TLDR:
- Continuation funds are becoming popular in the venture capital world as a way for VC firms to find exits in difficult economic environments.
- A continuation fund involves raising fresh money from investors and using it to buy out an existing portfolio, allowing the original investors to see a return and attracting new investors to the promise of future returns.
- Continuation funds have grown from a $5 billion industry to over $70 billion in the past 5 years, but they have raised concerns about pricing, fees, and the potential for prolonging the life of unsuccessful investments.
- Regulators may step in to regulate this industry, and it remains to be seen how investors will respond and whether better structures will be demanded.
In the venture capital world, continuation funds are gaining popularity as a way for VC firms to find exits for their investments in difficult economic environments. A continuation fund involves raising fresh money from a new set of investors and using that money to buy out an existing portfolio. This allows the original investors to see a return on their investment, while also attracting new investors to the promise of future returns. The Financial Times recently reported that Silicon Valley’s Lightspeed Venture Partners is seeking to use a continuation fund to sell $1 billion worth of start-up stakes.
However, the use of continuation funds has raised concerns among investors. Research firm Raymond James found that 42% of continuation fund deals happen at a lower valuation than the initial valuation of the start-up. This means that the original set of investors may be short-changed. Additionally, continuation funds allow VC firms to continue charging management fees on the entire value of the portfolio, even after it has been sold to the new fund. This has led some to compare the practice to a pyramid scheme.
It is still early days for continuation funds, and it remains to be seen what the ultimate outcome will be. Regulators may step in to regulate the industry, and investors may demand better structures. For now, though, VC firms are flocking towards this exit strategy as a way to navigate difficult economic environments and ensure returns for their investors.
