CV Market in Nascent Phase — Evening Brief – 07.08.24
The global market for continuation vehicles (CVs) is still in its nascent phase, according to investment bank Baird, which conducted interviews with GPs, LPs, and secondary investors to gain insights into the prevailing dynamics.
The volume of GP-led transactions in the CV market is expected to reach $175 billion by 2030, according to Baird. The firm forecasts that the total number of transactions will range from $60 billion to $65 billion in 2024, indicating a year-on-year growth rate in the high teens.
“Despite a history of rapid development in CVs, the asset class is still underpenetrated relative to broader M&A,” observed Brian Doyal, co-head of Baird Global Investment Banking. “Some GPs have done a handful of CVs, but most remain on a steep learning curve with minimal experience with this type of transaction technology.”
The factors contributing to the rise are stable macroeconomic conditions, record levels of unrealized private equity value, significant amount of available capital from secondary investors, and the increasing use CV technology by sponsors. A significant portion of the growth comes from transactions involving CVs valued at less than $1 billion. These deals accounted for 60% of the total CV volume last year, which is an increase from 39% in 2022.
The necessity for investor liquidity and the pressure to exit are potential factors. The analysis identified the CV value proposition as a potential alternative to more traditional exit pathways, allowing LPs to expand their ties with managers. For GPs, they can raise more dry powder for follow-up funding.
Following interviews with 60 market participants conducted by Baird, in conjunction with H/Advisors Cicero, 62% of GPs stated that prolonging the hold period for trophy assets was their top rationale for seeking a CV, while slightly more than 25% mentioned establishing an accelerated liquidity alternative for LPs.
According to Baird’s survey, 55% of buyers said NAVs were slightly overvalued in comparison to fair value, while 40% thought NAVs were priced fairly. Buyers reported a reversal from a year ago, when 65% rated NAVs slightly overvalued and only 12% as priced fairly. This “priced fairly” rate is primarily due to the absence of movement in private valuation marks in 2022, despite significant falls in public equity markets.
Investors want results. When examining single asset transactions, Baird discovered that more than 90% of buyers expect returns greater than 2.0x MOIC and 20.0% IRR net of CV economics. Buyers are typically willing to accept lower returns in the range of 1.8x-2.0x+ MOIC and 17.5%-20.0%+ IRR net CV economics for multi-asset transactions due to the added diversity.
The analysis revealed that, in the end, the CV transaction process consumes more resources than many GPs anticipate and typically takes longer to complete. ”As the market matures, GPs are increasingly demanding higher levels of sophistication from advisors, including marrying industry-specific knowledge and robust transaction execution capabilities with every transaction,” the report said.
Furthermore, it appears advisors have a consistent flow of work, as approximately 80% of GPs informed Baird that they intend to finalize at least one continuation vehicle per fund.