The fame of continuation funds has undergone a “exceptional transformation”, having emerged as an necessary various supply of liquidity in personal markets, based on a brand new report from the CFA Institute.

But, continuation autos increase heightened conflicts of curiosity for common companions (GPs), the CFA Institute has identified in its new research, ‘Continuation Funds: Ethics in Non-public Markets’.

Based on the CFA Institute, continuation funds have gained significance in personal markets by assembly growing calls for for liquidity, serving to them develop to an estimated $63bn (£26.6bn) in deal quantity in 2024.

Learn extra: Antares closes first personal credit score continuation automobile with $1.2bn commitments

The elevated want for liquidity comes amid a scarcity of conventional exits by way of mergers and acquisitions, or preliminary public choices. 

The “drought” has left personal fairness buyout funds globally with 29,000 unsold portfolio corporations valued at $3.6tn, and distributions to traders at their lowest stage in additional than a decade, the CFA Institute stated, pointing to Bain & Firm analysis.

In consequence, continuation funds which had been as soon as seen as “zombie funds”, at the moment are “a perceived repository of trophy property”.

“Continuation funds are designed to offer traders alternative: Those that need liquidity can money out, and those that wish to proceed their funding can roll over into the brand new continuation fund,” stated Stephen Deane, chartered monetary analyst, senior director, capital markets coverage on the CFA Institute and lead creator of the report.

“Many traders are joyful to take the cash, however some dismiss continuation funds as merely a switch of financial advantages to the fund managers. The GP sits on each side of the deal, stands to reset carry and prolong charges if profitable, and should even enhance the observe file of the legacy fund – all elements that may give rise to conflicts of curiosity.” 

“Continuation autos make for a central case research in how liquidity, alignment and governance come collectively in personal markets,” he added.

Learn extra: UK regulator warns on valuations and conflicts of curiosity at personal asset corporations

The report notes that conflicts of curiosity can even come up amongst totally different restricted companions.

Olivier Fines, chartered monetary analyst, head of coverage and advocacy analysis on the CFA Institute, stated that whereas the UK authorities has said its ambition to channel extra capital into personal markets to assist financial progress, finance is “hardly ever an ‘all people wins’ occasion”.

“With exit choices tougher to search out and valuations underneath pressure, continuation funds are a transparent signal of the pressures constructing in these markets – pressures that justify being attentive to the particular conflicts of curiosity and data asymmetries current within the sector,” Fines added.

Learn extra: Continuation funds mark subsequent stage of progress in personal credit score