Growing investor demand, structural supply-side factors and a shift in strategy across the buyout landscape is expected to see annual exit values from continuation investments increase 329 per cent by 2034, according to new analysis by Schroders Capital.
In 2024, continuation-related buyout and growth capital exit value had already reached close to US$45 billion, representing around 7 per cent of buyout and growth-related private equity distributions.
When including the new capital being injected in such transactions, as well as continuation investments outside of buyout and growth capital such as venture capital, private debt and infrastructure, the total continuation transaction volume reported by independent market advisers set a new record of more than US$70 billion.
Annual exit values from continuation investments are expected to quadruple over the next decade, up to approximately US$300 billion, based on forecasts by Schroders Capital.
Schroders Capital chief investment officer Nils Rode said even conservative estimates still show significant growth for the continuation investment market.
“Under more optimistic assumptions, this growth could be even higher,” Rode said.
Rode said while some commentators suggest that the growth of the continuation fund market is merely cyclical, driven by a temporary drought in traditional exit routes against a challenging macroeconomic and market backdrop, Schroders’ analysis suggests otherwise.
According to its analysis, 80 per cent of the 2024 transaction volume for continuation investments was driven by structural growth, not cyclical effects.
In a recent analysis report, Schroders Capital highlighted five key structural factors that are driving the growth of the segment.
The report outlined that continued private equity ownership beyond the original holding period is now viewed as an established way to drive company transformation.
Fund-to-fund transactions, also known as secondary buyouts, have represented a significant share of exits for more than two decades, averaging 38 per cent of deal count and 36 per cent of deal value since 2006.
“This reflects the reality that the typical private equity fund model, which assumes a value creation phase of four to six years often does not allow for full realisation of value potential in standout portfolio companies,” Schroders said.
“There is often further value that can be generated under continued private equity ownership – and many companies will go through multiple phases of such ownership. In the past, this meant being sold from one fund manager to the next, and then sometimes again to the next and so on.”
Continuation investments have disrupted this dynamic, with many portfolio company transformations now being led by the same fund manager rather than being sold to another.
Schroders explained that continuation investments also allow for new capital to be brought in to fund continued expansion.
This also ensures there is further independent due diligence and enables an exit for existing investors that wish to cash out.
“Our analysis of the returns of around 2,600 realised buyout deals in the Schroders Capital investment database shows that about 31 per cent of all buyout portfolio companies are potential candidates for continued transformation based on their performance and trajectory – and so are also potentially suitable for continuation investments,” the report said.
It also noted that continuation investments allow fund managers to manage promising assets in the next phase of growth and typically do so more cost-effectively for end investors than secondary buyouts.
Based on 2024 volumes, the total investor savings from lower fee structures in continuation vehicles over a four-year hold period for buyout investments would amount to approximately US$3.8 billion, according to Schroders’ analysis.
Schroders said the return profile of continuation investments has historically been statistically more stable than that of traditional buyouts.
“Since managers continue to own their successful companies where no change in control is needed, such investments naturally mitigate risks associated with investing in unknown companies,” it said.
“Schroders Capital data on realised continuation investments suggests that these investments have more normally distributed returns and a smaller tail risk profile on a logarithmic scale of TVPI multiples, compared to traditional buyouts.”
While there are a number of structural factors driving the case for continuation investments, recent macroeconomic headwinds have acted as an accelerant, according to Schroders.
“The private equity industry is now in its fourth year of a cyclical exit downturn, brought about by a more uncertain economic environment and volatile public equity markets, which have dampened demand for M&A from corporate buyers, reduced the volume of debt financing that is available, and reduced the number of IPOs on stock markets,” it said.
Based on analysis by Schroders Capital, the cyclical tailwind for continuation investments contributed about 17 per cent of the transaction volume in 2024.
As continuation investments become a more attractive and cost-effective option, Rode said large private equity firms and secondaries managers are increasingly launching dedicated continuation strategies.
“This trend is already driving innovation, such as hybrid arrangements where a fund manager retains ownership for the continuation of the transformation of a portfolio company, while an additional fund manager joins and shares partial ownership to bring in specific skills for the next phase of company transformation,” he said.
Schroders Capital estimates that continuation investments will displace 8 per cent of total deal flow for mid and large buyouts over the next 10 years, compared to where it would be otherwise.
“Under more optimistic assumptions for the growth of continuation investments, this disruption could be even bigger,” Rode said.
Rode said continuation funds are redefining the private equity landscape by eating into the deal flow of mid and large buyouts and by unlocking even greater potential in the lower mid-market.
“As the market evolves, we expect continuation investments to offer investors significant opportunities for value creation, resilience and diversification for many years to come,” he said.
