Continuation vehicles (CVs) have emerged as an increasingly popular tool in venture capital, offering fund managers and limited partners (LPs) greater flexibility in managing portfolio investments. This article explores what CVs are, their benefits, challenges, and real-world applications.
What Are Continuation Vehicles?
A continuation vehicle is a secondary market structure that allows venture capital firms to move one or more portfolio companies from an existing fund into a new investment vehicle. This approach enables fund managers to continue managing promising assets beyond the original fund's intended lifecycle while providing liquidity options to existing investors.
Key Components and Structure
Basic Structure: The original fund transfers selected portfolio companies to a new entity (the continuation vehicle)
Existing LPs can choose to:
Sell their stakes and exit
Roll their interests into the new vehicle
Sometimes do a combination of both
New investors can buy into the continuation vehicle
The GP typically maintains management control
Economic Terms: The CV usually includes:
A new management fee structure
Reset carried interest arrangements
Fresh capital for follow-on investments
A defined investment period and term
Why Use Continuation Vehicles?
For Fund Managers (GPs)
Extended Runway for Value Creation
More time to optimize exit timing
Ability to support portfolio companies through key growth phases
Opportunity to capture additional upside
Portfolio Management Flexibility
Can separate high-performing assets
Maintain involvement with promising companies
Reset economics on specific assets
For Limited Partners (LPs)
Liquidity Options
Immediate exit opportunity for those seeking liquidity
Choice to maintain exposure to promising assets
Potential for partial liquidity while retaining upside
Can rebalance exposure to specific assets
Opportunity to increase allocation to high-performing companies
Risk management through selective participation
Real-World Examples
Technology Focus CV: Consider a hypothetical scenario where VC firm "Innovation Partners" has a 2015 vintage fund with several successful SaaS companies:
Original Fund Structure:
$500M fund size
10-year term ending in 2025
Portfolio includes 3 high-growth SaaS companies
CV Solution:
$300M continuation vehicle created for the 3 SaaS companies
60% of existing LPs choose to roll
New investors contribute $150M in fresh capital
4-year extended holding period
Single Company CV: A real-world trend has been single-company continuation vehicles:
Original Situation:
One portfolio company has grown significantly
Original fund reaching end of life
Company needs 2-3 more years before IPO readiness
CV Implementation:
Dedicated vehicle for single company
Fresh capital raised for pre-IPO rounds
Original investors given option to roll or exit
New governance structure focused on IPO preparation
Common Challenges and Considerations
Valuation Complexity
Need for independent valuation
Potential conflicts between existing and new investors
Market timing considerations
Alignment of Interests
Balancing existing LP rights with new investor demands
Structuring appropriate incentives for the GP
Managing potential conflicts between different investor groups
Operational Considerations
Legal and tax structuring requirements
Ongoing reporting obligations
Resource allocation between old and new vehicles
Best Practices for Implementation
Clear Communication
Transparent process with existing LPs
Detailed information about options and timeline
Regular updates during transition
Independent Oversight
Third-party valuation
Independent board members
Clear governance framework
Structured Process
Well-defined timeline
Clear decision points for LPs
Professional advisory team
Continuation vehicles represent a significant innovation in venture capital fund management, offering solutions to traditional fund lifecycle constraints. While they present certain challenges, careful structuring and implementation can create win-win scenarios for GPs, existing LPs, and new investors. As the market matures, we can expect continued evolution in how these vehicles are structured and utilized.
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