Swiss pension funds are weighing governance and manager selection issues as they assess general partner (GP)-led private equity continuation funds.
Diego Liechti, chief investment officer at PKG Pensionskasse, the pension fund for small- and medium-sized firms, pointed to early academic evidence suggesting that the performance of continuation funds is broadly comparable to that of traditional buyout funds, making them a legitimate part of the opportunity set.
“However, they involve specific risks, in particular structural conflicts of interest, even when third-party valuations are used. Therefore, careful manager selection and strong governance are essential,” he said.
PKG has not invested in continuation vehicles so far, mainly because its advisers have yet to recommend one.
“That said, we are open to investing in well-structured continuation vehicles with robust governance and a compelling underlying asset,” Liechti added.
PKG continues to diversify broadly across financing stages, regions, investment strategies, vintages and GPs in private equity.
The exit environment is improving and valuations are more conservative than in late 2022, but the market remains selective, the CIO said.
“That said, private equity continues to offer opportunities, especially in small and mid-market buyout, operationally focused managers, and it might still provide diversification relative to public markets through different company sizes, sectors, and active ownership models,” he added.
Private equity firms use continuation vehicles to sell difficult-to-exit assets to themselves and generate liquidity.
The volume of GP-led transactions through continuation funds has grown and is expected to quadruple from around $70bn to more than $300bn over the next decade, according to Schroders.
However, a poll conducted by the Institutional Limited Partners Association (ILPA) among webinar participants showed that the majority of limited partners (LPs) still prefer conventional exit routes, even at lower valuations.
“Besides some opportunities, for example, the fact that attractive assets can be held for an extended period of time, we see a relatively high number of risks [when investing in continuation vehicles], as the requirements for governance, transparency, and valuation are very high,” said Romano Gruber, team leader for asset manager selection and illiquid assets at PPCmetrics.
The concept of the continuation fund partially contradicts the original promise of a classic closed-end fund with a clearly defined maturity date.
“This leads to additional complexity and potential conflicts of interest in an already very complex asset class,” Gruber said.
For now, however, continuation funds are not at the top of the agenda for pension funds grappling with low interest rates, their impact on return expectations and asset allocation, which could lead to renewed demand for private equity, he added.
Swiss pension funds continue to see opportunities in private equity, particularly in buyouts and venture capital, an asset class offering potential for high returns, especially when investing in top-tier funds, said Andreas Nicoli, head of private equity at Zürcher Kantonalbank.
“They might be more wary of continuation funds initiated by private equity managers, with concerns regarding potential conflicts of interest and realistic valuations, as the private equity manager acts as both a seller and a buyer. This can lead to reluctance,” Nicoli said.
