(Bloomberg) — Private equity firms’ strategy of shuffling assets to buy more time for investments to pan out is starting to show signs of weakness.More than 100 so-called continuation funds were raised between 2019 and 2021 to move portfolio companies from one private equity vehicle to new ones backed by fresh capital. Some are now running into trouble amid a sluggish dealmaking environment and declining asset values.
Related: Private Equity Does Not Belong in Your 401(k)Enviva, a supplier of wood pellets that Riverstone Holdings rolled into a 2020 continuation vehicle, emerged from bankruptcy in December with a restructuring agreement that cut $1 billion of debt and gave control of the company to a new shareholder.
Wheel Pros, a tire manufacturer operating as Hoonigan, also exited Chapter 11 last month with a restructuring agreement that handed ownership to a group of lenders. Clearlake Capital Group moved the company into a continuation vehicle in 2021.
Related: Adjusted for Risk: Setting Expectations For Alternative InvestmentsCracks are emerging elsewhere.
Revelstoke Capital Partners shunted Upstream Rehabilitation into a $660 million continuation vehicle in 2019 to fund its strategy of consolidating the physical therapy market. But Revelstoke marked down Upstream’s valuation in recent quarters as its earnings deteriorated, according to private financial documents seen by Bloomberg. Upstream’s public debt trades at levels suggesting financial stress, with a secured loan due in 2026 trading at roughly 83 cents on the dollar, according to data compiled by Bloomberg.
Private equity firms are increasingly turning to continuation funds to help them hang on to prized assets for longer if they believe there’s more upside, need more time for a turnaround or want to wait for a better climate to sell. The industry has unloaded fewer portfolio companies since the Federal Reserve started raising interest rates in 2022.
“The exit markets continue to be constrained,” Conrad Axelrod, a partner at law firm King & Spalding, said in an interview. “We’ve had extended holding periods and secondary sales on the rise for at least the last five years.”
A continuation fund typically has half the lifespan of a traditional buyout fund — about five years — meaning that many of those raised in 2019 and 2020 are reaching maturity. Investors in those funds will be agitating for sales or other ways to recoup their money, although not all may be able to exit.
Some of the biggest limited partners, public pension funds, have brought in extra help to get a better handle on their increasingly complex investments, including continuation vehicles, according to people familiar with the matter. California State Teachers’ Retirement System and the Los Angeles County Employees Retirement Association are among those that hired consultants and other specialists to assist them with the often Byzantine arran
