scrutiny on the asset(s) and the strategy will be required.

Appetite among lenders tends to differ when considering single asset or highly concentrated asset pools. It’s typical to manage these additional risks via familiar NAV-style covenants. “This could include a minimum number of assets, a minimum NAV to be held, a minimum LTV, or other asset performance-based covenants” says James. “Lenders can structure the transaction like a NAV deal to give themselves protections regarding concentrated assets. This could also include mandatory prepayment mechanics on some realisations.”

Different debt structuring

The motive behind the CV, such as a liquidity event, long-term hold or strategic pivot, influences not only risk and lending appetite but also debt structuring – which needs to accommodate legacy terms, existing investor rights, level of leverage, undrawn capital cover, asset diversification and asset-level financing.

“Are GPs planning on holding or growing the asset? Are they doing follow-ons, pursuing M&As, or is there a bespoke exit strategy which needs support? Do they need ongoing funding or a single hit? It all affects the structure of the lending facility,” says Pierre.

Fundamentally, lenders want a clear pathway to repayment. “For a standard sub-line, the lender is typically going to get repaid by capital calls from investors, but with a CV, the lender could be bridging equity or could have to wait for repayment from asset sales,” says James.

Flexible financing

It’s clear that CVs continue to grow in popularity, allowing fund managers to extend the life and value of assets beyond traditional fund terms, while offering flexibility to investors amid market uncertainty. The underlying characteristics for each CV are likely to vary from deal-to-deal and understanding these nuances is vital for a lender. Fund managers should therefore engage early with banking partners to ensure CV debt structuring aligns with investor dynamics and asset realities. “It’s a more complex, nuanced transaction than a standard subline deal for all the reasons discussed in this article, and lenders want to fully understand the CV strategy and assets,” says James.

While the CV market is growing, there are still a fairly limited number of comparables in the market and facility structuring is yet to be standardised. “These vehicles highlight how the industry is innovating in terms of available products,” concludes James.

To discuss how we can support you with lending for CVs, please reach out to your relationship team.

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Financing continuation vehicles: key insights for Fund Managers

By Penelope Rance

5 minute read time

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