Alexandra Heal in London and Antoine Gara in New York

In retail it’s called “evergreen” in institutional it’s called “continuation”, when I was young it was called “churning”. What it involves transactions that create liquidity for those who want cash from their investment, fees for the managers and continued support for the organisations invested in (whatever they’re actually worth).

If we believe in transparency, then news that use of this practice has almost doubled from 12 to 2o% of Private Equity funds sold this year is worrying. This from the FT .

Roughly a fifth of all PE sales this year involved groups raising money from new investors to acquire businesses from their older funds, up from 12-13 per cent the previous year, said Sunaina Sinha Haldea, global head of private capital advisory at Raymond James.

It’s size as well as the numbers of sales that’s jumped,  Haldea is predicting that the final figures for America in 2025 would show $107bn in such sales, up from $70bn last year. It’s the same story in Europe as in the USA.

The tactic enables PE firms to return cash to investors in older funds, but has prompted concerns about potential conflicts of interest.

Pension funds should be worried

Unless very big, British pension funds trust the fund manager to make decisions on what is going on. Direct Investment in the equity of organisations means due diligence which most pension funds cannot afford to do themselves or resource from outside.

So the fear is that fund managers are fearful of the true value of their private companies and choose instead to hold on to investments in hope of fetching more in the future. It could pay off but each time that a continuation deal involves a private company’s shares the dice are rolled. It could be worth more, but there’s a real chance it could be worth less than stated.

There is one sure winner, the continuation structure is attractive to buyout firms because such deals generate extra management fees and potentially lucrative future performance fees from companies in ageing funds.

But some backers of PE funds such as pension funds are concerned that in such transactions the same buyout firm is on both the sell and buy sides of a deal.

This summer, the FT’s Toby Nangle explained to LGPS officers at a Pension UK event that those pools accessing direct investment are getting better returns than those investing in fund of funds.

The FT’s Alexandra Heal concludes her article pithily

Consultancy Bain & Co, considered an authority in the industry, recently found that almost two-thirds of investors in private equity funds would prefer companies to exit holdings conventionally through sales or initial public offerings.

Under used facilities such as the London Stock Market ought to be used more – in other words.

I suspect that  the movement of pension funds from vanilla index funds to private equity and credit funds will be followed by a demand that continuation funds are limited and that good governance is demonstrated to trustees and members , by use of public listings over time.

I am sorry not to be able to have Chris Sier to give me more on this. I hope that Iain Clacher, Con Keating and other academics will speak out on this as we have very little data beyond that provided to the FT. I don’t trust the value of continuation and evergreen funds and hope as they are more used within pensions, so transparency will appear.

Google continuation fund for more