The common risks in continuation vehicle transactions and practical steps to mitigate them
With 2018 to 2020 vintages looking for exits, continuation vehicles have emerged as an increasingly popular way to give remaining assets more runway while generating liquidity for existing investors.
However, because the GP sits on both sides of the transaction, continuation vehicles raise unique challenges and risks that both GPs and LPs must actively manage.
Our team outlines the problems that may arise in continuation vehicle transactions and practical ways to mitigate them.
1. Approvals, process and evidence
Move quickly, but do not rush the process. Approvals should be fully informed, properly documented and supported by a process that gives LPs and LPAC members sufficient time, information and independence to deliberate.
2. Valuation and pricing
Assume the valuation will be tested. The GP should be able to demonstrate that pricing was independently scrutinised, based on complete information and fair to investors on both sides of the transaction.
3. Information symmetry
Information parity is the best protection against a disclosure dispute. Existing LPs, LPAC members, advisers and continuation vehicle investors should be treated as audiences who may later compare notes.
4. Alternative exits
A continuation vehicle should not be presented as the only credible exit unless the record supports that conclusion. Alternative liquidity routes, even if ultimately rejected, are likely to be a focus of any later dispute.
5. Relief, arbitration and confidentiality
Dispute resolution provisions should be drafted with interim relief in mind. Waiting periods, emergency relief carve-outs and arbitral seat provisions can determine whether a dispute remains private or becomes public.
6. Practical steps to reduce the risk of disputes
Continuation vehicles can be effective liquidity tools, but they carry increased dispute risk if not managed carefully. The safest transactions are those where the GP can show that the deal was fair, the process was robust and all relevant investors were properly informed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
