Private fairness finds new technique to cope with its deadline disaster | USAEMALL.com

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Serial procrastinators know the feeling. Find yourself on deadline, wrangle an extension, breathe a sigh of relief and — before you know it — you are up against it again.

This is the situation some private equity firms may soon face. Buyout funds generally seek to buy, revamp and then sell the companies they acquire within a few years. But with mergers and initial public offerings hard to pull off, the industry has had to get creative.

One answer has been “continuation vehicles”. These are new pockets of investment that private equity firms can use to hold on to assets that have been on the books for longer than planned, while giving investors in mature funds the chance to cash out.

The snag is that continuation vehicles, which took off in 2021 and usually have a three- to five-year lifecycle, are themselves ageing. Buyout firms are therefore having to get creative again. The result: the CV-squared fund.

Examples of assets shunted from one continuation vehicle into another are dribbling out. PAI Partners is poised to do so with part of its investment in €15bn ice cream maker Froneri. Tech-focused Accel-KKR has also raised $1.9bn for a single-asset continuation vehicle that will acquire its investment in software firm isolved, previously passed to a continuation fund in 2019.

CV-squared deals are not just a way of avoiding deadline crunches. In some cases, they may allow private equity managers to hold on to assets they really like and which still have room to grow.

Investors in such vehicles may also be comforted by the fact that the first round of continuation vehicles has performed well. For vintages between 2018 to 2023 the median fund returned 1.4 times the original investment, according to a Morgan Stanley report, compared with 1.3 times for buyout funds.

Continuation funds do have a couple of advantages over traditional buyout funds. Their money is parked in investments from day one. In a buyers’ market, secondary investors can often acquire assets at a discount to their net asset value. That may well apply to CV-squareds too.

The risk remains, though, that they become repositories for assets that are past their prime. At some point, companies may still need to be passed back to public markets, which tend to demand a discount.

The fact that this trade has emerged at all highlights just how hard life has become for private equity. It is not simply a case of having to navigate cycles. As the asset class becomes bigger and bigger, finding quickie turnaround plays becomes harder.

That fits poorly with the industry’s traditional structure of raising a succession of seven-to-10-year funds — and may help explain why this is becoming harder to do.

The CV-squared — along with other innovations such as “evergreen” retail funds — show that, for private equity, extending deadlines is becoming a feature rather than a bug.

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