Continuation Funds As A Tool For Creating Liquidity – Fund Management/ REITs & More News Here

In latest years, the beforehand uncommon continuation funds have
turn out to be extra widespread as a strategy to create liquidity in shut-ended
funds. Continuation funds allow the realisation of an funding
in such a fashion that the fund supervisor retains management and has the
risk to profit from a possible future improve in worth of
the funding goal. In this publish, I current some central particular
traits of continuation funds that fund managers and
buyers ought to take into account.

What Are Continuation Funds?

In a median continuation fund transaction, a continuation fund
purchases one or a number of funding targets in a fund that’s
managed by the identical fund supervisor and infrequently close to the top of its
time period. Investors of the prevailing fund have the choice to both promote
(i.e. redeem) their funding or to switch it to the
continuation fund. Completely new buyers pay their commitments
to the continuation fund, which supplies liquidity for these
buyers of the prevailing fund which have determined to withdraw from
the funding goal. The phrases and situations of the continuation
funds are negotiated between the fund supervisor and the brand new
buyers, and so they typically fluctuate in line with the asset classes
which might be the thing of the continuation fund transaction.

When used strategically accurately, a continuation fund can
fulfill the pursuits of the totally different stakeholders and obtain
a number of targets: it could supply a liquidity window for present
buyers wishing to withdraw, steadiness conflicting pursuits,
customise incentives and prolong the holding interval of the
funding targets to maximise their worth creation.

Continuation fund transactions are, nonetheless, advanced
transactions, and if the method to rearrange them is weak, it typically
damages the fund supervisor’s repute. A profitable
institution of a continuation fund requires that the buyers
are supplied with a transparent enterprise justification, that the
transaction construction is created in a fashion that solves the primary
authorized and tax challenges and that the authorized and industrial course of
is effectively managed.

The Main Contradiction

A substantial portion of continuation fund transactions
facilitated by fund managers is rarely accomplished. Common causes for
this are disagreements on the honest worth and the grounds justifying
the transaction. Some buyers could also be apprehensive in regards to the
justifications: is the fund supervisor really making an attempt to carry on to a
excessive-high quality funding goal or is the last word function of the
transaction to dump to the continuation fund unprofitable
funding goal that would not be realised at an acceptable
worth on the conventional market? There may be suspicions that the
fund supervisor would possibly need to use a continuation fund to carry on to
the charges referring to the funding targets that they might not get
if the funding was realised to a 3rd occasion.

Usually, the dynamics of a continuation fund transaction are
extra advanced than a typical withdrawal from a goal firm, as in
observe the fund supervisor acts as each events within the transaction.
To create a beautiful liquidity various, the fund supervisor
should supply the potential patrons a beautiful transaction proposal
and worth.

On the opposite hand, performing as the vendor, the fund supervisor additionally
has the obligation of care in direction of the prevailing fund: in observe, the
gross sales can’t be executed until a adequate variety of current
buyers are persuaded to help the gross sales. Sometimes the fund
supervisor also can ask the patrons for a bunch dedication to a different
fund raised by the fund supervisor, which can improve the complexity
of the transaction. When there’s a battle of pursuits, measures
and justifications are essential to make the transaction credible
and passable to each events.

Starting the Procedure

If you’re an investor contemplating investing in a continuation
fund, we suggest consulting advisors at an early stage. The authorized
documentation of the prevailing fund and its funding targets
ought to be fastidiously reviewed in order that any required approvals and
potential restrictions, resembling regulatory points or switch
restrictions, could be recognized.

Tax recommendation is critical for the possibly advanced structuring
of the transactions, particularly, if the prevailing buyers are
to spend money on the continuation fund in a tax-impartial method.
Financial advisors are sometimes wanted to assist with the coordination
of selling, the industrial course of and investor relations, as
effectively as with proving the transparency and impartiality of the
valuation and gross sales course of to the buyers. Sometimes additional
assessments on whether or not the transactions are market-primarily based are
obtained.

As continuation fund transactions are, as a rule, insider
transactions, they sometimes require an approval by the prevailing
fund’s advisory committee or buyers. The advice is
that the fund supervisor hears the advisory committee earlier than planning
the transaction very far. This helps in demonstrating transparency
and rising the buyers’ belief, each of that are very
essential in making certain a clean course of.

Discovering Buyers and Negotiating Terms and Conditions

After forming the group of advisors, the fund supervisor ought to
determine potential patrons. These may embody single buyers or
a consortium. Buyers will turn out to be buyers of the continuation fund
and thus present liquidity for the buyers of the sooner
fund.

The fund supervisor can discover patrons by their contacts or, for
instance, by a bidding course of. The bidding course of is often
managed by the monetary advisor who assists in figuring out the
honest worth and relieves buyers’ considerations referring to the
impacts that the fund supervisor’s conflicts of pursuits could have
on the transaction.

After the potential patrons have been recognized, the
negotiations that observe is usually a vital section that requires
experience each in funds and in company transactions. Even although
the phrases and situations of the prevailing fund can be utilized as a
foundation for sure situations, the central phrases and situations of
continuation fund transactions are often customised. These
embody monetary phrases, the fund supervisor’s personal funding,
situations on new investor safety, points regarding uncalled
commitments between present and new buyers in addition to situations
regarding transferable belongings and the minimal variety of
transferring buyers. All current buyers’ facet letters
ought to be reviewed, and fund managers ought to be ready in case
the buyers need to renegotiate their facet letters at this
stage.

As establishing a continuation fund is bizarre fundraising,
fund managers ought to take into consideration all provisions which might be
often utilized, resembling purposes and approvals referring to the
advertising and marketing of the funds.

What Should Current Investors Take into Account?

A disclosure memorandum is often drawn up for the present
buyers. In addition to the main points regarding the transaction,
the memorandum consists of essential authorized info and infrequently additionally
a type with which the buyers can partially withdraw from the
present fund or switch part of their holdings to the
continuation fund.

Often present buyers also can make a further dedication
to the continuation fund rising their relative oblique
publicity to the transferring funding targets. Any needed
approvals of the advisory committee and current buyers are additionally
obtained at this stage.

As an exit organized by a continuation fund deviates from an
bizarre exit, it’s fairly widespread for the fund settlement to require
acquiring an approval of the prevailing buyers. This is often
smart additionally contemplating the fund supervisor’s legal responsibility dangers.
However, some fund agreements decide permissible inside
transfers broadly in such a manner that the sooner fund can switch
its holdings in an funding goal to any fund managed by the
fund supervisor or its subsidiaries, together with a continuation
fund.

From the buyers’ and fund managers’ standpoint, it
is really useful that the potential for establishing a continuation
fund is mentioned already together with the fundraising for
the unique fund with a purpose to keep away from surprises in direction of the top of
the fund’s time period.

Successful Completion of the Transaction

When buyers have determined whether or not they need to withdraw or
switch their holdings and all preconditions have been fulfilled
(e.g. authority approvals have been acquired), the transaction can
be accomplished. Withdrawing buyers are distributed revenue, the
current fund can realise the funding goal and the
continuation fund takes accountability for holding and growing
the funding goal.

The key to a profitable continuation fund transaction is
commencing shut cooperation with the buyers already at an early
stage, and a clear course of for figuring out the worth helps
such cooperation. Another vital subject is coordinating the
pursuits of the present and new buyers in an acceptable and
honest method, which requires thorough consideration of authorized,
monetary and tax issues.

The content material of this text is meant to offer a common
information to the subject material. Specialist recommendation ought to be sought
about your particular circumstances.

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