Continuations funds in the European Union – Market practice and transaction dynamics

Publication

04-11-2024

2 minutes read

Although the “continuation fund” concept is not new, this type of fund transaction has been more widely applied in the European Union only in recent years. This growth can be explained by the difficult economic environment of the recent period, which often prevented a traditional sale or initial public offering (IPO) of portfolio companies. The use by US private equity sponsors and the wide acceptance of continuation deals in the US market, triggered increased awareness of this type of transaction also for European private equity players.

A continuation fund continues the business of an existing investment fund, by acquiring (certain) portfolio companies of the first fund. Both funds are managed by the same fund manager. This sets this type of transaction apart from a regular private sale whereby a portfolio company is sold to a private third-party buyer.

As the fund manager acts on behalf of both the buying and the selling fund there is a natural conflict of interest. In addition, the fund manager, but often also one or more of the investors, have their own private interests in concluding the transaction. Because of these conflicts of interest, it is important to carefully prepare and execute a continuation fund transaction. If the conflicts of interest are not adequately managed and mitigated, the required backing from investors may not be obtained and the transaction would be at risk.

Given its increased popularity in the European Union and the complexity of continuation fund transactions, this article provides some practical general guidance on how to successfully complete this type of transaction within the European Union.

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