AFIRE Summit Journal - Spring issue
Carry On, Carry Over
By Max LaVictoire and Ashley Anderson
While continuation vehicles were once viewed in a negative light, due to the potential conflicts between GP and LP interests, or to the tendency for such vehicles to be utilized only when there had been a failure or delay in accomplishing a fund’s objectives, market sentiment is rapidly changing. Blackstone’s nearly US$15 billion recapitalization of BioMed Realty at the end of 2020 took what might have been a taboo conversation with an LP and brought it to the mainstream, and their announced €21 billion recapitalization of Mileway just sixteen months later established this type of transaction as a mainstay liquidity strategy for the private equity giant.
Blackstone is by no means alone. In a January 2022 update, Landmark Partners noted that GP-led transactions involving the recapitalization of funds and property portfolios reached US$7 billion of net asset value in 2021, representing a 25% increase year-over-year and a 38% annual growth rate over the last five years. Anecdotally, the authors have also seen a similar increase in interest for these types of transactions among both clients and institutional LPs.
Traditionally, secondary trades have been driven primarily by end-of-life fund situations or LPs otherwise seeking liquidity. In those cases, the buyer is typically seeking higher returns for providing such liquidity. More recently, however, most secondary trades have been led by the GP (Exhibit 1), and in 2021, 74% of these trades comprised “in-favor” sectors such as rental housing, logistics, and data centers (Exhibit 2).
Rather than end-of-life scenarios, the new iteration of recapitalization transactions typically (1) provide an early liquidity event that demonstrates strong performance for the fund and (2) provide the continuing investors with a high-quality portfolio, sometimes with potential future value creation opportunities that could not be executed in the prior fund due to an expired investment period. Increasingly, these continuation funds may serve as the formation transaction for an open-end fund, where managers can raise additional capital to make new investments over time.