New Form Of Exit, New Set Of Issues: Continuation Funds And Co-Investments

Continuation funds or vehicles (CVs) have become ubiquitous in a macro environment in which exit options for private equity-held assets are scarce. As we've previously noted, in 2023, CVs represented 12% of global sponsor-backed exit volume, compared to only 5% in 2021. Co-investments—both passive co-investments through sponsor-managed vehicles and "co-underwritten" transactions—present a distinct set of issues when it comes to fund exits via CVs.

Tied at the hip?

Generally, "passive" co-investments (syndicated or otherwise) involve the use of co-investment vehicles that feature a "tied at the hip" clause, meaning the GP of the vehicle (typically an affiliate of the sponsor) is obligated to make the co-investment vehicle exit on the same terms and conditions (subject to certain carve-outs) as the main fund that is also invested in the asset. This requirement has the potential to cause unexpected results when applied in a CV exit context. For example, if 60% of