Paul Hastings LLP has launched the third edition of its Continuation Vehicles Report from its Secondaries practice, part of its Investment Funds & Private Capital group. The 2024 Report outlines the key terms of the GP-led continuation vehicles (CVs) that Paul Hastings advised on between Q1 2023 and Q1 2024, offering insight into the provisions found in CVs’ legal documentation.

The reported CVs span a variety of sectors and range in size from $85m to $1.5bn, with an average size of $592mm. Total commitments to the reported CVs exceeded $7bn, and approximately 65% of the CVs related to single-asset deals.

Key trends include:

1. Tiered carry returns to 2021-2022 levels

This year’s report shows an increase in the percentage of CV carry waterfalls with tiered carry to 80%. This reflects a return to 2021-2022 levels of tiered carry (77%), after a decrease in the incidence of tiered carry to 46% in 2022-2023.

2. Management fees remain stable

Analysis of CV terms shows that the majority (73%) of CVs charged a management fee of between 0.5% - 1% of invested capital, reflecting a continuing trend from 2022-2023, where 52% of CVs charged fees at this rate. In contrast, in 2021–2022, only 4% of CVs charged a management fee at this level while 43% charged a management fee of 1% of invested capital and 25% charged a management fee of between 1% and 2%.

3. Lead investor terms becoming codified

Lead investor status and terms have also been codified, with 100% of CVs now paying for lead investor expenses (up to a capped amount). This is in part a consequence of the establishment of the ‘lead investor and syndicated investors’ paradigm that the market has experienced, which is widening access to CVs beyond secondary funds.

Ted Craig, Private Funds and Secondaries partner in the Investment Funds & Private Capital practice of Paul Hastings’ London office, said:

“As private fund sponsors continue to seek liquidity solutions amidst market uncertainty, our annual Continuation Vehicles Report highlights that the deployment of continuation vehicles is here to stay. It is interesting to note the sustained cooling in management fees and reduction in the rate and range of carry charged. Whilst the changes observed in the 2024 edition are not as dramatic as those in last year’s report, the stabilisation of fee and carry levels suggest the establishment of market norms around what is still a relatively new feature within the broader private funds market.

“We have seen lead investors on CVs become increasingly more sophisticated, including incidents of PE buyout groups setting up dedicated CV teams. This is also opening the gates for an increasingly wide variety of syndicate investors, such as family offices and pension funds, who you might historically have expected to prefer blind pool funds.”