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As with many VC trends, Europe tends to piggyback on the US — and the recent spurt of so-called continuation funds is no exception.
This week European VC Speedinvest announced it raised some €30m for its first continuation fund — a vehicle that allows VCs to hold onto their mature companies for longer while also giving LPs a way to cash out. The firm also shared that it has another €30m continuation fund in the works, which it expects to close in the coming weeks.
Spotify and Revolut-backer Lakestar also announced a $265m continuation fund — one of Europe’s largest — at the end of August.
Though European continuation funds aren’t wholly a new trend (Germany’s HV Capital raised one in 2022), it’s definitely picked up pace, insiders report.
“The question is more: who is not doing it, than who is doing it,” Olav Ostin, founder and managing partner of London-based secondaries firm TempoCap, tells me.
He says we’re seeing a “massive increase” in continuation funds. Omolade Adebisi, a principal at fund of funds Isomer Capital, is also seeing more such funds emerge.
It’s no surprise that VCs are turning to continuation funds. Companies are staying private for much longer, and although the IPO market is showing some glimmers of hope, with recent big debuts like Klarna, many mature companies are still waiting in the wings. It’s created an environment where LPs are desperate for some cash back, sparking a boom in the secondaries market.
“I think the main motivation is to generate some DPI,” says Ostin, referring to a measure of money returned to LPs. “A lot of the [VC firms] need to raise a new fund, and the LPs are basically saying, 'show me some DPI’.” If you can't sell the companies on the open market, one option is a continuation vehicle, he adds.
“Proactively creating secondary transactions in your portfolio will be part of any successful VC mandate, especially when you invest in the early stages, because we still need to attract institutional capital,” Oliver Holle, cofounder and managing partner at Speedinvest, said this week. “We need to keep our LPs happy and they need to see returns that are not taking 14-15 years to materialise.”
Other investors like Christian Saller, general partner at HV Capital, note that VCs are realising there is still “significant value creation potential for many of their portfolio companies even at the end of the typical 10 + two fund year lifetimes.” (Think again about Klarna, which took 20 years to go public.)
For Ostin, the recent increase in such funds also shows the maturing of the European market; private equity firms have long been launching continuation funds, as have US VCs.
But will we see a continuation of this continuation fund trend? (Forgive me, I’m jetlagged.)
Ostin believes it will only increase. “Before, people were seeing this as kind of a signal of failure. But the buyout industry is doing it all the time, and it's not a failure,” he says, adding that he sees more VCs looking into the option.
However, since the economic terms (like fees and carry) of the fund are reset with a continuation fund, Adebisi argues that it may be “challenging to be strongly motivated by economics” for managers of smaller funds. “It’s probably more costly” for them to go through the process of setting up a continuation vehicle in that case, she says. Nonetheless, Adebisi believes that GPs will still “increasingly view” them as a “valuable tool in today’s slower exit environment.”
Reader, I’d love to hear from you: are you thinking about launching a continuation fund? If so, why take that route rather than pursuing other kinds of secondaries (like direct or strip sales)? Which VCs do you know are raising continuation funds? What are the pros and cons? I’m all ears.
