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By: Andreas Hinsen, Loyens Loeff

The decline in global M&A activity during the Covid-19 pandemic, combined with the ongoing lack of attractively priced targets, led to a rise in an alternative exit scenario for private equity firms: selling their portfolio companies to themselves, typically by creating a so-called continuation fund. Such deals are no novelty but given their rising popularity, a closer look should be taken at the potential pitfalls involved in such deals.

Typical scenarios and structure

A sale to oneself is often used in any of the following two scenarios:

• As a leeway to hang on to well-performing portfolio companies with good returns. This is one of the results of the trend of funds holding onto their investments longer, potentially beyond their initially planned life-cycle.

• Or as solution if a buyout fund nears the end of its life cycle but has not yet sold (all of) its portfolio companies. This is in particular the case where additional time is needed before a satisfactory exit can be achieved, a scenario which became more frequent due to the Covid-19 pandemic.

To execute such an older-to-newer fund sale, a private equity firm often creates a so-called continuation fund. Investors of the existing fund can either exit or reinvest/rollover in the new fund. This new fund is then used to buy one or several portfolio companies already owned by the firms' other (older) funds.

Such continuation funds are often e......................

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