E311: How Continuation Vehicles Quietly Reshaped Private Equity

0:00Benjamin Carper:So Ben, you help lead the 90-person secondaries team at Jeffries, which is largely focused on the continuation vehicle space today. Why is there such a focus on continuation vehicles today?

0:14David Weisburd:Well, continuation vehicles represent one of the fastest growing and probably most innovative parts of the private markets. There will be announced in the next week or so north of$110 billion of continuation vehicle volume in 2025. That's a second record year in a row for the market and up quite significantly from where we were in 2024 at about$75 billion of continuation vehicle volume.

0:49Benjamin Carper:Is there an 80-20 aspect to this$110 billion where there's a few firms driving the majority of that behavior?

0:57David Weisburd:It's quite broadly distributed amongst a variety of not just mid-market, large-cap, smaller-cap buyout-focused firms, but venture capital firms. Are these$20 million vehicles,$200 million vehicles? The general market is around half a billion dollars of size for an individual continuation vehicle with the range between, you know, a hundred million dollars to five billion dollars. The companies that are being involved, contributed to continuation vehicles are companies that could be$50 million of EBITDA or$500 million of EBITDA. There's definitely a strong cohort of mid-market companies that are being targeted by continuation vehicles, but we're also seeing continuation vehicles for pre-IPO VC darlings as well, the Stripes and Databricks and Anthropics of the world.

2:00Benjamin Carper:And I want to get into in a little bit deconstructing what a typical continuation vehicle deal looks like. But first, why this trend for continuation vehicles? Why has there been such an increase in volume over the last couple of years?

2:18David Weisburd:It's a confluence of factors that is driving the category forward and really up and to the right these last couple of years. What continuation vehicles do at their core is help sponsors manage portfolio companies that are not necessarily well-timed to the 10-year closed-end private equity fund life cycle. You know, the five-year hold period that you oftentimes hear private equity firms talk about.

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4:46Benjamin Carper:Last year, you're dressing up the asset to sell. First year, you're really trying to get a sense for management. So you kind of have these two dead years, which, why does that matter? Well, if you're holding it for five years, 40 % of your time is spent either trying to get up to speed on opportunity or trying to dress up an opportunity. But perhaps most importantly, what's a little bit absurd about that is that the going practice is to build these assets, often cases, actually turn them around, replace management, do all these painful things And then when you're done within five years, sell it to your competitor.

5:24Benjamin Carper:And that's just been the established practice versus a CV allows you to keep your winners and to continue compounding those winning assets with this asymmetric information where GPs are able to know what's exactly the company that they're buying.

5:40David Weisburd:That's exactly why the market has accelerated as it has. And the solution, the continuation vehicle market is looking to provide. There's obviously a lot of friction that happens when a company is sold and a board changes over and a management team is reintroduced to new owners, potentially replace. There are a lot of private equity-owned businesses that have established growth plans and a playbook that's really working, be it organic or inorganic trajectories. And continuation vehicles just allow sponsors to have more time and capital to prosecute those already working strategies.

6:26Benjamin Carper:Last time we chatted, you were very frank with me and told me some LPs like continuation vehicles. Some dislike it. Most actually hold both opinions at once that have this cognitive dissonance. Why do LPs like continuation vehicles and at the same time don't like those same vehicles?

6:45David Weisburd:Continuation vehicles are a pretty steady source of liquidity and not just liquidity, but cash liquidity for LPs. So about a little bit shy of 20 % of all private equity distributions in 2025 are happening via continuation vehicle transactions. So check one for LPs who haven't seen a lot of liquidity. They also allow LPs to compound winners in their portfolio and keep that capital invested over time versus see one sponsor sell a company to another sponsor and maybe in their exact same roster of managers. And, you know, quite often LPs are committing capital to secondary funds and continuation vehicle focused funds because they see them as a gateway to getting access to really high quality companies featuring superior transaction dynamics and alignment dynamics with both sponsors who are supporting the continuation vehicles as well as management teams at the portfolio companies underneath of them.

7:56David Weisburd:Now, there's some cognitive dissonance to your point because continuation vehicles have created a portfolio management consideration and motion, frankly, that didn't exist for many LPs 10 years ago. If you were an LP with 100 different line items in your primary fund roster 10 years ago, then you may see one continuation vehicle election in your entire roster of managers. Going back to the stat that I shared that continuation vehicles are representing 15 to 20 % of all private equity exits, you're now looking at a dozen plus LP elections in your portfolio.

8:43Benjamin Carper:In many ways, having LPs play a direct investing role. A lot of LPs are not set up to do direct deals. Now they essentially are re-underwriting it on a direct basis. It's a different skill set almost. Yeah, no, that's right. I think that's where a lot of the consternation comes from for LPs is how do they handle that

9:05David Weisburd:new responsibility in their portfolios.

9:08Benjamin Carper:LPs also, and I think rightfully so, have skepticism to say the least about these marks in these CV transactions. Abu Dhabi Investment Corporation went so much as to sue one of their managers because of that mark. How do LPs know that this is the right pricing? What's their mechanism for ascertaining the true value of assets?

9:31David Weisburd:There are a few different ways that these continuation vehicles can be priced. The most common mechanism is for a sponsor to hire an advisor to run an auction process really focused on continuation vehicle investors that would bid for the asset and submit term sheets for a continuation vehicle opportunity. These are a host of both traditional secondary investors as well as a variety of new entrants that historically were not focused at all on continuation vehicle investments and are now raising dedicated strategies focused on the segment. So that's one of the ways that these transactions are priced is via this M &A-like auction process.

10:30David Weisburd:But instead of targeting financial sponsors and strategics, you're really focused on these continuation vehicle investors. The other way is as part of a equity recapitalization of a business that is led by another financial sponsor.

10:47Benjamin Carper:The asset was worth a billion dollars at entry point. Let's say now another buyout firm wants to come in at a$5 billion valuation, but the GPs from that fund that invests at a billion dollars want to essentially co-invest or co-manage with that$5 billion. Is that what you're talking about?

11:03David Weisburd:Yeah, that's right. So at the larger sizing end of the spectrum, the$5 to$10 to$15 to$20 billion TEV companies that are private equity owned, quite frequently you'll see two, three different private equity firms as well as large institutional investors become direct owners of those companies. So company went from a billion dollars to five billion dollars owned by the same sponsor. Now that sponsor has a lot of equity to be parted with as it's thinking about an exit. It may bring in another sponsor for a billion dollars at that five billion dollar valuation, leaving quite a lot of unrealized value that they continue to hold.

11:51David Weisburd:The continuation vehicle in that instance could be used to monetize that residual stub that they weren't able to get liquidity on at that$5 billion valuation. That's maybe about a quarter of the continuation vehicle market. Again, the vast majority of these transactions are being priced by auctions targeting CB investors.

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14:13David Weisburd:Yeah, continuation vehicles are really predicated on a rollover option for LPs, a flexible rollover option for LPs. This is a great option for LPs to either take liquidity or to continue to compound a position that already exists and is performing quite nicely. and LPs need to feel like it's truly an option for them to be able to do exactly just that. So that rollover option is a particularly important leg of the stool for these transactions full stop.

14:54Benjamin Carper:Do you have LPs that are rolling some and taking some chips off the table?

14:59David Weisburd:Yeah. That's kind of the best practice? Typically, we see LPs either take full liquidity or roll over their entire position in a CB. But you'll have a host of LPs that go in either direction. And you do have a bunch of LPs that also say, gosh, I'd love to take my cost basis back, but I can probably roll the rest.

15:22Benjamin Carper:What are you looking for as a banker on these deals? What's the most attractive type of deal and why?

15:29David Weisburd:I'll answer that question two different ways, one of which being the general profile of the company that is in consideration. There's a really broad level of interest from continuation vehicle investors for mid-market companies that in the call it$25 to $250 million of EBITDA zip code that have reoccurring revenues, predictable future cash flows, inorganic and organic growth vectors, be it a bolt-on M &A strategy or a cross-selling strategy where they can build market share or build products to be sold to their existing customers. Those are the profiles of companies that we really, really love to bring to market and absolutely resonate with continuation vehicle investors.

16:30David Weisburd:In terms of general transaction, we obviously prefer to work with sponsors that are willing to eat their own cooking and roll the vast majority of their crystallized interest into the continuation vehicle. That sign of conviction and alignment is one of the reasons that the continuation vehicle market exists, frankly, and operates as seamlessly as it does.

16:58Benjamin Carper:In that same vein, if you're advising LPs, kind of three check the box preliminary questions on whether they should double click on a CV in their own portfolio or otherwise, what are those like three questions you should ask? How did you get here?

17:15David Weisburd:Is a great gating initial question for LPs. Background of the investment, how did it perform? What were the specific layers of growth that had benefited from? How you thought about monetization up until this point? What strategic alternatives did you consider for the company before deciding that you wanted to attempt a continuation vehicle transaction. The continuation vehicle market is in a dustbin for companies that cannot be sold. Is the growth trajectory of the business that has been executed so far, does that have legs to continue over another five-year holding period as illustrated? You know, have the company reached a scale where M &A is no longer adding to the bottom line or the wallet share for customers cannot be, you know, really further maximized.

18:16David Weisburd:So the figuring out whether or not there's a disconnect between the last five years and the future five years is another important element.

18:25Benjamin Carper:Said another way, is this an asset that essentially has run its course? You have the GPs that are rolling their equity. You have the legacy LPs and that fund that oftentimes roll for the rest of the continuation vehicle. Who's gobbling up these opportunities today, 2026?

18:44David Weisburd:The vast majority of the capital going into the CVs right now represent institutional investors who obviously represent LPs, traditional limited partners, investing in private equity, private credit, real assets. And there's a there's a host of of established large players in that category between Collar Capital, Alpenvest, HarperVest, Neuberger Berman. And there are also hosts, as I referenced a little bit a little while ago, a host of new entrants who are really focused on single asset continuation vehicles. And some of those are particularly focused on different sectors, such as software and tech-enabled services businesses.

19:34David Weisburd:And some of them are profiling more like large-cap buyout funds that see continuation vehicles as an extension of established power rallies. There's also a host of, I would say, the largest global capital allocators that are profiling as LPs, kind of powering the private equity ecosystem. So the large U.S. pensions, the Canadian pensions, the Maple Leaf, the Middle Eastern and East Asian sovereigns that you're seeing as frequent LPs and direct investors and companies, those groups are responsible for a lot of the demand for continuation.

20:17Benjamin Carper:It kind of solves their problems of how do we deploy a lot of capital per transaction and not be adversely selective because you have the GPs underwriting, you have existing LPs rolling, but yet these deals are enormous.

20:30David Weisburd:One thousand percent for those LPs that are very keen on co-investment opportunities with their sponsor partners. Continuation vehicles are just another way to go about exactly that and buy companies really in partnership with their existing relationships.