Private equity executives defended continuation funds at Hong Kong’s investment summit on Wednesday. Jonathan Sokoloff said, "There are a lot of haters in the LP community, but it's here to stay." These funds help firms hold assets longer, though many investors worry about potential conflicts regarding exits and valuations.
(Bloomberg) -- Global private equity executives are pushing back against investor skepticism over continuation funds, mounting a defense of the increasingly popular structure at Hong Kong's flagship investment summit on Wednesday.
"There are a lot of haters in the LP community," said Jonathan Sokoloff, managing partner at Leonard Green & Partners, acknowledging persistent resistance from limited partners. "But it's here to stay."
The comments come as continuation funds have grown into an increasingly important source of liquidity, particularly after a difficult few years for exits through initial public offerings. The vehicles allow private equity firms to hold promising portfolio companies for longer, giving them more time to create value, but remain contentious because of potential conflicts between general partners rolling assets into new vehicles and existing investors seeking an exit.
Hamilton Lane co-CEO Juan Delgado-Moreira defended the structure, describing continuation vehicles as a "La La Land" for private markets, where investors can either realize value or remain invested. He said third-party valuations and approvals from investor advisory committees help address governance concerns.
Delgado-Moreira pointed to their historical performance, saying assets rolled into continuation vehicles have generated average money multiples of roughly four times, returns above the top quartile for buyouts and about twice the distributions to paid-in capital.
Still, he said private equity overall has lagged public equities in recent years and that Hamilton Lane had committed more capital to the asset class than it perhaps should have in 2021.
As higher interest rates reshape the economics of dealmaking, industry executives portrayed the shift as a return to fundamental, operationally driven investing. John Redett, Carlyle Group Inc.'s co-president and head of global private equity, said the industry is entering a "good old-fashioned phase" in which managers must generate returns through active operational value creation, requiring substantial resources and scale.
Bain Capital Chairman John Connaughton struck an even more bullish tone, arguing that elevated benchmark rates could usher in a "platinum age" for the asset class.
--With assistance from Kari Lindberg and Echo Wong.