Continuation Vehicles: Key LPAC Considerations

In today’s dynamic and complex environment, continuation vehicles bring much-needed optionality to investors, whether their goal is deploying capital as conditions improve, exiting an exceptional company at optimal value, retaining a stake in a high-performing business, or generating liquidity.

The Harris Williams Private Capital Advisory team works closely with our industry-focused bankers to meet this growing need for alternative liquidity solutions. Here, our senior professionals discuss the key considerations for limited partner advisory committee (LPAC) members evaluating CVs, including distinct stakeholder priorities, pros and cons of parallel M&A and CV processes, and nuances between CVs in the U.S. and Europe. We also share five key considerations for LPAC members tasked with approving a proposed CV transaction.

Q: As an LPAC member, what should be my priority when evaluating a potential CV?

Similar to M&A, CVs involve three stakeholder groups with distinct yet intertwining goals. General partners are focused on long-term portfolio performance and firm reputation to ensure that limited partners and prospective portfolio companies will view them as a partner of choice for years to come. Management teams are looking for partners to guide their long-term growth, help them navigate strategic options, and provide liquidity and next-level expertise. Existing LPs are prioritizing accelerated liquidity, while new secondary LPs are looking to deploy capital in high-performing assets and generate attractive risk-adjusted returns. As representatives of the entire LP base of a fund, LPAC members’ key responsibility is ensuring everyone’s objectives are being satisfied in a win-win transaction, and they should only approve a CV when those interests are aligned.  

Given the relative novelty of CVs among these groups, many are seeking help from our team to manage the nuances, opportunities, and challenges specific to their sector, geography, and business, and to provide an unbiased perspective on the best path forward.

Q: Are parallel CV and M&A tracks a good idea?

In our experience, it’s often better to focus on one strategy versus the other. While some investors assume that the cleanest price signal would be generated by running both processes simultaneously, doing so can create the impression of mixed or hidden priorities and reduce investor conviction.

Also, when both transactions are being pursued, a CV-focused investor may worry about not being able to compete with a specialist M&A investor, while an M&A investor may conclude that the GP is not committed to an outright sale. Successfully managing parallel tracks typically requires significant expertise in both types of transactions and in specific industries.

Q: What about switching between M&A and a CV?

We are often asked for help pivoting between a CV and M&A as conditions and objectives change in today’s dynamic environment. We have seen success with such shifts, particularly when there is a clear and compelling narrative behind the switch in strategy. Single-asset deals, in particular, tend to feature significant crossover in diligence materials, which can support a quick transition when required.

However, if the desired outcome is truly a CV, it’s often best to pursue that from the start so that it doesn’t appear to be “Plan B.” Likewise, an attempt at M&A following a failed CV may impact investor interest and competitive tension. That’s why it’s often a good idea to tap into the expertise of an independent advisor well-versed in both strategies and in industry-specific dynamics before embarking on either path.

Q: What are some of the key differences between U.S. and European CV transactions?

One nuance is more complex growth strategies in Europe given the number of distinct geographic markets with their own regulations and languages. As with M&A, that reality can limit the potential of buy-and-build-focused CV strategies.

There are also some important differences regarding carried interest, which can make it more difficult to ensure alignment among all the stakeholders involved in a European CV. And, in general, GPs in the U.S. are likelier to be early movers with regard to CVs, while European investors tend to want to see more precedents in their countries and sectors. The flipside of these differences is that there may be additional room for growth among European investors as they gain familiarity with CVs and the optionality they can provide.

A Deeper Understanding 

Overall, CVs can provide valuable flexibility for investors and management teams while fostering continued company growth. For LPs in particular, CVs offer the opportunity to optimize exposure to assets at key inflection points as opposed to the “one size fits all” approach of a normal hold or sell decision.  

As these alternative structures continue to gain momentum, it will be increasingly important for LPAC members to continue to deepen their understanding of the key considerations underpinning an optimal choice between CVs and traditional M&A.

To learn more about our range of private capital advisory capabilities and in-depth industry expertise, please contact our senior professionals.